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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of private ruling

Authorisation Number: 1011612214804

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Ruling

Subject: Tax break - investment allowance - changing the size of the asset

Are you able to upgrade to a different asset to what has been purchased/ordered and still be eligible for the small business tax break?

No.

This ruling applies for the following periods:

1 July 2009 to 30 June 2010.

1 July 2010 to 30 June 2011.

The scheme commences on:

1 July 2009.

Relevant facts and circumstances

In December 2009 you placed an order for an asset. The asset was to be delivered between 1 July 2010 and 31 December 2010.

You are now thinking of up-grading to a larger asset.

The asset will be delivered once you receive the private ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 328-111

Income Tax Assessment Act 1997 section 40-25

Income Tax Assessment Act 1997 section 40-30

Income Tax Assessment Act 1997 section 40-40

Income Tax Assessment Act 1997 section 41-25

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 of the ITAA 1936 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

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our 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 13 December 2008 and 31 December 2009.

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

Application to your circumstances

You entered into a contract in December 2009 when you ordered the asset. This is the contract under which you will hold the asset. Therefore, you have committed to investing in the asset. If the asset is delivered to you and you use it or have it installed ready for use in your business before 31 December 2010, the asset will qualify as a depreciating asset for the small business tax break.

You did not order or enter into a contract to purchase the larger asset before 31 December 2009. Therefore, you have not committed to investing in the larger asset during the investment commitment time.

The asset that you have committed to investing to is the asset that will qualify for the tax break, which is the original asset. There is a difference between the original asset and the larger asset.

We have not considered if you are eligible for the tax break. You will have to meet all of the eligibility requirements to be able to claim the tax break.

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