Edited version of private ruling

Authorisation Number: 1011616403583

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Ruling

Subject: Tax break - investment allowance - extending the period for the first use time

Is the Commissioner able to extend the 'first use time' to allow an asset to be used or installed ready for use after 31 December 2010 to qualify as an eligible asset for the small business tax break?

No.

This ruling applies for the following periods:

1 July 2009 to 30 June 2010.

1 July 2010 to 30 June 2011.

1 July 2011 to 30 June 2012.

The scheme commences on:

1 July 2009.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are constructing a facility. The machinery to be used in the construction had to be imported from overseas. Before the machinery can be installed there are ground works required to be completed.

You received approval before 31 December 2009 but you were not allowed to commence any works until the council issued a construction certificate. The construction certificate has been issued.

You have attempted to start ground works since that time however, extreme rain events have prevented the start date.

The current forecast suggests the ground may not dry out sufficiently to allow the asset to be installed ready for use prior to 31 December 2010.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 41-20.

Income Tax Assessment Act 1997 Section 40-25.

Income Tax Assessment Act 1997 Section 328-110.

Income Tax Assessment Act 1997 Section 43-10.

Income Tax Assessment Act 1997 Section 43-140.

Income Tax Assessment Act 1997 Section 43-70.

Income Tax Assessment Act 1997 Section 40-30.

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 of the ITAA 1936 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 of the ITAA 1936 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 of the ITAA 1936, 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.

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 Income Tax Assessment Act 1997 (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 (paragraph 41-20(1)(b) of the ITAA 1997). The 'investment commitment time' is when you are committed to investing in an eligible asset.

Where an amount is included in the first element of the asset's cost, the investment commitment time is defined under paragraph 41-25(1)(a) of the ITAA 1997 as 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...

To qualify as a recognised new investment amount, section 41-30 of the ITAA 1997 states that the first use time must occur:

(i) no later than the end of the income year, and

(ii) no later than 31 December 2010…

The first use time if the amount is included in the first element of the asset is the time at which you start to use or have it installed ready for use.

Buildings and capital works

You cannot claim deductions under Division 40 of the ITAA 1997 if you can claim deductions for capital works under Division 43 of the ITAA 1997. As such, if a capital works deduction under Division 43 of the ITAA 1997 is available to you, you will not be able to apply the tax break.

Deductions for capital works

Division 43 of the ITAA 1997 provides deductions for capital works for buildings, structural improvements and environment protection works.

Under section 43-10 of the ITAA 1997 you can claim deductions for capital works if:

· the capital works have a construction expenditure area

· there is a pool of construction expenditure for that area, and

· you use your area in the income year in the way set out in the table in section 43-140 of the ITAA 1997.

For capital works commenced after 30 June 1997, the construction expenditure area is the part of the capital works on which the construction expenditure was incurred, that at the time it was incurred by you, was to be owned, leased or held under a quasi-ownership right.

Construction expenditure is defined under section 43-70 of the ITAA 1997. It is the capital expenditure incurred in the construction of capital works that is deductible under Division 43 of the ITAA 1997.

Application to your circumstances

You have asked if the Commissioner is able to extend the period that an asset is used or installed ready for use to qualify for the small business tax break.

Section 41-30 of the ITAA 1997 is quite clear that the first use time must be before 31 December 2010. There is no legislation that would allow the Commissioner to exercise his discretion to extend the period for the first use time.

Therefore, an asset must be used or installed ready for use before 31 December 2010 to qualify as an eligible asset for the tax break.

We have not ruled on whether you have met the investment commitment time (receiving a Development Application may not meet the requirements of section 41-25 of the ITAA 1997) nor have we considered whether the asset will qualify as a depreciating asset (it may be capital works under section 43-10 of the ITAA 1997).