Edited version of private ruling

Authorisation Number: 1011748083106

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Ruling

Subject: Tax break - investment allowance

Question 1

Are you eligible to claim the 50% tax break under Division 41 of the Income Tax Assessment Act 1997 (ITAA 1997) for the in ground pool?

Answer

No

Question 2

Are you eligible to claim the 50% tax break under Division 41 of the ITAA 1997 for the filtration system?

Answer

You are eligible to claim the 50% tax break on the components making up the filtration system which cost $1,000 or more (exclusive of GST).

Question 3

Are you eligible to claim the 50% tax break under Division 41 of the ITAA 1997 for the set of lights?

Answer

Yes

This ruling applies for the following period:

1 July 2009 - 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

The taxpayer is a trust carrying on a business.

The business has a turnover of less than $2 million per annum.

The trust entered into a contract for the construction of an in ground swimming pool, to be used in the business, inside the investment commitment period.

The total value of the contract was greater than $1,000, which included a filtration system and a set of identical lights.

The filtration system consists of filters, pumps and a chlorinator, some of the components cost less than $1,000 (exclusive of GST). The set of lights cost more than $1,000 (exclusive of GST).

Plumbing and electrical work was required to complete the contract.

The construction was finished and the pool brought into use prior to the first use time required.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 40-25(1)

Income Tax Assessment Act 1997 subsection 40-30(1)

Income Tax Assessment Act 1997 subsection 40-30(4)

Income Tax Assessment Act 1997 subsection 40-45(2)

Income Tax Assessment Act 1997 subsection 43-10(1)

Income Tax Assessment Act 1997 subsection 43-20(1)

Income Tax Assessment Act 1997 paragraph 45-40(1)(a)

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 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

Under Division 41 of the ITAA 1997 small business entities are now 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.

Business 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.

Eligible assets

The tax break is available for new tangible, depreciating assets for which a deduction is available under subdivision 40-B of the ITAA 1997 and new investment in existing eligible assets.

When a taxpayer first starts to use an eligible asset it must be reasonable to conclude that the asset will be used principally in Australia for the principal purpose of carrying on a business.

For your improvements to be eligible for the tax break they must be assets that can be depreciated under subdivision 40-B of the ITAA 1997.

Subdivision 40-B of the ITAA 1997: Capital allowances and deductibility

Subsection 40-25(1) of the ITAA 1997 provides that you can deduct an amount for the decline in value for an income year of a depreciating asset that you have held during that year. A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over time. Land, trading stock and certain intangible assets are excluded from being depreciating assets (see subsection 40-30(1) of the ITAA 1997).

All of the assets that you acquired under the contract have a limited effective life and are, unless they are deductible under another division of the act, assets that can be depreciated under subdivision 40-B of the ITAA 1997.

Subsection 40-45(2) of the ITAA 1997 prevents deductions that are available as capital works from being deductible under subdivision 40-B of the ITAA 1997. The deductibility of expenditure incurred in relation to capital works is determined under Division 43 of the ITAA 1997.

Division 43 of the ITAA 1997: Deductions for capital works

Subsection 43-10(1) of the ITAA 1997 allows you to deduct capital expenditure incurred in constructing capital works, including buildings and structural improvements. Capital works is a term of wide definition. Subsection 43-20(1) of the ITAA 1997 states that it covers three broad categories of expenditure: buildings, structural improvements and environment protection earthworks. Capital works that are considered plant are excluded from being deductible under this division and are therefore deductible under subdivision 40-B.

Plant

There is no all inclusive definition of plant in tax legislation. The meaning of plant is therefore given its ordinary meaning. The legislation does, in paragraph 45-40(1)(a) of the ITAA 1997, extend the definition of plant to include articles, machinery, tools and rolling stock.

Taxation Ruling TR 2004/16 gives the Commissioner's view as to the meaning of plant. It states that it is a question of fact and degree as to whether an item forms part of the premises or would be a separate plant. The following are relevant matters to consider when determining that question:

· whether the item appears visually to retain a separate identity

· the degree of permanence with which it has been attached

· the incompleteness of the structure without it, and

· the extent to which it was intended to be permanent or whether it was likely to be replaced within a relatively short period.

TR 2004/16 also discusses the meaning of machinery and states that the term includes heating appliances and hot water systems but does not include the ducting that is connected to the machinery unless it is a part of the machine itself.

Taxation Determination TD 97/24 states that an item of property that is a fixture will not meet the definition of plant where it merely provides the general setting in which income producing activities are conducted. Additionally, a fixture is not plant where it is built into the ground so as to form a permanent feature of the place where a business may be carried on and where it had no other function than to provide a convenient stand for the performing of work of the business.

In Carr v. Sayer (UK) 65 TC 15, where it was held that quarantine kennels were not items of plant, Nicholls J said at 23:

buildings, which I have already noted would not normally be regarded as plant, do not cease to be buildings and become plant simply because they are purpose-built for a particular trading activity. Such a distinction would make no sense. Thus the stables of a racehorse trainer are properly to be regarded as buildings and not plant. A hotel building remains a building even when constructed to a luxury specification. I say nothing about particular fixtures within the building. Similarly with a hospital for infectious diseases. This might require special lay-out and other features, but this does not convert the buildings into plant. A purpose-built building, as much as one which is not purpose-built, prima facie is no more than the premises on which the business is conducted.

