Edited version of private ruling

Authorisation Number: 1011802031271

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Ruling

Subject: small business and general business tax break

Question 1

Do you satisfy the definition of 'small business entity' under section 328-110 of the Income Tax Assessment Act 1997 (ITAA 1997) for the purposes of claiming the 50% tax break under Division 41?

Answer

No.

Question 2

Are you eligible to claim the 30% deduction rate under section 41-15 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period

Year ending 30 June 2009

The scheme commenced on

1 July 2008

Relevant facts and circumstances

Your company is a business which trades in high value/low profit items.

In view of this, your turnover is considerably higher than the small business turnover threshold of $2,000,000.

Your actual gross income being your fee income is significantly lower than the threshold.

You purchased a new car and took possession it prior to 30 June 2009. You use the logbook method to work out deductions for the car expenses.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 328-110

Income Tax Assessment Act 1997 section 41-15

Income Tax Assessment Act 1997 section 41-35

Income Tax Assessment Act 1997 section 41-10

Income Tax Assessment Act 1987 section 40-25

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

Small business tax break

Under the Tax Laws Amendment (Small Business and General Business Tax Break) Act 2009 a deduction is available for eligible expenditure on new investment in tangible, depreciating assets.

Small business entities are able to claim a 50% bonus tax deduction (the tax break) for eligible assets costing $1,000 or more 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.

To be a 'small business entity', the individual or company must carry on a business in the income year and have an aggregated turnover for the year of less than $2 million. Section 328-115 states the 'aggregated turnover' is the sum of the entity's annual turnover and the annual turnover of any connected entities and affiliates. 'Annual turnover' is an entity's total ordinary income derived in the income year in the ordinary course of carrying on a business.

In your case, your ordinary income is considered to be the revenue that your business derives. This includes the 'sale' proceeds of your items. Whilst we acknowledge that your profit is only small in comparison, your turnover exceeds $2 million. Therefore, you are not a small business entity and you cannot apply the 50% rate.

Amount of deduction

If you are not a small business entity, the tax break is worked out using a rate of either 30% or 10% depending on when you committed to investing in the asset and used it, or installed it ready for use.

Provided all of the eligibility criteria are satisfied for the income year, the tax break can be claimed as a tax deduction in the income tax return for the income year in which the asset is first used or installed ready for use.

To qualify for the 30% deduction you must:

· commit to investing in the asset between 13 December 2008 and 30 June 2009;

· meet your 'new investment threshold', and

· first use the asset or have it installed ready for use, or bring the asset to its modified or improved state, on or before 30 June 2010.

New investment threshold

New investment in relation to an asset (usually the asset's goods and services tax (GST) exclusive cost) needs to meet a certain threshold before it can qualify for the tax break. The new investment threshold is:

· $1,000 for small business entities, and

· $10,000 for all other taxpayers.

In your case, you purchased a new car in 2009 for approximately $X which makes you eligible for the 30% deduction.

Entitlement to deduction for investment

A motor vehicle is considered a depreciable asset under Subdivision 40-B.

Section 41-10(1)(b) states you can deduct an amount for an income year in relation to tax break for your motor vehicle if you can deduct the amount under section 40-25 in relation to the asset for the income year.

As you use the logbook method to work out deductions for your motor vehicle expenses, you can claim depreciation for your motor vehicle under section 40-25.

Conclusion

To access the small business tax break you must be an eligible entity. An eligible entity is an entity that is in business and has a turnover of less then $2 million. As the company has a turnover greater than $2 million you cannot claim the 50% tax break on the purchase of a motor vehicle. You are eligible for the 30% deduction as you satisfy the relevant conditions.