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Edited version of private ruling

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Ruling

Subject: Tax break - investment commitment time - chattel mortgage

Question 1:

If a depreciating asset is subject to chattel mortgage agreement, is the investment commitment time under paragraph 41-25(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) the time at which the chattel mortgage agreement is accepted?

Answer:

Yes.

Question 2:

Are you entitled to receive the small business tax break for your expenditure on a motor vehicle under the chattel mortgage agreement?

Answer: No.

This ruling applies for the following period:

1 July 2008 to 30 June 2009.

The scheme commences on:

1 July 2008.

Relevant facts and circumstances

A brand new vehicle was purchased for use in the business and considered a company vehicle.

You have provided a copy of the Chattel Mortgage contract. You have provided additional documentation which states that the Accepted Date of the contract was date Q.

You have provided a document which states that the delivery date for the vehicle was date R. The vehicle was used in the business from date R.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 41-1.

Income Tax Assessment Act 1997 Section 40-25.

Income Tax Assessment Act 1997 Section 328-110.

Income Tax Assessment Act 1997 Section 40-40.

Income Tax Assessment Act 1997 Paragraph 40-30.

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.

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, go to our website 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

Small business tax break

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 ITAA 1997 as Division 41.

Small business entities are now able to claim a bonus tax deduction for 50% for eligible assets costing $1,000 or more (exclusive of GST) that they:

To qualify for the 50% rate you need to meet the definition of a small business entity in section 328-110 of the ITAA 1997. This generally means that the taxpayer is carrying on a business and has an annual turnover of less than $2 million.

Businesses can commit to investing in an asset by:

Eligible assets

The tax break is available for new tangible, depreciating assets for which a deduction is available under Subdivision 40-B of the ITAA 1997 and new investment in existing eligible assets.

Section 40-25 of the ITAA 1997 allows you to deduct from your assessable income an amount equal to the decline in value of a depreciating asset you hold to the extent in which it is used to produce assessable income. Whether you hold a depreciable asset is determined by applying section 40-40 of the ITAA 1997. Paragraph 10 of Taxation Ruling TR 2005/20 provides that the default or general rule is that a taxpayer holds an asset when he, she or it is the owner of the asset.

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.

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

When is an investment considered to occur?

In order for an amount to be a recognised new investment amount, its 'investment commitment time' must be between date R and date T.

Where an amount is included in an asset's first element of cost, the investment commitment time will be the time at which you:

Chattel mortgages

The mortgagor of an asset subject to a chattel mortgage will generally be the party entitled to the tax break as it will be treated as the holder of the asset. This is the case notwithstanding that the mortgagee is the legal owner of the asset. The mortgagor's investment commitment time is usually when the chattel mortgage agreement is entered into and not the time a contract order is made with the supplier of the asset.

Application to your circumstances

Question 1

The right to hold the depreciating asset is the right acquired by you under the chattel mortgage. The offer was accepted and the contract took effect on date Q.

In this case the investment commitment time is when the offer of the chattel mortgage was accepted. The offer was accepted on date Q and this is the time at which you entered into the contract under which you hold the asset (section 40-40 of the ITAA 1997).

In order for an amount to be a recognised new investment amount, the investment commitment time must be between date R and date T. In your case the investment commitment time is date Q.

Question 2

As the investment commitment time is before the date R you will not be entitled to claim the small business tax break for the vehicle.

There is no discretion in the relevant legislation that would allow an entity to claim the tax break if they did not meet the requirements of the investment commitment time.

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