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Authorisation Number: 1011391891098

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Ruling

Subject: Business tax Break

Question 1

Can a personal services entity that is not a personal services business claim a tax break under Division 41 of the Income tax Assessment Act 1997 (ITAA 1997)?

Summary

Provided the PSE satisfies all of the other eligibility requirements.

Detailed reasoning

The Tax Laws Amendment (Small Business and General Business Tax Break) Act 2009 received Royal Assent on 22 May 2009. This has been inserted into the Income Tax Assessment Act 1997 (ITAA 1997) as Division 41.

Small business entities are now able to claim a bonus tax deduction of 50% 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. This generally means that the taxpayer is carrying on a business and has 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

· starting to construct the asset.

Eligible assets

The Tax Break is available for new tangible, depreciating assets for which a deduction is available under Subdivision 40-B and new investment in existing eligible assets.

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.

Decline in value deduction

Section 40-25 allows you to deduct from your assessable income an amount equal to the decline in value of a depreciating asset to the extent to which it is used to produce assessable income.

Under section 40-30, a depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used. There are exceptions to that rule such as land, an item of trading stock and some intangible assets.

Cars

In regard to motor vehicles, subsection 86-70(1) of the ITAA 1997 does not stop a personal services entity deducting car expenses for one car where there is no private use.

However, in a situation where there is more than one car that has private use subsection 86-70(3) of the ITAA 1997 states that the entity must nominate the car for which it wants to claim the deductions. Therefore, any car expenses for the second or subsequent cars for which there is private use are not deductible.

It has been advised that there is only one car that is used for part private use. Therefore, if you use the one-third of actual expenses, log book or 12% of original value method to calculate your deductions for car expenses, you may be eligible to claim the tax break in relation to the car. However, you still need to satisfy the purpose test. That is, you must be able to demonstrate that, when you start to use the car, it is reasonable to conclude that you will use the car principally in Australia for the principal purpose of carrying on a business.

Personal services entity (PSE)

If you are a PSE carrying on a business and in receipt of personal services income, but do not meet any of the four personal services business tests and have not received a personal services determination, you will be entitled to a deduction for the tax break if you meet all the other eligibility requirements.

A PSE is defined by subsection 86-15(2) of the ITAA 1997 to be a company, partnership or trust whose ordinary or statutory income includes the personal services income of one or more individuals.

Section 86-60 of the ITAA 1997 contains the general rules concerning deduction entitlements of PSE's. This section does not apply to deny a deduction for the tax break to a personal services entity that is conducting a business.

Conclusion

As long as all the other requirements are satisfied, the PSE may claim the 50% tax break in respect of eligible assets costing $1,000 or more GST exclusive. The fact that the PSE does not satisfy any of the personal services business tests nor have a personal services determination does not in itself prevent the PSE from claiming the tax break.

Question 2

If the claim for the small business tax break results in a loss is it limited by section 86-87 of the ITAA 1997?

Summary

Yes.

Detailed reasoning

See question 3.

Question 3

If there is a loss from claiming the deduction under Division 41 of the ITAA 1997 can it be attibuted to the individual who performed the personal services?

Summary

Yes.

Detailed reasoning

Personal services income loss

Section 86-27 of the ITAA 1997 allows a deduction to the appropriate individual with respect to a net personal services income loss suffered by a personal services entity for a particular income year.

Section 86-27 of the ITAA 1997 states that -

If your personal services deduction amount exceeds your unreduced personal services income, then you can deduct the excess amount. For this purpose:

(a) your personal services deduction amount is the amount of deductions relating to your *personal services income worked out under step 1 of the method statement in section 86-20, increased by the amount (if greater than zero) worked out under step 4 of the method statement; and

(b) your unreduced personal services income is the personal services income that would have been included in your assessable income for the income year if there had not been any reduction under section 86-20.

To determine the amount by which the personal services income should be reduced the steps in the method statement at subsection 86-20(2) of the ITAA 1997 should be followed, they are:

Step 1 Work out the amount of any deductions (other than entity maintenance deductions or deductions for amounts of salary or wages paid) to which the entity is entitled that relate to the individuals personal services income.

Step 2 Work out the amount of the entity maintenance deductions to which the entity is entitled.

Step 3 Work out the entity's assessable income, disregarding the individual's personal services income or the personal services income of anyone else.

Step 4 Step 2 less step 3. That is, subtract from the entity maintenance deductions the non-personal services income first.

Step 5 If the amount under step 4 is greater than zero, the amount of the deduction against the personal services income is the sum of the amounts under steps 1 and 4.

Step 6 If the amount under step 4 is equal to or less than zero, the amount of the deduction against the personal services income is the amount under step 1.

Entity maintenance deductions are defined in section 86-65 of the ITAA 1997 and include expenditure such as bank fees, tax related expenses, outgoings incurred in relation to preparation or lodgement of a document prepared to comply with the Corporation Act 2001, and any fee or charge payable by an entity to an Australian government agency for any licence or the like that is granted under an Australian law.

Accordingly, section 86-27 of the ITAA 1997 allows the relevant individual to claim a deduction for the loss year with respect to the entity's personal services income loss. If the deduction means that the individual's taxable income is less than zero, the tax loss may be carried forward to future income years in accordance with Division 36 of the ITAA 1997.

To prevent a deduction also being claimed with respect to the same amount by the personal services entity, section 86-87 of the ITAA 1997 precludes a deduction for this amount from being allowed to the personal services entity. That section states -

SECTION 86-87 Personal services entity cannot deduct net personal services income loss

86-87 The total amount of the deductions to which a *personal services entity is entitled for an income year is reduced by the amount of any deduction that an individual, whose *personal services income is ordinary or statutory income of the entity for that income year, is entitled to under section 86-27.

Conclusion

Any loss claimed in the individual's income tax return in relation to the personal services income cannot also be claimed by the entity.

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