Edited version of private ruling

Authorisation Number: 1011633255678

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Ruling

Subject: Small Business and General Business Investment Allowance

If a sole trader purchases a motor vehicle within the qualifying period with the intention of using it predominantly in business do they need to be in business at the time of purchasing the vehicle in order to be eligible for the 50% investment allowance in Division 41 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No.

This ruling applies for the following period

Year ending 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

The taxpayer purchased a new motor vehicle with the intention of using it predominantly in a business. At that time, the business had not yet commenced. It was purchased with optional extras in order to be ready to utilise in the business.

Relevant legislative provisions

Division 41 of the Income Tax Assessment Act 1997

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 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

Unless otherwise stated, all legislative references in the following Reasons For Decision relate to the Income Tax Assessment Act 1997.

Summary

Provided at first use time it is reasonable to conclude you will use the asset for the principal purpose of carrying on a business and you qualify as a small business entity you may be eligible for the tax break if the other conditions are met.

Detailed reasoning

The Small Business and General Business Tax Break provides an additional deduction for business investment in new, tangible depreciating assets and new expenditure on existing assets. The legislation is found in Division 41.

Small business entities can claim the fifty per cent deduction for investments in eligible assets of $1,000 or more. All assets must be used principally in Australia for the principal purpose of carrying on a business and meet the relevant eligibility criteria. Provided all of the eligibility criteria are satisfied for the income year, the tax break can be claimed as a tax deduction in the income tax return for the income year in which the asset is first used or installed ready for use.

To qualify for the 50% deduction, you must:

· be a small business entity for the income year in which you commit to the investment, put the asset to use or claim the tax break

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

· meet your 'new investment threshold'

· first use the asset or have it installed ready for use, or (in the case of new investment in an existing asset) bring the asset to its modified or improved state, on or before 31 December 2010, and

· at first use it is reasonable to conclude you will use the asset for the principal purpose of carrying on a business.

In general terms, a 'small business entity' is an entity (that is, an individual, partnership, company or trust) that:

· is carrying on a business, and

· has an aggregated turnover of less than $2 million.

Whether the particular entity which acquired the asset will be considered to be a small business entity will be determined in respect of the year as a whole rather than at a point in time, as stated in the Guide to small business and general business tax break. Consequently, the fact that an asset in respect of which the allowance is sought has been acquired before the business commenced operations will not necessarily preclude entitlement to the allowance. It is only necessary that the business qualifies as a small business entity for that income year in addition to meeting the other qualifications.

However, it is necessary that the entity which acquires the asset is the same entity which conducts the business in which it is being utilized. The tax break is to be claimed by the taxpayer that is entitled to depreciation deductions under Division 40. Only the holder of a depreciating asset can claim a deduction for its decline in value. Generally, the legal owner of an asset will be its holder.

In the present case, the asset was acquired but the business did not commence operations until later in the financial year. Provided that the taxpayer claiming the allowance qualifies as a small business entity in respect of the year and the other criteria are met, the taxpayer will be able to claim the 50% allowance.