Edited version of private ruling

Authorisation Number: 1011506023100

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Ruling

Subject: investment commitment time for the purchase of an asset

Will the Commissioner of Taxation confirm that, for the purposes of section 41-25 of the Income Tax Assessment Act 1997 (ITAA 1997), the investment commitment time in relation to the acquisition of an asset by the entity was in 2009?

Answer: Yes

This ruling applies for the following period:

The 2008-09 and 2009-2010 income years

The scheme commences on:

The scheme has already commenced

Relevant facts and circumstances

The entity is the head company of an Australian tax consolidated group which includes a wholly owned subsidiary.

During the 2007-08 income year, the entity entered into an agreement with a supplier for the purchase of one new asset and deposits were paid in the following months.

Early in 2009, the entity (seller) entered into an Asset Purchase and Sale Deed (the Deed) with a bank (buyer) in relation to the asset.

Under the Deed, the entity would transfer to the bank its right, title and interest in the asset.

Also on the same day in 2009, the entity and the bank entered into an Asset Hire Purchase Agreement (HP Agreement) in relation to the asset.

Under the HP Agreement, the entity is described as 'lessee' and the bank described as 'lessor' whereby the lessor has agreed to lease the asset to the lessee under the terms of the agreement.

The HP Agreement provides that, during the term of the agreement, the lessee has the right to become owner of the asset by giving notice to the lessor.

Final Delivery

The asset was delivered in January 2009.

The asset remained in storage until such time that representatives of the entity inspected the asset and were satisfied to take acceptance of the asset.

Prior to this date, the entity did not have access to the asset and was not able to take possession of the asset or to make any modifications to it.

The asset was accepted by the entity on the final delivery date in February 2009.

Settlement

Settlement under the Deed took place in 2009 at which time the bank made a final payment for the consideration outstanding under the agreement. The HP Agreement also took effect at that time.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 41-25.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 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 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

Reasons for decision

Section 41-10 of the ITAA 1997 provides that a taxpayer is entitled to a deduction for the recognised new investment amount in relation to a depreciating asset if it exceeds the new investment threshold for that year of income.

An amount of expenditure relating to an eligible asset is a 'recognised new investment amount' where the 'investment commitment time' occurs in the period between 13 December 2008 and 31 December 2009: paragraph 41-20(1)(b) of the 1TAA 1997.

Where an amount is included in the first element of the asset's cost, the investment commitment time is defined under paragraph 41-25(1)(a) of the ITAA 1997 as 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...

In order to determine the investment commitment time, it is crucial to determine the point in time at which the taxpayer becomes the holder of the asset, for the purposes of section 40-40 of the ITAA 1997, as defined under section 995-1(1) of the ITAA 199.7

The table in section 40-40 of the ITAA 1997 provides some guidance on who might be the holder of a depreciating asset at a particular time.

Generally, a taxpayer starts to hold an asset under the contract to purchase the asset. This means that a taxpayer can order an asset and may still be eligible for the tax break even though the asset is not delivered until after the cut off date. This is because the taxpayer has made the decision to invest within the prescribed period. This would be the case if the taxpayer financed the acquisition in a way that still gives them legal title to the asset.

The outcome, however, is different if the acquisition of the asset is financed under hire purchase agreements (which are not generally entered into until the asset is delivered). This is due to the effect of the 'hold' rules in Division 40 of the ITAA 1997 which provide that a taxpayer starts to hold the asset under a hire purchase agreement.

Under item 6 of the table in section 40-40 of the ITAA 1997, the hirer of a depreciating asset subject to a hire purchase agreement will be the holder if they:

· possess the asset or have a right to do so immediately, and

· have a right to become the legal owner and it is reasonable to expect that they will become the legal owner or that the asset will be disposed of for their benefit.

In the present instance, there exists a purchase contract that was entered into prior to the earlier eligible investment commitment time, that is,13 December 2008, and several deposits were also paid prior to this date.

However in February 2009, the entity and a bank entered into an Asset Hire Purchase Agreement (HP Agreement) in relation to the asset.

Under the HP Agreement, the entity is described as 'lessee' and the bank described as 'lessor' whereby the lessor has agreed to lease the asset to the lessee under the terms of the agreement.

Pursuant to a clause of the HP Agreement, the lessee has the right to purchase the asset for its terminating value and the entity confirms that it is reasonable to expect that the entity will exercise this right and acquire the asset, then either own the asset, sell the asset or enter into another financing arrangement (either operating lease or hire purchase agreement) in relation to the asset.

Based on these facts, it is considered that the purchase order placed with the supplier in the 2007-08 income year was not the contract under which the entity held the asset at that time. The right of possession and the right to become the asset's legal owner were rights acquired by the entity under the hire purchase agreement. By entering into the hire purchase agreement, it gave rise to a contract under which the entity would hold the asset for the purposes of subparagraph 41-25(1)(a)(i) of the ITAA 1997. Therefore, the entity became the holder of the aircraft under item 6 of the table in section 40-40 of the ITAA 1997.

As the HP Agreement was entered into in 2009, the investment commitment time was on that day in 2009.

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