Edited version of private ruling

Authorisation Number: 1011494248128

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Ruling

Subject: Tax break - investment allowance - investment commitment time

Question:

Will you commit to invest in the asset within the investment commitment time for the purpose of paragraph 41-20(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997)?

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

You entered into a contract for purchase of a depreciating asset. The contract was signed and dated before 13 December 2008 and stated that Finance Arrangements were through a particular company. Delivery of the asset was to be after 13 December 2008.

Prior to the delivery of the asset, you were in the process of changing your banking loans. The bank offered to quote on the loan needed to purchase the asset and provided you with a better deal. You signed the loan contract (Commercial Loan) with the bank after 13 December 2008 with a charge/Bill of Sale over the goods.

Relevant legislative provisions

Income tax Assessment Act 1997 Section 40-40.

Income tax Assessment Act 1997 Paragraph 41-25(1)(a).

Income tax Assessment Act 1997 Subparagraph 41-25(1)(a)(i).

Income tax Assessment Act 1997 Paragraph 41-25(1)(b).

Reasons for decision

Small business tax break

Small business entities are now able to claim a bonus tax deduction of 50% for eligible assets costing $1,000 or more (exclusive of GST) 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 of the ITAA 1997. This generally means that the taxpayer is carrying on a business and has an annual turnover of $2 million or less.

What is an eligible asset?

To be eligible for the tax break, the asset must be a tangible 'depreciating asset' for which a capital allowance deduction is available under section 40-25 of the ITAA 1997.

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. The 'investment commitment time' is when you are committed to investing in an eligible asset.

Where an amount becomes included in an asset's first element of cost, the investment commitment time will be the point in time you have:

- entered into a contract under which you hold the asset or will start to hold at some point in time

- started to construct the asset, or

- started to hold the asset in some other way.

To satisfy the investment commitment time test for such an amount, it is enough that you entered into a contract in relation to the asset between 13 December 2008 and 31 December 2009.

Holding an asset

Section 40-40 of the ITAA 1997 sets out 10 items under which a taxpayer is taken to hold a depreciating asset. The general rule is that the taxpayer holds an asset when he or she or they are the owner of the asset (item 10).

Chattel mortgage arrangements

Under the capital allowance rules, if you enter into a legal chattel mortgage where the mortgagee is the legal owner of the asset, the contract under which you hold the asset is the chattel mortgage agreement. Therefore, the investment commitment time is when you enter into the chattel mortgage, not when an order contract is made with the supplier. However, if you purchase a depreciating asset and become its legal owner prior to entering into the legal chattel mortgage, the investment commitment time is the time at which you enter into the contract to purchase the asset. This may be when the order contract is made with the supplier.

If you enter into an equitable chattel mortgage which operates only by way of a charge over the asset and you are the legal owner of the asset, the order contract with the supplier is the contract under which you hold the asset as its legal owner. Accordingly, the investment commitment time is when you enter into the order contract with the supplier.

Application to your circumstances

In your case, you will hold the asset under item 10 of the table in section 40-40 of the ITAA 1997 and therefore you are the legal owner of the asset. The commercial loan operates only by way of a charge over the asset.

The contract under which you will hold the depreciating asset is the contract to purchase the asset as that is the contract under which you will become the legal owner.

The investment commitment time will be when you entered into the contract to purchase the asset, which was before 13 December 2008.

As the investment commitment time for purchase of the asset was before 13 December 2008 you are not eligible for the 50 % small business tax break for the purchase of the asset.