Edited version of private ruling

Authorisation Number: 1011696056584

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Ruling

Subject: Tax break - investment allowance - purchased by the partnership and first used by the company

Question:

Is the company eligible to claim the small business tax break for the truck for the year?

Answer: No.

This ruling applies for the following periods:

1 July 2009 to 30 June 2010.

The scheme commences on:

1 July 2009.

Relevant facts and circumstances

The partners ordered a vehicle before 31 December with the intention of commencing a business. Delivery was expected to take four months and contracts and tenders were to be found once the vehicle was delivered.

The vehicle was delivered and a tax invoice was issued by the supplier to the partnership. The vehicle was paid for out of a bank account in the name of the partners.

Work was sought by the partnership and a contract was discussed, however, the partners were advised that all contracts offered were to companies only.

A company was established. The company applied for an Australian business number (ABN) and registered for goods and services tax (GST). The application for an ABN by the company listed the reason for application as purchase of an existing business.

The company has always used the partners' bank account because the company uses that trading name. The GST for the vehicle was claimed by the company in the relevant quarter Business Activity Statement (BAS) and this BAS was reviewed by the ATO.

Shortly after delivery of the vehicle, the company completed its first job.

The business income of the company is below $2 million.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 40.

Income Tax Assessment Act 1997 Section 40-40.

Income Tax Assessment Act 1997 Division 41.

Income Tax Assessment Act 1997 Subsection 41-10(1).

Income Tax Assessment Act 1997 Section 41-35.

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

The Tax Laws Amendment (Small Business and General Business Tax Break) Act 2009 received Royal Assent on 22 May 2009. This has been inserted into the ITAA 1997 as Division 41.

Small business entities are now able to claim a bonus tax deduction for 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 less than $2 million.

Businesses can commit to investing in an asset by:

· entering into a contract under which they will hold the asset, or

· starting to construct the asset.

Section 41-35 of the ITAA 1997 states that the new investment threshold for an income year in relation to an asset is $1,000 if you are a small business entity during any of the following income years

· the income year in which occurs the investment commitment time

· the income year in which occurs the first use time, or

· the relevant income year.

Broadly speaking, Division 40 of the ITAA 1997 provides a deduction for the decline in value of a depreciating asset a taxpayer holds to the extent the asset is used for a taxable purpose. The table in section 40-40 of the ITAA 1997 identifies a holder of a depreciating asset in any particular circumstance. The default rule is that a taxpayer holds an asset if they are the legal owner of it (item 10 of the table in section 40-40 of the ITAA 1997). Where an entity is not a holder under a particular item, it cannot be the holder under any other item in the table.

In Union Trustee of Australia Ltd v Federal Commissioner of Land Tax (1915) 20 CLR 526 Griffith CJ stated that ownership is concerned with claims of dominion over the thing that is owned. The entity that has the greatest claim of dominion over something can generally be considered the owner of the thing.

The purchase, finance and registration of a vehicle in a particular name is substantial evidence of ownership. It would be reasonable to assume that the entity in whose name a vehicle is purchased, financed and registered will be its legal owner.

Claiming the tax break

The deduction will be claimed by the taxpayer who holds the asset for the purposes of Division 40 of the ITAA 1997; that is, the same person who claims capital allowance deductions in relation to the asset is entitled to the tax break.

The bonus deduction provided by the tax break is on top of the usual capital allowance deduction claimable for the asset as part of the taxpayer's income tax return. The tax break has no impact on deductions for an asset's decline in value claimed under Division 40 of the ITAA 1997.

The deduction is claimable as part of the taxpayer's income tax return for the income year in which the asset is installed ready for use (subsection 41-10(1) of the ITAA 1997).

Application to your circumstances

The partnership entered into an agreement to purchase a vehicle before 31 December 2009. The vehicle was delivered several months later and used for a business use by the company in the same month.

It has not been determined as to who holds the truck but it is the company that uses the truck in carrying on a business. Therefore it would be the company that would be the entity that would be entitled to claim the tax break. The partnership can not claim the tax break as the partnership does not carry on a business.

However, the company would not be eligible to claim the tax break for the truck as the company did not commit to investing in the asset, the truck, before 31 December 2009 as the company did not exist until after 31 December 2010.