Edited version of private ruling

Authorisation Number: 1011749650950

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Ruling

Subject: Deductions

Question 1

Under the financing arrangement is the Trust able to claim the 10% investment allowance on equipment that it has acquired, on the basis that the investment commitment time is on 18 December 2009?

Answer

Yes.

This ruling applies for the following period:

1 July 2010 to 30 June 2011

The scheme commences on:

18 December 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 Group comprises a number of entities, trusts and corporations that perform specialised tasks.

The Trust is the responsible entity in the group that arranges for the various inputs of the production process.

The Trust placed purchase order on Friday 18 December 2009 to acquire equipment valued in excess of $2million.

The purchase order is binding upon the Trustee.

A deposit of $50,000 was paid on 22 December 2009.

The acquisition was financed via a letter of credit during the installation process which commenced at the end of April 2010. The letter of credit meant that there was an existing agreement for the financier to pay the supplier at an agreed time during the acquisition process.

The asset was commissioned and installed by the supplier and handed over to the Trust on 22 November 2010.

The commercial loan will crystallise at the time that the letter of credit is drawn upon. Drawdown is triggered by the Trust certifying in writing to the vendor that the equipment has met agreed operating criteria. This requires testing under actual commercial production conditions to identify any issues and remedy these.

Title to the asset did not pass to the financer when the Trustee entered into the financial arrangements. The Trustee will retain ownership throughout the life of the loan.

The Trustee is the sole user of the asset.

Relevant legislative provisions

Income Tax Assessment Act 1997

section 40-25

section 40-30

section 40-40

section 40-60

section 40-185 Item 1

paragraph 40-190(2)(a)

subparagraph 41-20(1)(c)(ii)

paragraph 41-20(1)(d)

paragraph 41-20(1)(e)

paragraph 41-25(1)(a)

subparagraph 41-25(1)(a)(i)

paragraph 41-25(1)(b)

Tax Laws Amendment (Small Business and General Business Tax Break) Act 2009

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

The conditions for an additional deduction for certain new business investment in terms of Division 41 of the Income Tax Assessment Act 1997 (ITAA 1997) have been satisfied. A deduction to the extent of 10% is allowable.

Detailed reasoning

Investment Allowance general rules

Under Division 41 of the ITAA 1997, you (not a small business entity) may deduct an amount equal to a 10% Investment Allowance in relation to a new asset if:

§ the asset is a depreciating asset other than an intangible asset

§ an amount can be deducted in relation to the asset under section 40-25

§ the total of the recognised new investment amounts for the income year in relation to the asset equals or exceeds the new investment threshold which is $10,000

§ the investment commitment time occurs between 1 July 2009 and 31 December 2009

§ the first time use occurs no later than 31 December 2010

§ it is reasonable to conclude that the asset will be used principally in Australia for the primary purpose of carrying on a business

What is an eligible asset?

To be eligible for the tax break, the asset must be a new, tangible 'depreciating asset' for which you can deduct an amount equal to the decline in value for an income year. A depreciating asset is one which declines in value because it has a limited effective life. An asset would have a limited effective life therefore it is a depreciating asset for the purposes of section 40-30 of the ITAA 1997. 

Under section 40-25 of the ITAA 1997, a taxpayer can deduct an amount equal to the decline in value of a depreciating asset for an income year where that asset was held during the year. Section 40-60 of the ITAA 1997 states that the depreciating asset starts to decline in value when its 'start time' occurs. This is when the depreciating asset is first used or installed ready for use.

A taxpayer is taken to hold a depreciating asset if the taxpayer is, among other things, the owner of the asset in terms of section 40-40, Item 10 of the ITAA 1997. The Trust would be the holder of the asset from the date on which it is fully installed by the suppler.

The Recognised New Investment Amount

The recognised new investment amount is the amount included in the first element of the asset's cost worked out in accordance with Subdivision 40C of the ITAA 1997 or the second element of the asset's cost base in accordance with paragraph 40-190(2)(a) of the ITAA 1997. The new investment threshold is $10,000.

The expenditure incurred would have contributed to the first element of the cost base of the asset in terms of section 40-185 Item 1 of the ITAA 1997 (being the amount which was paid).

When is an investment considered to occur?

In order for an amount to be a recognised new investment amount, its 'investment commitment time' must be between 1 July 2009 and 31 December 2009. The 'investment commitment time' is when you are committed to investing in an eligible asset.

Where an amount becomes included in an asset's first element of cost, the investment commitment time will be the point in time you have:

§ entered into a contract under which you hold the asset or will start to hold at some point in time

§ started to construct the asset, or

§ started to hold the asset in some other way.

You placed a purchase order on 18 December 2009. The purchase order was binding upon the Trustee and a deposit of $50,000 was paid on 22 December 2009. Because you entered into a contract in relation to the asset between 1 July 2009 and 31 December 2009 the order date satisfied the investment commitment time test for eligibility to claim a 10% deduction for the purposes of Division 41 of the ITAA 1997.

In accordance with the Revised Explanatory Memorandum to the Tax Amendment (Small Business and General Business Tax Break) Bill 2009 at 1.104, it is not relevant that the taxpayer had not yet paid for the asset outright or had taken delivery of the asset at that time.

The acquisition was financed with a letter of credit. The letter of credit is presented to the supplier and this is a 'promise to pay'. At no time did the financier have a lien or any other equitable interest in the equipment being purchased. Therefore the date on which the Trust is considered to have entered the 'investment commitment time' is 18 December 2009.

First Time Use

Paragraph 41-20(1)(e) of the ITAA 1997 indicates that (where the amount expended is included in the first element of the asset's cost) the first use time is the first time you or any other entity have used the asset, or have it installed ready for use.

In order to comply with subparagraph 41-20(1)(c)(ii) of the ITAA 1997 the use or installation must have occurred before 31 December 2010.

The asset was installed ready for use by the supplier on 22 November 2010 therefore that requirement is satisfied.

Paragraph 41-20(1)(d) states that it must be reasonably concluded that the asset will be used principally in Australia for the principal purpose of carrying on a business. The Trustee is the sole owner of the asset and it conducts business in Australia.

Does Part IVA, or any other anti-avoidance provision, 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 of the ITAA 1936 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 of the ITAA 1936, 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.

Other relevant comments

For a financial arrangement such as that of a legal chattel mortgage in which the mortgagee is the legal owner of the asset the ATO has determined that the commitment time is when you enter into the chattel mortgage agreement.

Therefore if you entered into a contract to buy an asset prior to 31 December 2009 but entered into the chattel mortgage arrangement (where the mortgagee is the legal owner) after 31 December 2009 the investment commitment time would not be satisfied because the applicable date would be that on which the financial arrangement was entered into.

That type of financial arrangement does not apply to this transaction.