Income tax - Treatment of quad bikes for depreciation purposes

All legislative references are to the Income Tax Act 2007 unless otherwise stated.

This QWBA applies in respect of section EE 29

Question

1. As quad bikes are not specifically listed in the Commissioner's Table of Depreciation Rates, we have been asked to clarify how they are to be treated for depreciation purposes.

Answer

2. For the purposes of the depreciation regime, quad bikes are treated as "motor vehicles" that are designed mainly to carry persons. This being so, the rate of depreciation applicable to them is set by section EE 29(3). This section prescribes depreciation rates of 30% DV or 21% SL.

Explanation

3. A quad bike is similar in nature and size to a motor cycle, but with four wheels. Commercially, they are predominantly used in the agriculture and leisure industries. Although they are able to be registered for road use, quad bikes are generally used "off road".
4. Economic depreciation rates for the various items of depreciable property are set in accordance with sections EE 26 - 30. In particular, section EE 29(3) sets the depreciation rate for motor vehicles that are designed exclusively or mainly to carry persons. Because of this, determinative of how quad bikes are treated for depreciation purposes is whether a quad bike is a "motor vehicle" and if it is, whether it is designed at least mainly to carry persons.
5. While section YA 1 contains a definition of motor vehicle, this definition relates only to subpart DE (motor vehicle expenditure) and the FBT rules. Motor vehicle is not defined for the purposes of the depreciation regime. This being so, we need to consider the words ordinary meaning.
6. The Concise Oxford Dictionary defines a "motor vehicle" as:
   n. a road vehicle powered by an internal combustion engine.
   
   This same dictionary defines a "motorcycle" as:
   n. a two-wheeled vehicle that is powered by a motor
   
   and "quad bike" as:
   n. a motorcycle with four large tyres, for off road use.
   
   
7. The dictionary definition of "motor vehicle" places emphasis on the vehicle being a "road vehicle". While a quad bike is able to be registered for road use, its principal use is as an off road vehicle.
8. Despite this, most New Zealand motor vehicle legislation potentially includes quad bikes within their definition of "motor vehicle". In particular, because a quad bike is "...a vehicle drawn or propelled by mechanical power...", the Land Transport Act 1998, Motor Vehicle Securities Act 1989, Motor Vehicle Dealers Act 1975, and the Road User Charges Act 1977 would all include a quad bike within their definitions of a motor vehicle.
9. For legislative purposes, the fact that a quad bike may not be used principally as an on-road vehicle does not appear to be decisive in considering it a "motor vehicle". It is sufficient that it is a vehicle propelled by a motor.
10. On balance, the Commissioner considers that quad bikes are "motor vehicles" for the purposes of the depreciation regime on the basis that they are vehicles drawn or propelled by mechanical power and may be registered for use on the road.
11. To come within the ambit of section EE 29(3) not only must a quad bike be a "motor vehicle", it must also be a motor vehicle that "...is designed exclusively or mainly to carry persons..." Most quad bikes are equipped with front and/or rear steel racks that are capable of carrying goods. However the steel racks are not intended to carry anything other than light, low or secured loads and carrying anything further requires the use of a small trailer. Despite this limited capability to carry goods, it cannot be said that a quad bike is designed exclusively to carry persons.
12. The Labour department publication, Guidelines for the safe use of quad bikes, states that where these vehicles are used on the farm, they can safely be used for inspecting the farm and stock, mustering work, spraying (when used in conjunction with a purpose built spray unit) and maintenance work. All of these uses require only the rider and do not involve the carrying of anything other than very light loads. On this basis it can be said that the carrying of goods is an ancillary purpose, to the quad bikes principle function of carrying the rider, in much the same way as a motor car has a boot to carry light loads. For all of these reasons it is the Commissioner's view that quad bikes are designed mainly to carry persons.
13. Having reached the conclusion that a quad bike is a "motor vehicle that is designed exclusively or mainly to carry persons", the economic rate of depreciation to be used by taxpayers must be that set by section EE 29(3); 30% DV or 21% SL.
14. It should be noted that this rate does not apply to quad bikes that are available for hire for a period of 1 month or less. These are depreciated using the rates included in either the Transportation asset category as Motor vehicles (for transporting people, up to and including 12 seats and used for short-term hire of 1 month or less only), or the Hire equipment (short-term hire of one month or less only) asset category as Motor vehicles (for transporting people, up to and including 12 seats). In both cases the quad bike has an estimated useful life of 4 years and is depreciated at the rate of either 50% DV or 40% SL.
15. It is proposed to add "quad bikes" as a general asset class to the Leisure and the Agriculture, Horticulture and Aquaculture industry categories and the Transportation asset category.