Edited version of private ruling

Authorisation Number: 1011623236385

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Ruling

Subject: Small Business Investment Allowance

Is the vehicle that you purchased considered a new vehicle for the purposes of the small business investment allowance in Division 41 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes.

This ruling applies for the following period

1 July 2009 to 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

The taxpayer purchased a work vehicle. Their intention was to purchase a new vehicle.

The vehicle was delivered to them. The odometer showed that a small number of kilometres had been travelled prior to the taxpayer taking possession.

A dispute ensued as to whether the taxpayer had received what they had purchased. The matter ended up before the relevant Tribunal. In its judgment, the Tribunal awarded limited compensation. The taxpayer made attempts to get the vehicle replaced with another vehicle. Those attempts were rebuffed by the dealers.

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 to of the ITAA 1936 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 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

Unless otherwise stated, all legislative references are to the Income Tax Assessment Act 1997.

Summary

The use of the motor vehicle prior to transfer to the taxpayer and other evidence supports an objective conclusion that the use amounted for practical purposes to no more than reasonable testing and trialling for the purposes of subsection 41-20(3). The facts indicate that at the time of purchase the motor vehicle could still be considered new. As a consequence, the vehicle would meet the requirements to qualify for the investment allowance in Division 41.

Detailed reasoning

Division 41 allows an additional deduction for certain new business investment in new, tangible depreciating assets and for new expenditure on existing assets. To qualify, the asset must not have been previously used or installed ready for use for any purpose (paragraph 41-20(1)(e)). The Revised Explanatory Memorandum to Tax Laws Amendment (Small Business and General Business Tax Break) Bill 2009 notes at paragraph 1.59:

Division 40 of the ITAA 1997 does not contain a concept of new or second-hand assets. However, this is an important feature of the eligibility criteria for the Tax Break. An asset is new for the purposes of the Tax Break if it has never been used or installed ready for use either by the taxpayer or another entity for any purpose...This means that second-hand assets are not eligible for the Tax Break.

Although the general rule is that the tax break is only available for investment in new assets, there is an exception in the case where the previous use of the asset 'was merely for the purposes of reasonable testing and trialling,' as stated in subsection 41-20(3). That exception is noted in the Revised Explanatory Memorandum notes at paragraph 1.62.

To come within the scope of the exception, there are effectively two requirements that need to be satisfied. Not only must the use satisfy the description of testing or trialling, the nature and extent of that use must also be reasonable.

The policy context of the tax break is to provide an incentive in the form of a temporary bonus tax deduction for investment in new tangible assets. Once an asset has been used it can no longer be described as new. However, in the limited case of use for reasonable testing and trialling, the law provides that the asset can nevertheless be eligible for the tax break.

As the Explanatory Memorandum notes, an asset can still be considered new despite it having been used for testing and trialling, if the nature and extent of that use is consistent with the asset retaining the essential attributes of what would be regarded as a new asset. In that sense, the adverb 'reasonable' qualifies the nature and extent of the testing and trialling which can have occurred. Accordingly, if the testing and trialling results in the asset losing the quality of what is essentially a new asset, then it is considered that the use will mean the asset is ineligible for the tax break.

That approach is consistent with the interpretation applied in the context of the old investment allowance law in determining whether an asset was able to qualify as 'new' under former subsection 82AQ(1) of the Income Tax Assessment Act 1936 . Taxation Ruling IT 2132 examined the circumstances in which a demonstrator vehicle could be regarded as new. The Ruling notes at paragraph 3 that 'a limited amount of demonstration mileage is not regarded as affecting the newness of a particular vehicle'. Further at paragraph 4 it states:

As a guide it may be accepted that a vehicle which would otherwise qualify as new will continue to be so regarded where it is used for ordinary demonstration purposes for less than three months. The term "ordinary" is used to guard against the situation where there may be excessive use of a vehicle for demonstration purposes in a three month period which would lead to the conclusion that the particular vehicle could not be regarded as new in the hands of the purchaser.

The basis upon which the Ruling distinguished between demonstrator vehicles that could be regarded as new and those that could not turned on whether the use detracted from the 'newness' of the vehicle. As a guiding principle, use over a significant period or use that exceeded the mileage that would be expected for 'ordinary' demonstration purposes was regarded as affecting the quality of 'newness' of the vehicle.

Whether the use of a demonstrator motor vehicle for the purposes of testing and trialling is 'reasonable' is a question of fact and degree. In the present case, various facts apply. The use of the motor vehicle prior to transfer to the taxpayer and other evidence supports an objective conclusion that the use amounted for practical purposes to no more than reasonable testing and trialling for the purposes of subsection 41-20(3).

The facts indicate that at the time of purchase the motor vehicle could still be considered new. As a consequence, the vehicle would meet the requirements to qualify for the investment allowance in Division 41.

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