Edited version of private ruling

Authorisation Number: 1011760603491

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Ruling

Subject: Small business 50% tax break

Question

Does the purchase of the car qualify for the small business 50% tax break under Division 41 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

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 company was formed a number of years ago to provide services in a market.

The company currently has a single director and shareholder who is also the sole employee of the company. The company has leased an office in a complex.

Since the formation of the company, the director has been developing products for this market and expects sales to come in future years when the products are ready for sale.

The director has approached potential customers regarding the product and has participated in an expo to showcase the company's products.

The company has registered a trademark for the company and created a point of sale website for the company.

It is anticipated in the business plan that once the products are launched and sales come in then the company will hire more staff. Meanwhile, the company will only have one staff member in order to reduce overheads.

The company has provided consulting services in order to support the operation during this development phase. One contract is considered personal services income (PSI) under tax law and others are not.

The company purchased a new car in 20XX and collected it in early 20XX. The car is to be provided to the director as a fringe benefit and is also for company use.

You state that given the company is providing the car as employment remuneration, it will be taken to be devoted 100% for business use and in addition, the car will also be heavily used for marketing and sales when the products are ready.

The logbook method has been used to calculate car expenses to date. However, expenses have been minimal as the car has had little use to date. It has been garaged at the business complex.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 40-25

Income Tax Assessment Act 1997 Section 41-20

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

All legislative references are to the ITAA 1997.

The tax break

Division 41 allows an additional deduction for certain business investment in new, tangible depreciating assets and for new expenditure on existing assets - the 'tax break'.

The purpose test

One of the conditions that must be met for a depreciating asset to be eligible for the tax break is, at the time the asset is first used by the taxpayer, it must be reasonable to conclude that the taxpayer will use the asset principally for the purpose of carrying on a business (paragraph 41-20(1)(d)), this is referred to as the purpose test.

Carrying on a business

It is a question of fact as to whether a taxpayer's activities amount to the carrying on of a business. Income Taxation Ruling TR 97/11: 'Am I Carrying on a Business of Primary Production' discusses the relevant indicators to consider in determining whether a taxpayer's activities amount to the carrying on of a primary production business. These indicators are equally relevant when determining whether a taxpayer is carrying on a business generally.

The relevant indicators, which emerge from the case law in this area, to consider are:

· whether the activity has a significant commercial purpose or character;

· whether the taxpayer has more than just an intention to engage in business;

· whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;

· whether there is repetition and regularity of the activity;

· whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business;

· whether the activity is planned, organised and carried on in a businesslike manner, such that it is directed at making a profit;

· the size, scale and permanency of the activity.

Commencement of a business

There is a distinction between activities undertaken after the point of commencement of a business and preparatory activities prior to the commencement of a business.

The question of what the taxpayer's business is may be decisive in determining whether business has commenced. Carrying on a business can include activities which are preparatory to the derivation of income from the business if the scope of the taxpayer's business is considered to include such preparatory activities.

In Whitfords Beach Pty Ltd v. Commissioner of Taxation (1983) 14 ATR 247; 83 ATC 4277 (Whitfords Beach), Bowen CJ, Morling and Fitzgerald JJ said 'in order to determine when the taxpayer's relevant business commenced, it is necessary to have regard to both the taxpayer's purposes and to its activities'. A mere intention to commence a business is not enough: see Hill J in Goodman . There must also be activity.

However, the degree of activity which is requisite to the carrying on of a business varies according to the circumstances in which the relevant business is being conducted. The requisite degree of activity will be established where the taxpayer's activities show that the taxpayer is committed to proceed with the implementation of its purpose to carry on a business.

The decision in Whitfords Beach illustrates this point. The Full Federal Court said that although the relevant project:

was to extend over a number of years and was to involve development in stages, there was from 20 December 1967 both a persistent intention to develop, subdivide and sell all of the deferred urban and rural land and a continuous course of conduct directed to the implementation of that intention.

Accordingly, the Full Federal Court concluded that the taxpayer's business of developing, subdividing and selling the land commenced as soon as the intention to take steps for that purpose in relation to the entire land was formed and activities directed to that end were commenced.

In Esso Australia Resources Ltd v FCT (1998) 39 ATR 394, it was said that establishing the proper character of the particular business said to have been carried on is critical to resolving the question of whether the expenditure is a deduction. In this case, it was concluded that the taxpayer did not carry on an exploration business despite the substantial sums expended.

Application to your situation

You describe your activity as the provision of products and consulting services for a market.

In your case your activity does not amount to the carrying on of a business, the activities are developmental or preparatory to that of business. Facts which describe the developmental state of the activities include:

· since formation, the director has been developing products

· the products are expected to be ready for sale in future years

· the director has approached potential customers

· it is anticipated that once the products are launched sales will come in

· consulting services support the enterprise financially during this development phase, one consulting contract is under PSI, others are not

· the car will be used for sales and marketing when the products are ready

The facts demonstrate that at first use time the activities were in a development stage which did not amount to the carrying on of a business. This stage of activity is reflected in the business plan which set out that the product under development would not be ready until future years.

In the circumstances it would not be reasonable to conclude that at first use time the asset would be used in the carrying on of a business.

In summary you would not satisfy the purpose test under paragraph 41-20(1)(d). As a result you are not eligible for the tax break on the purchase of the car.