Edited version of private ruling

Authorisation Number: 1011497537695

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Ruling

Subject: Investment commitment time

Question 1

What is the investment commitment time for the purposes of section 41-25 of the Income Tax Assessment Act 1997 (ITAA 1997) for your project?

Answer

2009

This ruling applies for the following period:

1 January 2010 - 31 December 2010

The scheme commenced on:

1 January 2010

Relevant facts and circumstances

It was necessary to construct a new item for business purposes.

The directors approved the development of the item.

You entered into a contract for the installation of the item.

In accordance with the terms of the contract, you acquired various materials required for the construction of the item. You provided the materials to the contractor.

The contractor commenced fabrication work.

You terminated the contract.

Upon termination of the contract, the construction of the item ceased.

The Board of Directors approved an increase in the project budget to cover the increased cost of the proposed new contract, and approved the entry into a new contract with a contractor unrelated to the original contractor. The new contract was executed.

You are required to provide free-issue materials. These include items previously acquired and partially fabricated in relation to the previous contract.

You have advised that the item is a depreciating asset, and the amounts expended on the item are included in the first element of its cost base. You do not require a ruling on these issues.

Relevant legislative provisions

Income Tax Assessment Act 1997 41-25

Reasons for decision

Summary

Under Division 41 of the ITAA 1997, a deduction is allowed for investment in new depreciating assets. Under paragraph 41-20(1)(b) of the ITAA 1997, one of the conditions for deductibility is that the investment commitment time must fall within the period commencing on 13 December 2008 and ending on 31 December 2009 (the relevant period).

Under paragraph 41-25(1)(a) of the ITAA 1997, where an amount is included in the first element of an asset's cost, the investment commitment time for recognised new investment amounts is the time at which you:

(i) enter into a contract under which you hold the asset at that time, or will hold the asset at a later time; or

(ii) start to construct the asset; or

(iii) start to hold the asset in some other way.

In this case paragraph (i) applies, and the investment commitment time is the time when you entered into the contract under which you would hold the item. You first entered into a contract for the development of the item before the relevant period. That contract was terminated, and you entered into a second contract within the relevant period.

Based on the information you provided, we accept that the second contract is the contract under which you acquired the item.

Subsection 41-25(2) of the ITAA 1997 is an integrity provision that relates to situations where contracts are terminated for the purpose, or for purposes that include the purpose, of becoming entitled to a deduction under Division 41 of the ITAA 1997.

In this case, based on the information you provided, subsection 41-25(2) of the ITAA 1997 does not apply.

Detailed reasoning

In this case, you will be providing the actual item and some other materials required for the item, and the contractor is responsible for all installation work.

Based on subparagraphs 8(ii) and 8(iii) of Income Tax Ruling IT 2142, the asset that you are acquiring is a item.

Under Division 41 of the ITAA 1997, a deduction is allowed for investment in new depreciating assets. Under paragraph 41-20(1)(b) of the ITAA 1997, one of the conditions for deductibility is that the investment commitment time must fall within the period commencing on 13 December 2008 and ending on 31 December 2009 (the relevant period).

Section 41-25 of the ITAA 1997 defines the investment commitment time for recognised new investment amounts. Under paragraph 41-25(1)(a) of the ITAA 1997, where an amount is included in the first element of an asset's cost, it is the time at which you:

(i) enter into a contract under which you hold the asset at that time, or will hold the asset at a later time; or

(ii) start to construct the asset; or

(iii) start to hold the asset in some other way.

In this case, paragraph (iii) does not apply. You acquired the item under a contract. The issue is the extent of your involvement in the construction of the item.

If paragraph (ii) applies, the investment commitment time is the time when you first incurred expenditure in respect of the construction of the asset (subsection 41-25(3A) of the ITAA 1997). This would have been in 2007.

Paragraph 10 of Taxation Ruling IT 2142 is relevant to consideration of the issue of when an entity can be said to have constructed an asset. You contend that the facts of your case are consistent with paragraph 10(a) of IT 2142 because:

· the contractor is an independent contractor;

· your involvement is limited;

· the contractor is involved in a one-off activity and is not integrated into your business.

It is clear from the terms of the current contract that the contractor had control of, and responsibility for, the way in which the work was done, and was responsible for the hiring and supervision of sub-contractors. We agree that you did not construct the asset, and paragraph (ii) does not apply.

Paragraph (i) therefore applies, and the investment commitment time is the time when you entered into the contract under which you would hold the item. You first entered into a contract for the development of the item prior to the relevant period. However, that contract was terminated and you entered into the current contract within the relevant period.

You contend that the current contract is the relevant contract for the purpose of section 41-25 of the ITAA 1997, as it is under that contract that you acquired the item. Based on the information you provided:

· the first contractor completed some construction work on the item, but did not complete all of that work,

· the extent and value of the work completed by the first contractor was not of major significance in relation to the project as a whole,

· you provided the actual item and other materials to the current contractor,

· substantial design work was completed by you and other contractors,

· the current contractor was fully responsible for pre-installation work, installation, and pre-commissioning of the item.

We accept that the current contract is the contract under which you acquired the item. Although some work was completed by other parties, the second contractor installed and delivered the completed item. Based on the facts of this case, it is immaterial that you provided piping and other components for the item. The unit of property that you acquired from the current contractor was the completed item.

Provided that subsection 41-25(2) of the ITAA 1997 does not apply, the investment commitment time will be the date on which you entered into the current contract - in 2009.

Subsection 41-25(2) of the ITAA 1997

Subsection 41-25(2) of the ITAA 1197 is an integrity provision, which provides that if:

· at a time, you enter into a contract (the first contract) under which you will hold an asset at a later time; and

· at a later time, you engage in conduct that results in you entering into a contract (the second contract) under which you will hold the asset at that later time or an even later time; and

· you engage in that conduct for the purpose, or for purposes that include the purpose, of becoming entitled to a deduction under Division 41 of the ITAA 1997

the investment commitment time is the time at which the first contract was entered into.

In this case, you advised that:

· the first contract was terminated for a valid reason; and

· the current contractor was not related to the first.

There is nothing in the facts you have provided that would indicate that one of the reasons for termination of the first contract was to enable you to claim a deduction under Division 41 of the ITAA 1997. Based on the information you provided, subsection 41-25(2) of the ITAA 1997 does not apply.