Edited version of private ruling

Authorisation Number: 1011830162823

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Ruling

Subject: Capital Allowances - Tax Break

Question

Does the entity qualify as a small business entity and therefore be eligible for the capital investment allowance in paragraph 41-15(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period

Year ending 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You are an entity that was established with the intention to engage in the business of leasing commercial premises. This business has an office set up to handle its correspondence, a postal box and all the equipment required to operate a business.

You currently have a small number of commercial properties leased, with the intention of completing construction of another premises to lease. You have a small number of tenants. All investments made are on basis of commercial purpose only.

Profit is intended and you have previously recorded a profit in prior financial years.

You have an employee that would spend eight hours a week dealing with matters for the entity and 16 hours at month end to complete the reporting. The owner of the entity would spend 15 hours a week dealing with this business.

This business is carried on in an office environment with planned, daily, weekly and monthly activities. It has an ABN and is registered for GST on a quarterly basis. It has stationary with logo on business letterheads and other business stationary.

You are of the view that the activity is currently a large size business. In the future this will continue to grow with the additional premises it will have to lease.

Two of the properties are managed by your entity and the other property is managed by a separate entity.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 328-110
Income Tax Assessment Act 1997 Section 41-15

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 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.

The legislative references referred to herein are from the ITAA 1997, unless otherwise stated.

Under the Tax Laws Amendment (Small Business and General Business Tax Break) Act 2009 a 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).

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

· commit to investing in between 13 December 2008 and 31 December 2009, and

· start to use or have installed ready for use by 31 December 2010.

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

Carrying on a business

Whether a business is being carried on depends on the large or general impression gained (Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470 at 474; 5 AITR 548 at 551, Martin's Case) from looking at all the indicators of carrying on a business, and no one indicator will be decisive (Evans v. Federal Commissioner of Taxation 89 ATC 4540; (1989) 20 ATR 922). These indicators are described in Taxation Ruling TR 97/11. The indicators to establish whether a taxpayer is carrying on a business are contained in TR 97/11and include the following:

· significant commercial purpose or character

· purpose and intention to engage in business and nature of the activities

· intention to make a profit and prospect of profits

· repetition and regularity

· activities of the same kind and carried on in a similar manner to those of the ordinary trade in that line of business

· organisation, systematic, business like manner

· the size and scale of the activity

Other factors that can be taken into account are:

· whether the taxpayer is operating to a plan, setting budgets and targets, keeping records

· whether the taxpayer is engaged in another full time occupation

In the current situation, you own three commercial properties with three tenants.

You have an employee who spends eight hours a week dealing with business matters and 16 hours at month end to complete reporting. The owner of the entity would spend 15 hours a week dealing with this activity. Two of the properties are managed by your entity and the other property is managed by a separate entity.

The fact that the company owns a small number of commercial properties with a small number of tenants does not give the activity the required size and scale to indicate that it is involved in a commercial rental property business. Repetition and regularity of the activity is consistent, but the number of hours per week spent maintaining the enterprise is considered minimal especially as one property is managed by an independent entity. Based on these facts the entity is not in the business of renting commercial properties.

Conclusion

To access the small business tax break you must be an eligible entity. An eligible entity is an entity that is in business and has a turnover of less then $2 million. As the company is not in business it is not an eligible entity and cannot claim the small business tax break in relation to capital allowance deductions.

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