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Edited version of private ruling
Authorisation Number: 1011846795290
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Ruling
Subject: Cost of depreciating asset
Question
Is the partnership able to include the instalment payments in the cost of the asset for depreciation purposes?
Answer
Yes.
This ruling applies for the following period
1 July 2009 to 30 June 2010
The scheme commenced on
1 July 2009
Relevant facts
You purchased an asset to be placed in a hire arrangement.
During the 2008-09 financial year, you signed a Memorandum of Agreement with a distribution company for the purchase of an asset for the total purchase price of approximately $X00,000, payable in a number of instalments.
The distribution company had a distribution agreement to sell and distribute assets that another entity manufactured.
You had paid instalments totalling approximately X% of the purchase price to the distribution company when it was placed in receivership.
You had not received legal ownership of the asset and you attempted to get your money refunded by the distribution company to no avail. The receivers of the distribution company advised that the initial payments were no longer held by the company nor has it paid the manufacturer any sum in respect of the asset.
Pursuant to the terms of the distribution agreement, the manufacturer retained title to the asset.
At your request and to protect their reputation, the manufacturer agreed to transfer the asset to you under a confidential agreement for a purchase price which took into account the amounts already paid on the condition that you provide copies of receipts issued by the distribution company to you confirming payment of the instalment payments already paid.
Under a Bill of Sale executed in the 2009-10 financial year, the manufacturer transferred the title of the asset to you for the sum agreed upon.
Assumptions
N/A
Relevant legislative provisions
Income Tax Assessment Act 1997 section 40-40
Income Tax Assessment Act 1997 section 40-175
Income Tax Assessment Act 1997 section 40-180
Income Tax Assessment Act 1997 subsection 40-180(3)
Income Tax Assessment Act 1997 section 40-190
Reasons for Decision
Summary
The first element of cost of the asset includes, pursuant to subsection 40-180(3) of the Income Tax Assessment Act 1997 (ITAA 1997), expenditure you incurred in making the instalment payments to the distribution company which went into liquidation. This is because there is a direct and vital link between making these payments and starting to hold the asset due to the subsequent purchase of the asset from the manufacturer.
Detailed explanation
The cost of a depreciating asset consists of two elements (section 40-175 of the ITAA 1997). The first element of cost is worked out as at the time when the holder of the asset starts to hold it (section 40-180 of the ITAA 1997) while the second element of cost is worked out by the holder after that time (section 40-190 of the ITAA 1997).
A partnership will start to hold a depreciating asset at the time the asset becomes a partnership asset.
The means by which a taxpayer may hold a depreciating asset may vary. In this case, the partnership holds the asset through having entered into an agreement with the manufacturer for the purchase of the asset. Under the terms of that agreement the partnership attained ownership of the asset and therefore the partnership is the holder of the asset under item 7 of the table in section 40-40 of the ITAA 1997.
Subsection 40-180(3) of the ITAA 1997 includes in the first element of cost of a depreciating asset amounts the holder of the asset is taken to have paid in relation to starting to hold the asset if those amounts are directly connected with holding the asset.
Your expenditure in making the initial instalment payments to the distribution company was incurred in the course of purchasing the asset which was ultimately sold to you by the manufacturer. The relationship that exists between the initial instalment payments and the subsequent purchase of the asset (for the balance of the purchase price) from the manufacturer is a vital one which is not diminished by the fact that these payments were lost when the distribution company went into receivership.
It is clear from the condition in the purchase settlement agreement, that you provide evidence of the initial instalment payments made to the distributor, that there is a clear and direct link between this expenditure incurred by you and the purchase price agreed upon. It follows that the instalment payments were directly connected to you starting to hold the depreciating asset.
Accordingly, the first element of cost of the asset includes, pursuant to subsection 40-180(3) of the ITAA 1997, the expenditure you incurred in making the instalment payments to the distribution company which went into liquidation.