Edited version of private ruling

Authorisation Number: 1011644205753

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Ruling

Subject: Small Business Investment Allowance

Question

Will you be eligible to claim the Small Business Investment Allowance under Division 41 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the purchase of an asset?

Answer

No.

This ruling applies for the following period

1 July 2009 to 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You purchased an asset. Your stated intention in purchasing the asset was to use it primarily for business purposes. You were advised by your tax agent at the time that you would be eligible for the Small Business Investment Allowance at the 50% rate based on the use being primarily in your business.

You have also used the asset in your salaried job and for recreational use. As the business has not performed as well as expected, the use of the asset has ultimately proved to be primarily for private purposes.

Relevant legislative provisions

Income Tax Assessment Act 1997 41-10

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

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

Viewing the available facts objectively, it would not have been reasonable to conclude that at the first use time the vehicle would be predominantly used in earning income. The acquisition of the asset will therefore fail to meet the requirements of Division 41 without the Commissioner having to turn his mind to the further necessary condition as to whether the earning of the income constitutes the carrying on of a business.

Detailed reasoning

The Small Business Investment Allowance is available for new, tangible, depreciating assets for which a deduction is available under Subdivision 40-B of the ITAA 1997 and also for new investment in existing eligible assets. Section 41-10 specifies the circumstances in which you have entitlement to a deduction for new investment under the Allowance.

Section 41-20 indicates the circumstances in which an amount of expenditure in respect of an asset will constitute a recognised new investment amount. Paragraph 41-20(1)(d) states that an amount is a recognised new investment amount in relation to an asset if at the first use time it is reasonable to conclude that the asset will be used principally for the purpose of carrying on a business. The words 'for the principal purpose of carrying on a business' in paragraph 41-20(1)(d) are known as the 'purpose test'.

The expressions 'reasonable to conclude' and 'principal purpose of carrying on a business' are not defined in the legislation nor in the explanatory memorandum to the Tax Laws Amendment (Small Business and General Business Tax Break) Bill 2009. However, the Macquarie Dictionary defines the adverb 'principally' as 'chiefly' or 'mainly'.

Therefore, for it to be reasonable to conclude the asset in this case is to be used for the principal purpose of carrying on a business, it must be reasonable to conclude that it would be used for the chief or main purpose, but not necessarily the sole purpose, of carrying on a business. It should be noted that, for the purposes of the legislation, it is not sufficient that the asset be used principally in earning income, it must be used principally in carrying on a business.

A conclusion may be considered reasonable where the available facts suggest that, on balance, that conclusion is at least more likely than not to reflect reality. The intention of the taxpayer in acquiring the asset is a relevant consideration but that intention may be rendered unreasonable by an examination of the other relevant facts.

In the present case, it would be reasonable to conclude that the intention of the taxpayer was to use the vehicle for the principal purpose of carrying on a business if there is sufficient body of evidence to support such a conclusion and such evidence outweighs any evidence to the contrary.

From the beginning, it was going to be the case that the vehicle would be used partly for the purpose of earning income and partly for other purposes. It is necessary to establish whether at the first use time of the asset it would have been reasonable to make the assumption that the primary use of the asset on an ongoing basis would be for the purpose of carrying on a business and that other uses would be less significant. Whether such a conclusion is reasonable must be arrived at through an objective consideration of the relevant facts.

The facts in the present case include:

· You had a full-time job both before, at the time of and subsequent to the acquisition of the asset

· The full-time job provided a significant limitation on your capacity to expand the activities in which you use the asset

· In the financial year preceding the purchase of the asset you earned an amount from your wages to which any income related to the use of the asset was objectively likely to be marginal

· The expenditure on the asset seems disproportionate to the gross income generated by the activity in the year in question

· The asset has no features which particularly recommend it as being suitable as a work asset and its features seem more consistent with private and recreational use

Viewing the available facts objectively, it would not have been reasonable to conclude that at the first use time the asset would be predominantly used in earning income. The acquisition of the asset will therefore fail to meet the requirements of Division 41 without the Commissioner having to turn his mind to the further necessary condition as to whether the earning of the income constitutes the carrying on of a business.