Edited version of private ruling

Authorisation Number: 1011555205456

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Ruling

Subject: Small business tax break

Question

Will the acquisition of the truck under a finance lease agreement qualify for the small business tax break under Division 41 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2009

The scheme commences on:

1 July 2008

Relevant facts and circumstances

You acquired a truck between 13 December 2008 and 31 December 2009 for more than $1,000 (including GST). The contract for the acquisition was signed on this date.

You also entered into a finance lease agreement for the financing of the truck on the date of purchase.

You state that at the end of the lease term, you have the option to pay the residual and purchase the truck outright.

The finance lease arrangement passed all of the operating costs, that is, maintenance, running costs, registration and insurance to you.

You have forwarded a copy of the lease agreement. The agreement contains no option for you to acquire the truck at the end of the lease, and requires you to deliver the vehicle to the finance company at the end of the lease term.

You state that you have, in the past, financed all trucks under finance leases, and it is usual for you to pay out the residuals and purchase the trucks.

You will not depreciate the truck.

The truck was used in your business by 31 December 2010.

The truck will be used principally in Australia.

The applicant has stated that you are a small business entity.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 40-25

Income Tax Assessment Act 1997 Section 40-40

Income Tax Assessment Act 1997 Section 41-10

Income Tax Assessment Act 1997 Section 328-110

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Small business entities are able to claim a deduction of 50% under Division 41 of the ITAA 1997 for eligible assets costing $1,000 or more (exclusive of GST) that they:

· commit to investing in between 13 December 2008 and 31 December 2009, and

· start to use or have installed ready for use by 31 December 2010.

To qualify for the 50% rate you need to meet the definition of a small business entity in section 328-110 of the ITAA 1997. This generally means that you are carrying on a business and have an annual turnover of $2 million or less.

Businesses can commit to investing in an asset by:

· entering into a contract under which they will hold the asset or will start to hold at a later time

· starting to construct the asset or

· starting to hold the asset in some other way.

The deduction is available for tangible depreciating assets for which a capital allowance deduction is available under section 40-25 of the ITAA 1997. Where eligible assets are held under a lease, the tax break is to be claimed by the entity in the leasing arrangement who would claim the deductions for the decline in value of the asset.

When a taxpayer first starts to use an eligible asset it must be reasonable to conclude that the asset will be used principally in Australia for the principal purpose of carrying on a business.

Application to your circumstances

You acquired the truck between 13 December 2008 and 31 December 2009 and you started to use the truck in your business by 31 December 2010. The truck cost more than $1,000 exclusive of GST and will be used principally in Australia for the principal purpose of carrying on a business. The applicant has stated that you are a small business entity. It therefore only needs to be determined if a capital allowance deduction is available under section 40-25 of the ITAA 1997 for the truck.

Broadly speaking, Division 40 of the ITAA 1997 provides a deduction for the decline in value of a depreciating asset a taxpayer holds to the extent the asset is used for a taxable purpose (section 40-25 of the ITAA 1997).

The table in section 40-40 of the ITAA 1997 identifies a holder of a depreciating asset in any particular circumstance. The default rule is that a taxpayer holds an asset if they are the owner of it (item 10 of the table in section 40-40 of the ITAA 1997). However, there are items in the table that identify a taxpayer as a holder in various other circumstances even though they are not the asset's owner.

One of these other circumstances is contained in item 6 of the table in section 40-40 of the ITAA 1997 and applies where:

· a taxpayer has possession, or an immediate right to possession, of the asset combined with a right, the exercise of which would make it the holder (for example, an option to acquire) and

· it is 'reasonable to expect' that the taxpayer will become the holder by exercising that right or that the asset will be disposed of at their direction or for their benefit.

In your case, you are using the depreciating asset, being the truck, for the purpose of producing assessable income, which is a taxable purpose under paragraph 40-25(7)(a) of the ITAA 1997. You state that the truck is subject to the option to acquire on the cessation of the finance lease and you usually pay out the residuals of finance leases and purchase the trucks.

The lease agreement, however, does not contain any right or option for you to acquire the truck at the end of the lease term. In fact, the agreement requires you to deliver the vehicle to the finance company at the end of the term. It is not considered that an informal expectation that you will acquire the truck at the end of the term is sufficient for you to have a right which would make you the holder of the truck.

The truck will therefore not be held by you for the purposes of Division 40 of the ITAA 1997 under item 6 of the table in section 40-40 of the ITAA 1997. The finance company will be the holder of the truck under item 10 of the table in section 40-40 of the ITAA 1997 as the owner of the truck. A capital allowance deduction in relation to the truck is therefore not available to you under section 40-25 of the ITAA 1997.

You will therefore not be able to claim a deduction under Division 41 of the ITAA 1997 on the acquisition of the truck.

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