Edited version of private ruling

Authorisation Number: 1011498883641

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Ruling

Subject: General Business Tax Break

Questions

1. Is the contract the taxpayer entered into on 30 June 2009 considered to be the contract under which the taxpayer will hold the asset for the purpose of section 41-25 of the Income Tax Assessment Act 1997?

Answer: Yes

2. Can the taxpayer apply the 30% rate of deduction to the asset under section 41-15 of the Income Tax Assessment Act 1997 for the year ending 30 June 2010?

Answer: Yes

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

30 June2009

Relevant facts and circumstances

The taxpayer is a company.

The taxpayer is not a small business entity.

On the 30 June 2009 the taxpayer entered into a contract to purchase a new vehicle with the dealer.

A deposit was paid on 30 June 2009 to the dealer.

The dealer was unable to supply the original vehicle as the manufacturer ordered an insufficient number of engines to meet local demand.

The dealer became aware of the manufacturer's inability to supply the ordered engine just prior to amending the purchase order.

The original purchase order was amended in mid 2010.

It was not the taxpayer's request to change.

The option to meet the purchase order was to supply another vehicle in lieu of the original vehicle ordered which is an identical specification other than engine rating.

The purchase order was amended to specify the new vehicle as a having a larger engine.

The purchase price of the vehicle was increased by $X0,000 on the contract due to the larger engine being supplied.

The taxpayer advised in correspondence that the new vehicle will be delivered and installed ready for use by 30 June 2010.

A letter from the dealer states that the new vehicle will be delivered and registered by 30 June 2010.

The taxpayer has committed to purchasing the vehicle using a chattel mortgage.

The taxpayer has provided a copy of a Master Agreement between the lender, the taxpayer as borrower and the guarantors, signed by each party and dated in the particular month 2009.

The taxpayer has supplied a copy of the equipment loan schedule signed by the authorised officer for the taxpayer and dated in Mid 2010.

The taxpayer has supplied a copy of the terms and conditions in relation to the schedule.

The taxpayer confirmed via their tax agent that the vehicle was delivered and installed ready for use on 30 June 2010.

The taxpayer provided a copy of the registration receipt dated 30 June 2010.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 Division 41

Reasons for decision

Question 1

Summary

The contract the taxpayer entered into on 30 June 2009 is considered to be the contract under which the taxpayer will hold the asset for the purpose of section 41-25 of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

The tax break is available for new investment in tangible, depreciating assets for which a capital allowance deduction is available under section 40-25 of the ITAA 1997.

Section 40-25 of the ITAA 1997 allows you to deduct for an income year an amount equal to the decline in value of a depreciating asset that you held for any time during the year to the extent in which it is used for the purpose of producing assessable income.

A depreciating asset, under section 40-30 of the ITAA 1997, 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.

Whether you hold a depreciable asset is determined by applying section 40-40 of the ITAA 1997. The general or 'default' rule is that the taxpayer holds an asset when he, she or it is the owner of the asset.

Under section 40-25 of the ITAA 1997 a deduction from your assessable income is only available for depreciating assets that you hold.

In order for an amount to be a recognised new investment amount, its 'investment commitment time' must be between 13 December 2008 and 31 December 2009. The 'investment commitment time' is when you are committed to investing in an eligible asset.

Paragraph 41-25(1)(a) of the ITAA 1997 states that the investment commitment time for the amount which is included in the first element of the asset's cost is the time at which you:

(i) enter into a contract under which you hold the asset at that time, or will hold the asset at a later time, or

(ii) start to construct the asset, or

(iii) start to hold the asset in some other way.

A chattel mortgage over a depreciating asset may operate by way of the mortgagee having legal title to the asset but with the mortgagor having possession. In this case, the mortgagor is regarded as the holder of the asset when the chattel mortgage is entered into and not when the order contract is made with the supplier.

If a chattel mortgage operates only by way of a charge over the asset without the transfer of title to the mortgagee, then the mortgagor is still the owner and will be the holder of the asset. In this case the order contract with the supplier is the contract under which you hold the asset as its legal owner.

You entered into a contract with the dealer to purchase a new vehicle on 30 June 2009. At a later date you were advised by the dealer that the vehicle you ordered could not be delivered as the manufacturer had ordered an insufficient number of engines to meet local demand.

The option provided to meet the purchase order was for the manufacturer to supply a larger engine to place in the exact same specification vehicle. The purchase order was amended to reflect the increased engine size and also the increased price of the vehicle you originally ordered.

The terms of the original purchase order were not altered beyond the increased engine size of the vehicle and the resulting price increase; you were still committed to the purchase of the vehicle.

You committed to a chattel mortgage with your lender to purchase the vehicle. Under the contract terms and conditions you will own the vehicle but the lender will have a charge over it.

It is therefore considered that you started to hold the vehicle under the contract that you entered into with the dealer on 30 June 2009 and not when you entered into the chattel mortgage agreement with your lender.

Question 2

Summary

The taxpayer can apply the 30% rate of deduction to the asset under section 41-15 of the Income Tax Assessment Act 1997 for the year ending 30 June 2010.

Detailed reasoning

To qualify for the 30% deduction you must:

· commit to investing in the asset between 13 December 2008 and 30 June 2009,

· meet your 'new investment threshold' which is $10,000 for non small business entities, and

· first use the asset or have it installed ready for use on or before 30 June 2010.

The taxpayer entered into a contract on 30 June 2009 to purchase a new vehicle; this is within the investment commitment time.

The new investment amount for the vehicle is over $10,000 and thus meets the new investment threshold for non small business entities.

The vehicle was delivered and installed ready for use on 30 June 2010. This first use criterion has also been satisfied.

As a result the taxpayer qualifies for the tax break at the 30% rate. A bonus deduction can be included for the year ended 30 June 2010.

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