Edited version of private ruling

Authorisation Number: 1011515408248

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Deductions under section 41 of the ITAA 1997

Issue: Investment allowance deductions under section 41 of the ITAA 1997

Question

Is the taxpayer entitled to the full investment allowance as set out in Div 41 of the Income Tax Assessment Act 1997 (ITAA 1997) for the new assets purchased after 13 December 2008 and installed before 30 June 2009, provided that all the eligibility tests under section 41-10 of the ITAA 1997 are met.?

Answer: Yes

Relevant facts and circumstances

You are a business operating as a mutual association under the relevant legislation.

You are not a tax exempt entity however you are subject to the Mutuality of Income Principle and in the 2008-09 income year, you derived amounts of non mutual income.

You are a business that is considered to be an 'other business' for the purposes of the new investment allowance provisions with a turnover that exceeds $2M.

During the 2008-09 income year you acquired capital assets that either exceeded $10,000 individually, as a set, or grouping of like items.

These assets were purchased after 13 December 2008 and installed before 30 June 2009.

The assets are used 100% in the business, in the service areas where mutual income is derived.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 41

Detailed reasoning

Under Div 41 of the ITAA 1997, you may be eligible to claim the business tax break if you:

· carry on a business

· buy the asset by the deadline

· use or install the asset by the deadline

· meet the minimum thresholds

· use the asset principally in Australia and principally in your business, and

· are eligible to claim a deduction for the asset's decline in value under section 40-25 of the Income Tax Assessment Act 1997.

To qualify for the 30% tax break, you must:

· be a business with an annual turnover of $2 million or more

· buy an eligible asset between 13 December 2008 and 30 June 2009

· meet the $10,000 minimum threshold

· use or install or improve the asset by 30 June 2010

· use the asset principally in Australia and principally for business, and

· be able to claim a deduction for the asset's decline in value under section 40-25 of the Income Tax Assessment Act 1997.

If you miss the 30% deadlines, you will qualify for the 10% tax break, if you:

· are a business with an annual turnover of $2 million or more

· buy an eligible asset between 1 July 2009 and 31 December 2009

· meet the $10,000 minimum threshold

· use or install or improve the asset by 31 December 2010

· use the asset principally in Australia and principally for business, and

· can claim a deduction for the asset's decline in value under section 40-25 of the Income Tax Assessment Act 1997.

You will also qualify for the 10% tax break if you:

· are a business with an annual turnover of $2 million or more

· buy an eligible asset between 13 December 2008 and 30 June 2009

· meet the $10,000 minimum threshold

· use or install or improve the asset between 1 July 2010 and 31 December 2010

· use the asset principally in Australia and principally for business, and

· can claim a deduction for the asset's decline in value under section 40-25 of the Income Tax Assessment Act 1997.

The issue to consider is the specific sections relating to eligibility to claim the business tax break under Div 41 of the ITAA 97.

Investment Allowance general rule

Under Division 41 of the ITAA 1997, a taxpayer may deduct an amount relating to the Investment Allowance for the 2009, 2010, 2011 or the 2012 years of income in relation to an asset if:

(a) the asset is a depreciating asset (other than an intangible asset) (paragraph 41-10(1)(a));

(b) an amount can be deducted in relation to the asset under section 40-25 (paragraph 41-10(1)(b));

(c) the total of the recognised new investment amounts for the income year in relation to the asset equals or exceeds the new investment threshold for the income year in relation to the asset (paragraph 41-10(1)(d));

(d) it is reasonable to conclude that the asset will be used principally in Australia for the principal purpose of carrying on a business (paragraph 41-20(1)(d)).

Each of these elements is discussed below.

Elements of Division 41

a. Depreciating asset

The tax break is available for new investment in tangible depreciating assets for which a capital allowance deduction is available under Subdivision 40-B (specifically, section 40-25) of the ITAA 1997. Broadly, a depreciating asset is an asset that has a limited effective life (section 40-30 of the ITAA 1997). Assets that receive capital allowance deductions under other sections of Division 40 of the ITAA 1997 are not eligible for the tax break - for example, capital expenditure incurred in constructing capital works such as buildings and structural improvements for which a capital works deduction is available under Division 43 of the ITAA 1997.

b. Deduction under section 40-25

Under section 40-25 of the ITAA 1997, a taxpayer can deduct an amount equal to the decline in value of a depreciating asset for an income year where that asset was held during the year.

i. Held

A taxpayer is taken to hold a depreciating asset if the taxpayer is, among other things, the owner of the asset (section 40-40, Item 10 of the ITAA 1997).The taxpayer would be the holder of the assets from the date of the supply.

ii. ii.Installed ready for use

A taxpayer will be entitled to claim a deduction for the decline in value of an asset when the asset is first used or installed ready for use (section 40-60 of the ITAA 1997).

