ATO Interpretative Decision
ATO ID 2003/1092
Income Tax
Capital Allowances: first element of cost - provision of a non-cash benefit - issue of sharesFOI status: may be released
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This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Where an entity contributes a depreciating asset to the taxpayer in return for the allotment of ordinary shares in the taxpayer at a defined future time, does Item 4 in the table in paragraph 40-185(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) apply in working out the first element of cost of the depreciating asset that began to be held by the taxpayer?
Decision
Yes. Item 4 in the table in paragraph 40-185(1)(b) of the ITAA 1997 applies to work out the first element of cost of a depreciating asset that began to be held by the taxpayer in return for the right to an allotment of shares at a defined future time.
Facts
The taxpayer raises funds by entities making contributions under a written agreement. Contributions that the contributing entities are obliged to make to the taxpayer under the agreement can be made in the form of depreciating assets, to which Division 40 of the ITAA 1997 applies. On receiving contributions, the taxpayer begins to hold the depreciating assets under Item 10 in the table in section 40-40 of the ITAA 1997.
Under the terms of the agreement, by contributing depreciating assets, the contributing entities will be entitled to be allotted, but not obligated to accept, ordinary shares in the taxpayer at a defined future time. The terms of the Agreement allow the contributing entities, at their absolute discretion, to elect not to be issued shares.
Reasons for Decision
The first element of cost is worked out as at the time when the asset starts to be held (section 40-180 of the ITAA 1997). In certain circumstances, the cost is the amount specified in the table in subsection 40-180(2) of the ITAA 1997. Otherwise, the cost is worked out under section 40-185 of the ITAA 1997 (subsection 40-180(1) of the ITAA 1997).
No item in the table in subsection 40-180(2) of the ITAA 1997 applies to the taxpayer's circumstances. The amount the taxpayer is taken to have paid to hold the depreciating assets is worked out under section 40-185 of the ITAA 1997. Item 4 in the table in subsection 40-185(1) of the ITAA 1997 includes in cost an amount you are taken to have paid to hold a depreciating asset in the case where you provide a non-cash benefit at or before starting to hold the asset.
Subsection 995-1(1) of the ITAA 1997 states that a non-cash benefit is property or services in any form, except money. Property includes choses in action, such as shares.
According to Taxation Ruling TR 96/23, at paragraph 68:
The general term 'property' includes choses in action, being valuable things as well as tangible goods. They are a species of property, as distinct from corporeal goods, and encompass rights of personal action, debts, mortgages, shares, copyrights and patent rights: Williams' Principles of the Law of Personal Property (14th ed, London, Sweet and Maxwell, 1894) at 1-42; Helmore's Personal Property and Mercantile Law in New South Wales , W J Chappenden and J W Carter (9th ed, Law Book Co, 1985) at 3.
Among the broad categories of rights which are recognised at law as clearly falling within the definition of a chose in action are:
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- the benefit of a contract, an option to purchase land or shares, rights to be issued shares in a company, and
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- recognised subjects of property, such as shares in a company, listed securities of all kinds, policies of insurance, copyrights patents, trademarks etc
(see Halsbury's Law of England 4th edn.)
On starting to hold the depreciating asset under the agreement, the taxpayer will not have provided property in the form of shares (by way of issue) to any particular contributing entity. However, the provision at that time by the taxpayer of the right to be issued shares is the provision of a proprietary right in meeting the obligation arising from the agreement. These rights are a form of property which is provided by the taxpayer at the time of starting to hold the depreciating asset.
The taxpayer provides a non-cash benefit (right to be issued shares) to a contributing entity at the time of starting to hold the depreciating asset. Therefore, Item 4 in the table in paragraph 40-185(1)(b) of the ITAA 1997 can apply to work out the first element of cost of the contributed depreciating asset to the taxpayer. Subsection 40-185(2) of the ITAA 1997 states that the cost of providing such a non-cash benefit is its market value when it is provided.
Date of decision: 24 November 2003Year of income: Year ended 30 June 2002
Legislative References:
Income Tax Assessment Act 1997
section 40-40
section 40-180
section 40-185
subsection 40-185(1)
paragraph 40-185(1)(a)
paragraph 40-185(1)(b)
Related Public Rulings (including Determinations)
Taxation Ruling TR 96/23
ATO ID 2003/1091
ATO ID 2003/1093
Other References:
Halsbury's Law of English 4th edn
Keywords
Cost of a depreciating asset
Depreciating assets
First element of cost
Non-cash benefits
ISSN: 1445-2782
| Date: | Version: | |
| You are here | 24 November 2003 | Original statement |
| 3 October 2008 | Archived |