Edited version of private ruling

Authorisation Number: 1011647863671

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Ruling

Subject: Small Business Investment Allowance

Will the furniture that you purchased be considered a new asset for the purposes of the small business investment allowance in Division 41 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No.

This ruling applies for the following period:

1 July 2009 to 30 June 2010

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.

The taxpayer, a small business entity, purchased assets. The assets were previously used by another business for display purposes in a display home.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 Section 41-20.

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 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 are to the Income Tax Assessment Act 1997.

Summary

The usage by the previous owner prior to your acquisition did not represent reasonable testing and trialling but actual usage of the assets. The fact that the assets had suffered negligible wear and tear does not really bear on a consideration of whether they were new or second-hand.

The facts support an objective conclusion that at the time of purchase the assets could not be considered new. As a consequence, they would not meet the requirements to qualify for the investment allowance in Division 41.

Detailed reasoning

Division 41 allows an additional deduction for certain new business investment in new, tangible depreciating assets and for new expenditure on existing assets. 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,' as stated in subsection 41-20(3). That exception is noted in the Revised Explanatory Memorandum notes at paragraph 1.62.

To come within the scope of the exception, there are effectively two requirements that need to be satisfied. Not only must the use satisfy the description of testing or trialling, the nature and extent of that use must also be reasonable.

The policy context of the tax break is to provide an incentive in the form of a temporary bonus tax deduction for investment in new tangible assets. Once an asset has been used it can no longer be described as new. However, in the limited case of use for reasonable testing and trialling, the law provides that the asset can nevertheless be eligible for the tax break. That is consistent with the idea of ensuring that the Tax Break is carefully targeted toward new investment that will upgrade and extend our economy's productive capacity.

In the present case, the assets were purchased by one entity for use in its business then were sold to another entity. Assuming that the entity which used them had bought them from a retailer, they would be considered new in its hands. When it disposed of them to you, however, they were no longer new.

The concept of reasonable testing and trialling is most readily applicable to assets such as motor vehicles where some trialling to test the mechanical soundness of the asset is normal practice. Conceivably, usage by prospective purchasers whilst the assets in question were in the retailer's showroom might be considered testing and trialling; such use would not have prevented the assets from being considered new in the hands of the original purchaser.

However, the usage by the previous owner prior to your acquisition did not represent reasonable testing and trialling but actual usage. The fact that the assets had suffered negligible wear and tear does not really bear on a consideration of whether they were new or second-hand. Even if the original purchaser had not put the assets on display but left them in storage during its ownership that would not alter the fact that they would not be new in the hands of the next owner.

The facts indicate that at the time of purchase the assets could not be considered new. As a consequence, they would not meet the requirements to qualify for the investment allowance in Division 41.