Edited version of private ruling

Authorisation Number: 1011685870454

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Ruling

Subject: Investment allowance - Investment commitment time

The Group comprises a number of entities, trusts and corporations that perform specialised tasks.

A Trust which was formed is the responsible entity in the group that arranges for the various inputs of the production process (personnel, equipment and raw materials) to be utilised to produce final products for sale. It is the entity that is responsible for invoicing customers.

The equipment eligible for the investment allowance claim was acquired by the Trust, by it accepting a quote for the supply and installation of equipment through a supplier.

An original quote was given by the supplier to the Trust prior to 30^th June 2009.

In response to this quote, a written Purchase Oder from the Trust was given to the supplier with a deposit at the time of placing the order.

The Trust has been in discussions and been assessed for finance by a bank prior to the 30^th June 2009. The bank generally was satisfied to provide the finance although the process of funding was in stages.

The banks business finance agreement provides that throughout the pre-delivery phase, the bank would provide the finance by making instalments when required under the payment terms of the quote.

Upon delivery and subsequent commissioning of the equipment, the fully drawn facility arising from the bank making instalments under the forward exchange contract is to be refinanced into a commercial business loan.

The commercial business loan facility is due to expire in 2010, with an option for the Trust to renew this facility for a further term.

A further option exists for the Trust to refinance the commercial loan facility through an equipment finance company (refer to relevant section of the equipment finance company agreement). Utilisation of the equipment finance company for this purpose is at the discretion of the Trust.

The Trust placed a purchase order before the end of June 2009 for the purchase of equipment which was to be delivered December 2009 (first supply) and October 2010 (second supply).

This purchase order was legally binding on the trustee.

The acquisition was financed via a forward exchange contract during the manufacture process and instalments were made to the Vendor by the Trust in accordance with the payment terms agreed within the supply quotation. At the completion of the payment terms schedule, a commercial loan was created crystallizing the values advanced by the bank under the forward exchange contract.

The title did not and shall not pass to the bank. The trustee retains ownership throughout the life of the loan. A Chattel Mortgage was entered into with the bank in 2009.

The trust is the sole user of the equipment. The equipment is installed at the Group's manufacturing plant.

The Trust will be eligible to claim the Investment Allowance under Division 41 of the ITAA 1997 in respect of the equipment acquired from the Supplier at:

· 30% where

o a purchase order for the equipment is confirmed by the Supplier between 13 December 2008 and on or by 30 June 2009; and

o the equipment will be delivered to the Trust for its use on or by 30 June 2010; and

· 10% where:

o a purchase order for the equipment is confirmed by the Supplier on or by 31 December 2009; and

o equipment is delivered to the Trust for its use by 31 December 2010.

Detailed reasoning

1. 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 40-5 (paragraph 41-0(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 41-0(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 41-0(1)(d)).

Each of these elements is discussed below.

2. Elements of Division 41

(a) Depreciating asset

Broadly, a depreciating asset is an asset that has a limited effective life (section 40-0 of the ITAA 1997).

Given that the equipment owned by the Trust has an effective life of approximately 6 years, they are depreciating assets for the purposes of section 40-30 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). The Trust would be the holder of the equipment from the date on which the is delivered to the Trust by the Suppler.

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 997).

In Case X46, 90 ACT 378, Mr KL Beddoe held that a second hand cotton picker acquired for use in a cotton growing venture was installed and ready for use if it had been fuelled and operated by an operator, as the equipment in this case is ready for use as at delivery, it will be installed ready for use using this criteria. Hence, the equipment is eligible for a deduction in relation to the decline in value under section 40-25 of the ITAA 1997. It is noted that in Case X 46, the cotton picker was held not to be held in reserve as the business had not commenced at that time. This restriction does not apply to the Trust as the company operates a continuing business.

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. By way of example, the prime cost basis of depreciation is determined as follows (section 40-75):

Asset cost x Days held x 100%

365 Assets effective life

As is evidenced above, the formula to calculate depreciation is based on the number of days held, and so, all assets held for at least one day are eligible for depreciation.

It is intended that the Trust will hold the equipment for more than one day. Accordingly, the equipment should qualify for a deduction for decline in value for this period.

Based on the above three factors, the Trust is eligible to claim a deduction for the decline value of the equipment under section 40-25.

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)).

When the Trust places a purchase order to acquire the equipment which is subsequently confirmed in writing by the Supplier, a legally binding contract is formed. As such, this constitutes the investment commitment time for the purposes of Division 41.

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].

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).

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

A deduction for decline in value is available in respect of the equipment as it are used in the Trust's business prior to any possible sale to a financing entity.

The financing arrangement is being undertaken by the Trust to achieve greater flexibility in managing the cost of funds and is required by the finance provider in order to secure the funds. This does not prevent the trust from claiming the allowance for the following reasons:

When the Trust receives the equipment from the Supplier, the equipment will be installed and in use in the Trust's business.

The equipment is always owned by the Trust.

On the basis that the equipment is installed ready for use when delivered, the delivery date will constitute the first use time under Division 41.

(c) Recognised new investment amount

The amount paid by the Trust to acquire the equipment 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.

This ruling is only concerned with amounts which are incurred within the relevant investment period. Hence, this requirement should be satisfied.

ii. 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).

On the basis that the equipment purchased by the Trust from the Supplier are new and cost in excess of the required $10,000 threshold, this requirement is satisfied.

(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.

On the basis that the equipment is only used in the business of the Trust to provide supplies and the business is carried on in Australia, this requirement is satisfied.

The amount of deduction available:

Under paragraph 41-15(1)(c) the amount that the Trust can deduct is:

(i) 30% where the purchase order for the equipment is confirmed by the supplier between 13 December 2008 and on or before 1 July 2009 and the equipment is delivered to the trust for its use on or before 1 July 2010 or

(ii) 10% where the purchase order is confirmed after 30 June 2010 and by 31 December 2010 and the equipment is used or installed by 31^st December 2010.

(iii) 10% where the purchase order is confirmed by between 1 July 2009 and 31 December 2009 and the equipment is used or installed by 31 December 2010.

Conclusion:

As the purchase order was confirmed on 30^th June 2009 and the equipment was used or installed by 30^th June 2010, the Trust is eligible for the 30% investment allowance on the purchase of the first delivery of equipment.

However, the second delivery of equipment was first used or installed after 30^th June 2010 but before 31 December 2010, and therefore the Trust is only eligible for a 10% allowance on the purchase cost.

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