ATO Interpretative Decision

ATO ID 2004/89

Income Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Does an STS taxpayer estimate the taxable purpose proportion of a pre-existing asset for the purposes of section 328-205 of the Income Tax Assessment Act 1997 (ITAA 1997) at the end of the financial year?

Decision

Yes. The taxable purpose proportion of a pre-existing asset is estimated at the end of the income year the asset is allocated to an STS pool.

Facts

The taxpayer entered the STS on 1 July 2001.

On 30 June 2001 the taxpayer held various items of plant and equipment that were subsequently allocated to a general STS pool.

One of the depreciating assets allocated to the pool was a motor vehicle.

The motor vehicle was used 70% for taxable purposes from 1 July 2001 to 30 July 2001.

After this time the motor vehicle was used exclusively for private purposes.

The motor vehicle was not disposed of during this year of income, accordingly there is no balancing adjustment event.

Reasons for Decision

An STS taxpayer calculates their deduction for depreciating assets under Subdivision 328-D of the ITAA 1997. Section 328-205 of the ITAA 1997 requires an STS taxpayer to estimate the taxable purpose proportion for each asset the taxpayer uses or has installed ready for use for a taxable purpose. Subsection 328-205(1) of the ITAA 1997 relates to the estimate of taxable purpose proportion for pre-existing assets.

A pre-existing asset is an asset the taxpayer:

(a)

holds just before, and at the start of, the first income year the taxpayer is, or last became, an STS taxpayer; and

(b)

has started to use, or has installed ready for use, for a taxable purpose: subsection 328-185(3) of the ITAA 1997.

Subsection 328-205(1) of the ITAA 1997 states:

You must, for the first income year for which you are, or last became, an STS taxpayer, make a reasonable estimate for that year of the proportion you will use, or have *installed ready for use, each *depreciating asset that you *held just before, and at the start of, that year for a taxable purpose if:

(a)

the asset has not previously been allocated to your *general STS pool or *long life STS pool; and

(b)

you have started to use it, or have it installed ready for use, for a taxable purpose; and

(c)

you calculate your deductions for it under this Subdivision.

Note 1: That proportion will be 100% for an asset that you expect to use, or have installed ready for use, solely for a taxable purpose.

Note 2: Your estimate will be zero for an income year if another provision of this Act denies a deduction for that year: see section 328-230.

* denotes a term defined in section 995-1 of the ITAA 1997.

This provision does not specifically state that the estimate is to be made at the beginning of the income year or at the end of the income year.

Paragraph 5.39 of the Explanatory Memorandum to the New Business Tax System (Simplified Tax System) Bill 2000 states:

For business assets the taxpayer initially brings into the STS, the estimate will be made in the income year the taxpayer first enters the STS. For business assets acquired during an STS income year, the estimate will usually be made at the end of that income year. Where a taxpayer leaves and later re-enters the STS, the estimate will need to be made in the year of re-entry for business assets not yet allocated to a pool which the taxpayer has acquired while outside the STS.

The Explanatory Memorandum makes it clear that the intention of the provision is that the reasonable estimate of use of an asset for a taxable purpose is made at the end of the income year that a taxpayer decides to enter or re-enter the STS.

The reasonable estimate the taxpayer makes at the end of the income year will reflect the fact the taxpayer has used the vehicle for 70% taxable purposes but only for a small proportion of the income year.

Year of income:  Year ended 30 June 2002

Legislative References:
Income Tax Assessment Act 1997
   section 328-185
   section 328-205
   section 328-225

Other References:
Explanatory Memorandum to the New Business Tax System (Simplified Tax System) Bill 2000
Revised Explanatory Memorandum to the New Business Tax System (Simplified Tax System) Bill 2000

Keywords
Capital allowances for STS taxpayers
General STS pool
Simplified tax system
Taxable purpose proportion

Business Line:  Business and Personal Taxes Centre of Expertise

Date of publication:  30 January 2004

ISSN: 1445-2782