Edited version of private ruling

Authorisation Number: 1011487587572

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Ruling

Subject: Small Business Investment Allowance

Is the asset which you acquired eligible for the small business investment allowance in Division 41 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes.

This ruling applies for the following period

Year ending 30 June 2010

The scheme commenced on

1 July 2008

Relevant facts

The taxpayer entered into a contract to construct a roll-on roll-off cargo ship. The vessel was approved for construction according to the uniform shipping laws code. It was intended that the vessel be based in a particular port to service trade between it and another port. Rights had been secured to a berth for the vessel's exclusive use. Substantial work had been done to accommodate the berthing of the vessel.

The vessel was constructed elsewhere. Prior to departure for the port from which it was going to operate, an opportunity arose to sell the vessel. That opportunity was taken up.

A lease of vacant land had been taken out at the ports from which it was going to be operating. The expenses related to the berths included a shed, site levelling, fencing, berthing ramp and piles.

It was planned that the vessel would act as a common carrier. Anyone could hire the vessel for general freight. There were no fixed contracts in place but relationships had been built with traders in anticipation of carting produce.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 41

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 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 of the ITAA 1936, 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

Unless otherwise stated, all legislative references in the following Reasons For Decision relate to the Income Tax Assessment Act 1997 (ITAA 1997).

Summary

On the basis of the information provided, the preparatory activities undertaken and expenses incurred are sufficient to decide that 'at the first use time for the amount', it would be have been reasonable to conclude that the vessel would be used 'principally in Australia for the principal purpose of carrying on a business' and therefore comply with the requirements of paragraph 41-20(1)(d) of the ITAA 1997. On the basis of it complying with the other necessary requirements of Division 41, the vessel will qualify for the Small Business Tax Break.

Detailed reasoning

The Small Business and General Business Tax Break provides an additional deduction for business investment in new, tangible depreciating assets and new expenditure on existing assets. The new legislation is found in Division 41.

Small business entities can claim the 50% deduction for investments in eligible assets of $1,000 or more. All assets must be used principally in Australia for the principal purpose of carrying on a business and meet the other eligibility criteria. Provided all of the eligibility criteria are satisfied for the income year, the tax break can be claimed as a tax deduction for the income year in which the asset is first used or installed ready for use.

Whether the particular entity which acquired the asset will be considered to be a small business entity will be determined in respect of the year as a whole rather than at a point in time, as stated in the Guide to small business and general business tax break. It is only necessary that the business qualifies as a small business entity for that income year.

Section 41-20 indicates the circumstances in which an amount of expenditure in respect of an asset will constitute a recognised new investment amount. Paragraph 41-20(1)(d) states that an amount is a recognised new investment amount in relation to an asset if at the first use time it is reasonable to conclude that the asset will be used principally in Australia for the principal purpose of carrying on a business.

The expressions 'reasonable to conclude' and 'use the asset principally in Australia' are not defined in the legislation nor in the explanatory memorandum to the Tax Laws Amendment (Small Business and General Business Tax Break) Bill 2009.

A conclusion may be considered reasonable where the available facts suggest that, on balance, that conclusion is at least more likely than not to reflect reality. In the present case, it would be reasonable to conclude that the intention of the taxpayer was to use the vessel for the principal purpose of carrying on a business principally in Australia if there is sufficient body of evidence to support such a conclusion and such evidence outweighs any evidence to the contrary.

The vessel was built and initially put into service away from the port at which it was going to be based. Within a short time after its launch, and before it left, it was sold. Consequently, it never even reached the waters of the area in which it was going to operate let alone saw use in the carrying on of a business. There were no fixed contracts in place for work once the vessel reached the area. Such facts speak against the vessel being a qualifying asset for the purposes of the small business tax break.

Whilst we cannot now know what the entity would have done with the vessel if it had been put into service we can examine the entity's actions in the period leading up to the sale of the vessel to see if those actions are consistent with preparations to use the asset 'principally in Australia for the principal purpose of carrying on a business'.

Various activities were undertaken which were consistent with making preparation for the utilization of the vessel in income-producing activities. Rights were secured to a berth for the vessel's exclusive use. Substantial work was done to accommodate the berthing of the vessel. A lease of vacant land had been taken out. Various expenses were incurred which were also consistent with the intention to carry on a business.

On the basis of the information provided, the preparatory activities undertaken and expenses incurred are sufficient to decide that 'at the first use time for the amount', it would be have been reasonable to conclude that the vessel would be used 'principally in Australia for the principal purpose of carrying on a business' and therefore comply with the requirements of paragraph 41-20(1)(d) of the ITAA 1997. On the basis of it complying with the other necessary requirements of Division 41, the vessel will qualify for the Small Business Tax Break.

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