Edited version of private ruling

Authorisation Number: 1011618179555

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Ruling

Subject: Income and deductions relating to purchase, use and sale of an asset

Question 1

Is the discount received under an agreement assessable income pursuant to section 15-2 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Can I elect to use the effective life as determined and published by the Commissioner, in respect of different but similar asset to depreciate my asset when claiming a deduction under section 40-25 of the ITAA 1997?

Answer

No.

Question 3

When the asset is no longer used and offered for sale does it become trading stock as defined in section 70-10 at the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

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 have the following business model :

§ purchase and convert an asset for use in the business

§ engage people to use that asset on your behalf

§ at the end of a specified period offer the asset for sale as is; and

§ if it cannot be sold as is convert back to its original form and sell.

§ a replacement asset is purchased.

This plan is cyclical and the business always has an asset which it uses which is then sold and replaced.

Manufacturers of the assets provide them less than the market price in return for certain services which have to be performed.

Lists of the assets, discounts offered and services required to receive the discount were provided.

Relevant legislative provisions

Income Tax Assessment Act 1936 (ITAA 1936) Schedule 2F section 270-20

ITAA 1997 Section 8-1

ITAA 1997 Subsection 15-2(1) ITAA 1997

ITAA 1997 Division 17

ITAA 1997 Section 17-15

ITAA 1997 Section 40-25

ITAA 1997 Section 40-95

ITAA 1997 Section 70-10

ITAA 1997 Section 70-30

Question 1

Subsection 15-2(1) of the ITAA 1997 states:

Your assessable income includes the value to you of all allowances, gratuities, compensation, benefits, bonuses and premiums *provided to you in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by you (including any service as a member of the Defence Force).

Section 270-70 of schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936) defines a benefit as:

a) money, a dividend or property (whether tangible or intangible); or

(b) a right or entitlement (whether or not property); or

(c) services; or

(d) the extinguishment, forgiveness, release or waiver of a debt or other liability; or

(e) the doing of anything that results in the derivation of assessable income; or

(f) anything that, disregarding the preceding paragraphs, is a benefit or advantage.

Although Schedule 2F to the ITAA 1936 is looking at trust losses and other deduction it demonstrates that the definition of a benefit is very broad. In the application of subsection 15-2(1) of the ITAA 1997 the benefit is how much the taxpayer is better off (or how much they saved) from receiving the benefit.

As any discount you receive is contingent on you providing service to the supplier. If the services were not offered by you the asset would not have been provided at a reduced price.

Any reduction in the price is a benefit you receive for the services you provide.

Subsection 15-2(1) of the ITAA 1997 will apply to make the amount discounted assessable income.

However it should be noted that in calculating your assessable income under subsection 15-2(1) of the ITAA 1997 you will need to take into account Division 17 of the ITAA 1997.

Division 17 of the ITAA 1997 looks at the effect of goods and services tax (GST) when working out assessable income. The intent of Division 17 if the ITAA 1997 is to avoid double taxation of GST paid by making any amounts relating GST payable on a taxable supply non-assessable and non-exempt income.

In particular when working out an amount of assessable income under subsection 15-2(1) of the ITAA 1997 you may need to exclude certain amounts in accordance with section 17-15 of the ITAA 1997.

There are two parts to section 17-15 of the ITAA 1997. The first is that you will need to exclude from your calculation of assessable income under subsection 15-2(1) of the ITAA 1997 and amount received

The first part excludes from the calculation of assessable income any amount equal to any GST payable on a taxable supply relating to the amount of discount you receive.

The second part excludes from the calculation of assessable income any amount equal to any input tax credit from an acquisition relating to the discount you receive.

How Division 17 of the ITAA 1997 would apply to reduce you assessable income calculated under subsection 15-2(1) of the ITAA 1997 would based on the details of each discount provided. However if the discount given or quoted to you includes an amount of GST that would have been payable, section 17-15 of the ITAA 1997 has the effect of excluding from the calculation of assessable income under subsection 15-2(1) of the ITAA 1997 that amount of GST payable that was included in the 'discount'.

Question 2

Section 40-25 of the ITAA 1997 allows a taxpayer to deduct from their assessable income an amount equal to the decline in value of a depreciating asset to the extent that it is used to produce assessable income.  A depreciating asset is an asset with a limited effective life and can reasonably be expected to decline in value over time.

Section 40-95 of the ITAA 1997 allows two choices to determine this effective life. A taxpayer can choose to:

§ use an effective life determined by the Commissioner for a depreciating asset under section 40-100 of the ITAA 1997; or

§ work out the effective life of the asset themselves under section 40-105 of the ITAA 1997.

The Commissioner issues Taxation Rulings which lists the depreciating assets that he has determined the effective life of. The latest of these is Taxation Ruling TR 2010/2 Income tax: effective life of depreciating assets (applicable from 1 July 2010).

These Rulings contain tables which show the effective life of assets as determined by the Commissioner and paragraph 23 of TR 2010/2 states:

If an asset is not listed in either Table A or B then the Commissioner has not made a determination of its effective life and you will need to work out its effective life yourself.

This is reiterated in paragraph 27 of Product Ruling PR 2007/3 Income tax: Australian Bight Abalone Project 2007 which states in part:

. . .. As there has been no determination of the 'effective life' of an Abalone Basket by the Commissioner, Growers must self-assess an 'effective life' (section 40-105). . . .

As the Commissioner has not determined an effective life of your particular asset section 40-100 of the ITAA 1997 cannot be used. Therefore you will have to work out the effective life of the asset yourself under section 40-105 of the ITAA 1997

However as you have pointed out the Commissioner has determined the effective life of a similar asset which could be used by you as the basis of determining the effective life.

Paragraphs 60 to 62 of TR 2010/2 explains which parts of TR 2010/2 taxpayers should refer to when determining the effective life of an asset themselves.

Question 3

Under section 70-10 of the ITAA 1997 trading stock is defined to include anything produced, manufactured or acquired that is held for the purposes of manufacture, sale or exchange in the ordinary course of a business.

Section 70-30 of the ITAA 1997 looks at situations where items of property that are owned but not held as trading stock by a taxpayer are introduced as trading stock.

Under your business plan you replace your asset at the end of a specified period. You acquire it at the beginning of the period to use throughout that period. When the period ends you cease using it and offer it for sale as is. If that can't be done you convert the asset back to its original purpose and sell it. The next period you use the replacement asset.

Whilst the asset is being used it is an active asset of yours. When you cease using it and offer it for sale it becomes trading stock as defined in section 70-10 of the ITAA 1997. This is because at that point under your business plan it is held for the purpose of sale.

Therefore section 70-30 of the ITAA will apply to your asset from when it is offered for sale.

When this happened the change from an active asset to trading stock is treated as a disposal and re-acquisition at either cost or market value. This is taken to have happened just before the property became trading stock. It up to you to choose the cost or market value of the property as the cost for trading stock purposes.

A deduction is available under section 8-1 of the ITAA 1997 at the time of the change as if the property had been acquired as trading stock from a third party.

The amount chosen is also taken to be the proceeds on disposal of the property for the purpose of working out the tax consequences of the notional disposal of the property. For example, the amount is also used to work out balancing adjustments under the depreciation provisions or any capital gain or loss.