The company leased a car from an individual. In order to save fuel, the company installed gas cylinder equipment in it. How this should be reflected in accounting and what tax implications should be expected?
General improvement rules
The installation of gas cylinder equipment is an improvement of leased car. In accordance with Article 788 of the Civil Code of Ukraine (hereinafter − CCU), improvement is possible only with the consent of the lessor.
Improvement is the modernization, modification, completion, additional equipment, reconstruction, etc., which leads to an increase economic benefits in future, initially expected from the use of the facility (para.14 Accounting Standards 7 “Fixed Assets” and para. 28 of Methodological Guidelines on accounting of fixed assets, approved by the order of the Ministry of Finance of 30.09.2003, No. 561; hereinafter − Guidelines No. 561).
The lessee’s expenses for improvement of the operating lease object, which he/she recognizes as capital investment under the conditions specified in paragraphs 29−31 of the Guidelines No. 561, the lessee should reflect the capital investment under account debit. Such expenses are included in fixed assets as the initial value of the new object – “Other non-current tangible assets” (para. 21 of Guidelines No. 561).
The decision on the nature and feature of the work carried out by the company should be taken by the head of the company, taking into account the results of the analysis of the current situation and the significance of such expenses. He/she decides whether they are aimed at increasing the technical and economic capabilities (upgrading, modification, completion, reconstruction) of the facility, which will subsequently increase the economic benefits, or make them to maintain the facility in a usable state of use and obtain initially certain amount of future economic benefits from its use.
In particular, the replacement of certain important components (parts) of fixed assets can be reflected as a replacement of the object of fixed assets. This is possible if the useful life of such a part differs from the useful life of the fixed assets to which this component belongs. In this case, replacement of a component is considered to be capital investment in the acquisition of a new object of fixed assets and write-off of the replaced object.
Accounting peculiarities
In the situation under consideration, additional equipment is installed in the car. Its use to a certain extent “replaces” a component of the car as an internal combustion engine. Therefore, the lessee will save on the difference between the cost of ordinary fuel (gasoline, diesel fuel, fuel oil, etc.) and gas − that is, it will get economic benefits. Consequently, the purchase of gas cylinder equipment for installation in a leased car should be reflected in accounting under the debit of the subaccount 152 “Acquisition (manufacturing) of fixed assets” and credit of subaccounts 301, 311, 372, 685 (depending on the situation); and its installation − by the debit of the subaccount 117 “Other non-current tangible assets” and credit of sub-account 152. It is clear that the newly created object of fixed assets will be subject to depreciation under the debit of the relevant accounts and credit of sub-account 132 “Depreciation of other non-current tangible assets”.
Therefore, the residual value of this facility will be subject to the refund, if this improvement has been provided for by the contract. The amount of refund is not the income of the lessee. If the lessee improved the car without the consent of the lessor, he/she will continue to charge the depreciation.
Tax implications
The paragraph 138.3.3 of the Tax Code of Ukraine (hereinafter − TCU) does not provide such group of fixed assets as “Other non-current tangible assets”. However, we believe that it is worth creating a separate object of fixed assets in group 5 “Transport vehicles”. If the taxpayer applies the adjustment according to Section III of the TCU, he/she should the financial result before tax to:
- increase on the amount of accrued depreciation of fixed assets in accordance with Accounting Standards or IFRS (para. 138.1 of TCU);
- reduce the amount of calculated depreciation of fixed assets in accordance with paragraph 138.3 of TCU (para. 138.2 of TCU).
The tax authorities can consider the returning a car with an improvement without any refund (full or partial) to an individual-lessor as an additional benefit of such an individual (sub-para. “б” of para. 164.2.17 of TCU). Therefore, the lessee, as a tax agent, will have to impose the PIT on a residual value of improvement (initial value of improvement minus depreciation), and with the use of a natural coefficient.
The taxable amount of the PIT is subject to taxation by the war tax (sub-para. 1.2 of para. 161 of sub-sec. 10 of sec. XX of TCU). The war tax should be also withheld from the amount of residual value for improvement of the leased car. Legislation does not provide for the use of the natural coefficient for the war tax.
