Edited version of private ruling

Authorisation Number: 1011687010969

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Ruling

Subject: Small Business Investment Allowance

Question

Is the asset which you acquired eligible for the investment allowance in Division 41 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: No.

This ruling applies for the following period:

Year ending 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

The taxpayer commenced discussions with a supplier regarding the purchase of three assets. A quote was subsequently received. The taxpayer was advised that the assets could not be built until a date after 31 December 2009 due to the vendor's construction waiting list.

As the hire purchase agreement could not predate the construction of the assets it was not finalised until after 31 December 2009. The taxpayer confirmed the order for two of the three assets before 31 December 2009. The vendor accepted a deposit and requested a guarantee and indemnity from the bank as the construction date approached.

Because of the delay in availability of the assets the hire purchase contract was not finalised until after 31 December 2009. However, the taxpayer has advised that the agreement for the finance and the supply of the trailers was entered into prior to 1 January 2010.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 41-10

Income Tax Assessment Act 1997 section 41-20

Income Tax Assessment Act 1997 section 41-25

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 relate to the Income Tax Assessment Act 1997 (ITAA 1997).

Summary

The asset will not qualify as new investment for the purposes of Division 41. The contract to acquire the asset was not entered into within the investment commitment time specified in section 41-20.

Detailed reasoning

Section 41-10 states the circumstances in which you have entitlement to a deduction for new investment under the Small Business and General Business Tax Break. Under section 41-10, an amount of expenditure must be a recognised new investment amount in order to qualify for the allowance.

Section 41-20 defines what constitutes a recognised new investment amount. Paragraph 41-20(1)(b) states that an amount is a recognised new investment amount for the income year in relation to an asset if the relevant investment commitment time occurs in the period commencing 13 December 2008 and ending 31 December 2009.

Section 41-25 defines investment commitment time. Paragraph 41-25(1)(a) states that the investment commitment time for an amount which is included in the first element of cost of a depreciating asset is the time at which you:

(i) enter into a contract under which you hold the asset at that time, or will hold the asset at a later time, or

(ii) start to construct the asset, or

(iii) start to hold the asset in some other way.

In the present case, the relevant contract is a hire purchase agreement. Under item 6 of the table in section 40-40, the hirer of a depreciating asset subject to a hire purchase agreement will be the holder if they:

· possess the asset or have a right to do so immediately, and

· have a right to become the legal owner and it is reasonable to expect that they will become the legal owner or that the asset will be disposed of for their benefit.

In this case, the right of possession and the right to become the depreciating asset's legal owner are rights acquired by the taxpayer under the hire purchase agreement. Therefore, the taxpayer became the holder of the depreciating asset under item 6 of the table in section 40-40 when they entered into the hire purchase agreement. By entering into the hire purchase agreement, the taxpayer has entered into a contract under which they hold the asset for the purposes of subparagraph 41-25(1)(a)(i).

The purchase order placed with the supplier is not a contract under which the taxpayer holds the depreciating asset or will hold at a later time. The taxpayer's right to become the legal owner is not a right exercised under the purchase order and the taxpayer does not become the legal owner of the asset at the time that the purchase order is placed.

Accordingly, the investment commitment time is when the taxpayer entered into the hire purchase agreement after 31 December 2009. That is the time at which the taxpayer entered into the contract under which they hold the depreciating asset. As a consequence, the investment commitment time does not fall within the period required under section 41-20.