Edited version of private ruling

Authorisation Number: 1011644043382

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Ruling

Subject: Tax break - is the asset 'new' for the purposes of the tax break

Question:

Can a car which was built some time before it was delivered to the car dealer and then used as a demonstrator be considered 'new' for the purposes of the small business tax break?

Answer:

Yes.

This ruling applies for the following periods:

1 July 2008 to 30 June 2009.

The scheme commences on:

1 July 2008.

Relevant facts and circumstances

You purchased a car from a car dealer in a previous income year.

The car has a build date and a compliance date of some time earlier.

The car was delivered to the car dealer during the a previous income year and was first registered to the car dealer shortly after delivery.

From date of registration until you purchased the car it was used as a demonstrator and had an odometer reading of a few thousand kilometres.

You were provided with a three year warranty less three months.

The car was discounted in price because it was considered a 'demonstrator'.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 40-B

Income Tax Assessment Act 1997 section 40-180

Income Tax Assessment Act 1997 section 40-185

Income Tax Assessment Act 1997 section 40-190

Income Tax Assessment Act 1997 Division 41

Income Tax Assessment Act 1997 subsection 41-20(1)

Income Tax Assessment Act 1997 section 328-110

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 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 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 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

Small business tax break

Under the Tax Laws Amendment (Small Business and General Business Tax Break) Act 2009 a deduction is available (the tax break) for eligible expenditure on new investment in tangible, depreciating assets.

New investment in an eligible asset must be made between 13 December 2008 and 31 December 2009 for the tax break to apply and the amount of the investment in the asset needs to meet threshold criteria. Under section 41-35 of the Income Tax Assessment Act 1997 (ITAA 1997), the 'new investment threshold' is:

· $1,000 for small business entities, and

· $10,000 for all other business.

Small business entities are 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.

To qualify, the asset must not have been previously used or installed ready for use for any purpose (paragraph 41-20(1)(e)). The Revised Explanatory Memorandum to Tax Laws Amendment (Small Business and General Business Tax Break) Bill 2009 notes at paragraph 1.59:

Division 40 of the ITAA 1997 does not contain a concept of new or second-hand assets. However, this is an important feature of the eligibility criteria for the Tax Break. An asset is new for the purposes of the Tax Break if it has never been used or installed ready for use either by the taxpayer or another entity for any purpose...This means that second-hand assets are not eligible for the Tax Break.

Although the general rule is that the tax break is only available for investment in new assets, there is an exception in the case where the previous use of the asset 'was merely for the purposes of reasonable testing and trialling' (subsection 41-20(3) of the ITAA 1997).

The Revised Explanatory Memorandum notes at paragraph 1.62:

Further, an asset will still be considered to be new if it has only been used for the purposes of reasonable testing and trialling (by any entity).

Whether the use of a demonstrator motor vehicle for the purposes of testing and trialling is 'reasonable' is a question of fact and degree. Where it can be objectively concluded that factors such as the period of use and the extent of use mean that the vehicle can no longer be considered new, then the testing and trialling will not be reasonable.

The following factors are relevant when determining reasonable testing and trialling:

· the period over which the vehicle was used for testing and trialling;

· the number of kilometres travelled

· the decline in the market value of the vehicle; and

· the balance of the manufacturer's warranty remaining.

Application to your situation

New or used

The car was built some time ago. However, the car had never been used or installed ready for use until it was registered by the dealer. Where an item is manufactured some time prior to being sold it does not become used simply because of its age. As the car had not been used by another entity it will be considered "new" when it was registered by the car dealer.

Reasonable trialling and testing

The relevant factors in regard to the car in question are:

· the car had been registered and used as a demonstrator for just over three months at the time of purchase

· the car has travelled about 4,000 kilometres in the course of its use for testing and trialling

· the car was discounted in price as it had been used as a demonstrator, and

· only three months of the new car warranty had expired at the date of purchase.

These factors when viewed objectively indicate that the car was only used for the purposes of reasonable trialling and testing.

Therefore the car will be an eligible asset for the purposes of the tax break.