An asset is taken to be installed ready for use even if it is held in reserve (subsection 995-1(1) of the ITAA 1997).

iii. An amount must be able to be calculated as a decline in value

Section 40-25 of the ITAA 1997 does not stipulate a minimum period of time for which a depreciating asset is required to be held for the deduction to be claimed. This section allows a deduction for the decline in value of depreciating assets held for any time during the year (emphasis added).

In our view, assets held even momentarily would therefore technically qualify for a claim for a decline in value. This is further supported by the example in section 40-75 of the ITAA 1997 which suggests that as long as an asset is held and first used on a particular day, it is eligible for a claim for the decline in value in respect of that day.

The formulae prescribed under Division 40 of the ITAA 1997 to calculate the decline in value under the prime cost and diminishing value methods make reference to days held. However, there is no provision for apportionment of the Div 41 tax break deduction. If the requirements for entitlement are satisfied, then the amount of the deduction will not be reduced for any non-taxable use of the asset or apportioned based on the actual taxable use of the asset over a particular income year.

c. Recognised new investment amount and new investment threshold

i. Recognised new investment amount

Broadly, a recognised new investment amount is an amount included in the first element of an assets cost (worked out under Subdivision 40-C of the ITAA 1997), or second element of an assets cost under paragraph 40-190(2)(a) of the ITAA 1997, and where:

· the investment commitment time for the amount occurs between 13 December 2008 and 31 December 2009 (paragraph 41-20(1)(b); and

· the first use time for the amount occurs no later than the end of the income year and no later than 31 December 2010 (paragraph 41-20(1)(c)).

ii. Investment commitment time

For assets that are acquired, the investment commitment time is the time the contract under which the taxpayer will hold the asset is entered into (paragraph 41-25(1)(a) of the ITAA 1997).

It is not relevant that the taxpayer has not yet paid for the asset outright or has taken delivery of the asset at this time [Revised Explanatory Memorandum to Tax Amendment (Small Business and General Business Tax Break) Bill 2009 at 1.104].

iii. First use time

In relation to acquired assets, the first use time is the time the taxpayer starts to use the asset or have it installed ready for use (section 41-30 of the ITAA 1997).

As outlined above, the definition of installed ready for use under subsection 995-1(1) of the ITAA 1997 includes assets held in reserve. The assets are installed ready for use on delivery by the supplier, as confirmed by the dicta in Case X 46, as noted above.

iv. Recognised new investment amount

The amount paid by the taxpayer to acquire the assets will be considered a recognised new investment amount where:

· the investment commitment time for the relevant amount occurs between 13 December 2008 and no late than 31 December 2009; and

· the first use time for the relevant amount occurs no later than the end of the income year and no later than 31 December 2010.

v. New investment threshold

For large business entities, the new investment threshold for an income year in relation to an asset is $10,000. This threshold applies to new assets (that is, assets which have not previously been put into use).

d. Principal use in Australia for carrying on a business

To be eligible for the Investment Allowance, taxpayers must be able to demonstrate that at the time when the relevant asset is used or installed ready for use, it is reasonable to conclude that the asset will be principally used in Australia for the principal purpose of carrying on a business.

In this case, the assets are used 100% in the business where both assessable and non-assessable income is derived. In the 2008-09 income year, the assets were used to produce certain amounts of non-mutual income.

As explained above, there is no provision for apportionment of the Div 41 tax break deduction. If the requirements for entitlement are satisfied, then the amount of the deduction will not be reduced for any non-taxable use of the asset or apportioned based on the actual taxable use of the asset over a particular income year.

On the basis that the assets are only used in the taxpayer's business this requirement is satisfied.

Conclusion

The taxpayer is entitled to the full investment allowance for the assets purchased after 13 December 2008 and installed before 30 June 2009 provided that it has satisfied all the eligibility tests under section 41-10 of the ITAA 1997.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).