The first Australian court decision of note is Moreton Central Sugar Mill Co Ltd v. FC of T (1967) 14 ATD 468; (1967) 116 CLR 151 where Kitto J held that a pit for servicing a diesel locomotive - a hole in the ground lined with reinforced concrete and having steel girders supporting rails upon which the locomotive stood while being serviced from beneath - was not plant. Kitto J said that plant does not include:

a structure built into the ground so as to form a static and permanent feature of the place in which a business may be carried on and having no other function than to provide a convenient stand for the performing of work in the business.'

A more recent and relevant case is Case T102 86 ATC 1178 in which the taxpayer, a partnership formed by a husband and wife, provided tuition to scuba-divers. It constructed a special pool to provide more effective and efficient training facilities.

The taxpayer claimed to be entitled to an investment allowance deduction of $3,555 for the 1982 tax year. It also claimed to be entitled to a deduction for depreciation of $749, $1,426 and $1,318 for the 1982, 1983 and 1984 tax years respectively. The Commissioner disallowed the claims and the taxpayer objected, arguing that the pool constituted plant or articles so as to be depreciable and also qualify for the investment allowance (under the relevant legislation at that time).

The objection was disallowed and it was found that the establishment of the pool by a process of excavation and construction did not bring into existence any structure which could be considered as anything other than an integral part of the real property of the taxpayer. It was a static and permanent feature of the place. The claims for depreciation were not established and therefore the claim for the investment allowance was not established either.

Composite assets

According to subsection 40-30(4) of the ITAA 1997, whether a composite asset, that is an asset made up of several assets, is in itself a depreciating asset or whether the components are separate assets is a question of fact and degree based on all of the circumstances.

Taxation Ruling TR 94/11 at paragraph 3 states:

An item is generally a 'unit of property' if it has one, or more, of the following characteristics :

(a) it is an entity entire in itself, capable of being separately identified or regarded and having a separate function ( e.g. the transportable concrete mixer in Ready Mixed Concrete (Vic) Pty. Ltd. v FC of T 69 ATC 4038; (1969) 1 ATR 123).

(b) the item is functionally complete in itself. However, the item need not be self contained or used in isolation. It is not necessary that the item function on its own. It should however, be capable of performing its intended discrete function ( FC of T v Tully Co-operative Sugar Milling Assoc. Ltd. 83 ATC 4495; (1983) 14 ATR 495).

(c) the item when attached to another unit of property having its own independent function varies the performance of that unit (e.g. attachments for tractors such as rippers, post hole diggers, carry alls etc. ( Case M98 80 ATC 689; 24 CTBR(NS) Case 69)).

(d) the item itself performs a definable, identifiable function.

Identical assets

Notwithstanding the general rule, investment in assets that are identical can be aggregated for the purposes of meeting the threshold. Assets forming the 'batch' or the set still need to be new tangible, depreciating assets and the criteria around the timing of the investment in each asset still apply.

Application to your circumstances

You are a small business entity and all of the assets acquired under the contract will be used by you for the principal purpose of conducting your business. The investment commitment period and first use period were met. In order for the expenditure to qualify for the 50% tax break the assets must be greater than $1,000 (exclusive of GST) and depreciable under subdivision 40-B of the ITAA 1997.

The swimming pool

This asset is a static and permanent feature of the place and integrated into your real property. It is therefore a capital works improvement to the property and not depreciable under subdivision 40-B of the ITAA 1997. You cannot claim the 50% tax break for this asset.

The filtration system

In this situation the components of the filtration system do not amount to a single unit of property, that is, a composite asset. The components are separately identifiable assets, functionally complete and each performs a definable, identifiable function.

The assets making up the system are depreciable assets that do not fit within the definition of capital works found in section 43-20 of the ITAA 1997 and are therefore depreciable under subdivision 40-B of the ITAA 1997. You are able to claim the 50% tax break on the components costing more than $1,000 (exclusive of GST). Costs will need to be apportioned between the cost of the machinery and any parts considered capital improvements. Pipes and electrical wiring are generally not a part of the piece of machinery and are considered a part of the capital improvements.

The lights

The lights are depreciating assets eligible for a deduction under Subdivision 40-B, the aggregated expense of the lights clears the investment threshold. You can claim the 50% tax break for these assets.

Plumbing or electrical works

Costs incurred in installing a depreciating asset form a part of the cost base of that asset and are therefore expenditure incurred by you in acquiring a depreciating asset. Where costs are incurred in installing a variety of assets, you must reasonably apportion these costs.

Any plumbing or electrical work would need to be reasonably apportioned between the work done in installing the eligible assets and the work done in installing the capital improvements. Only expenditure apportioned to the installation of eligible assets is eligible for the additional deduction.