Edited version of private ruling

Authorisation Number: 1011858783962

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Ruling

Subject: Tax break - investment allowance - shop fit out

Question:

Is the entire shop fit out considered to be 'a set of assets' for the purpose of subparagraph 41-10(4)(b)(i) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

No.

This ruling applies for the following period:

1 July 2009 to 30 June 2010.

The scheme commences on:

1 July 2009.

Relevant facts and circumstances

The entity is a small business entity.

The entity commenced carrying on a business of operating a retail outlet in the 2009-10 financial year.

The business is carried on from leased premises. The entity entered into a contract for an entire shop fit out of fixtures and fittings so as to market itself as the outlet.

A detailed supplier invoice was provided listing a description of the fit out.

Relevant legislative provisions

Income Tax Assessment Act 1997 subparagraph 41-10(4)(b)(i)

Income Tax Assessment Act 1997 Division 41

Income Tax Assessment Act 1997 paragraph 41-10(1)(d)

Income Tax Assessment Act 1997 paragraph 41-35(a)

Income Tax Assessment Act 1997 subparagraph 41-10(4)(b)

Income Tax Assessment Act 1997 Subdivision 40-B

Income Tax Assessment Act 1997 Division 43

Income Tax Assessment Act 1997 paragraph 43-70(2)(e)

Income Tax Assessment Act 1997 Division 40

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

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

To be eligible for the tax break, the total of the recognised new investment amounts for the income year in relation to the asset must equal or exceed the relevant new investment threshold (paragraph 41-10(1)(d)).

For taxpayers that are small business entities, the new investment threshold in relation to an eligible asset of the taxpayer is $1,000 (paragraph 41-35(a)). The general rule is that the new investment threshold is applied on an asset by asset basis, meaning that it must be met in relation to each individual asset. However, you are permitted to aggregate your investment in assets that are identical, or substantially identical, and in assets that form part of a set for the purposes of meeting the threshold (subparagraph 41-10(4)(b)).

Assets forming part of a set

The word 'set' is not defined for the purposes of Division 41 and will take its ordinary meaning, subject to the context in which it appears in the legislation.

The Macquarie Dictionary, 2001, 3rd Edn, The Macquarie Library Pty Ltd, NSW relevantly defines 'set' as:

· a number of things customarily used together or forming a complete assortment, outfit or collection: set of dishes .

The Australian Oxford Dictionary, 1999, Oxford University Press, Melbourne relevantly defines 'set' as:

· a collection of implements, vessels etc, regarded collectively and needed for a specified purpose ( cricket set, tea set, set of teeth ).

The Shorter Oxford Dictionary, 1973, Oxford University Press, Oxford relevantly includes in the definition of 'set':

· a number of things grouped together according to a system of classification or conceived as forming a whole.

Guidance as to the intended meaning of the word 'set' in the context of Division 41 is provided in the Revised Explanatory Memorandum to the Tax Laws Amendment (Small Business and General Business Tax Break) Bill 2009 (the EM). The EM states, at paragraph 1.84:

Whether assets form part of a set will need to be determined on a case by case basis. Items may be regarded as a set if they are dependent on each other, marketed as a set, or designed and intended to be used together.

The meaning of the word 'set' is further clarified in the EM by the use of two examples:

· a lawn mower, brush cutter and leaf blower used in a landscaping business do not constitute a set, even if purchased at the same time from the same supplier or manufacturer (Example 1.11)

· a two way radio base station and mobile handsets used in a delivery business do constitute a set as they were intended to function together (Example 1.12).

The guidance provided by the EM reflects the ordinary usage of the word 'set' and the examples outline the parameters of what is considered to be a set for the purposes of Division 41.

Division 41 only applies to depreciating assets. Taking into account the dictionary definitions and guidance provided by the EM, it is considered that depreciating assets will form a set if there are two or more depreciating assets which are customarily regarded as forming a complete collection of things and they are:

· specifically designed and intended to be used together for a specific purpose (as with a dining table and chairs), or

· grouped together according to a system of classification (as with a set of saucepans).

While each of the landscaping tools in Example 1.11 is used, broadly, for garden maintenance, each of the tools is used for a different purpose and is not specifically designed to be used with the other tools. They are not customarily regarded as a collection. They do not form a set. Example 1.12, on the other hand, describes assets that are typically regarded as a complete group of things. They are specifically designed and intended to be used together for a specific purpose.

ATO Interpretative Decision ATO ID 2009/117 provides guidance on items being considered to be a set and specifically talks about a computer and a printer. The computer and printer and not considered to be a set as even though they may be compatible with each other they are not regarded as a collection of things and are not specifically designed to be used together for a specific purpose.

Substantially identical assets

The terms 'identical' and 'substantially identical' are not defined in the ITAA 1997 and accordingly take their ordinary meaning.

The Macquarie Dictionary, 2001, rev. 3rd edn, The Macquarie Library Pty Ltd, NSW relevantly defines 'identical' as:

· corresponding exactly in nature, appearance, manner etc.

· the very same

and 'substantial' as:

· relating to the substance, matter, or material of a thing

· of or relating to the essence of a thing; essential, material, or important.

Applying the ordinary meaning of the word, assets will be 'identical' if they are exactly the same in all respects. The presence of the adverb 'substantially' in the expression 'substantially identical' connotes that whilst there is not exact or absolute identity between the assets, having regard to their material and essential features, they are in substance the same.

The meaning of the expression 'substantially identical' has been considered in court cases in other legislative contexts. Under the legislation covering trade mark registration, an application to register a trade mark must be refused if it is substantially identical to another existing trade mark. Although the application of that legislation involves a comparison of words or visual representations rather than tangible assets, the principles formulated by the courts to explain what amounts to substantial identity between two trade marks are also relevant in the present context.

In Shell Co of Australia Ltd v. Esso Standard Oil (Australia) Ltd (1963) 109 CLR 407; [1963] ALR 634 Windeyer J said:

In considering whether marks are substantially identical they should, I think, be compared side by side, their similarities and differences noted and the importance of these assessed having regard to the essential features of the registered mark and the total impression of resemblance or dissimilarity that emerges from the comparison.

This test was applied by the Federal Court in Torpedoes Sportswear Pty Ltd v. Thorpedo Enterprises Pty Ltd (2003) 204 ALR 90; (2003) 59 IPR 318, where Bennett J said:

"Identical" is relevantly defined as "corresponding exactly in nature, appearance, manner, etc" (Macquarie Dictionary, revised third edition)....The requirement of substantial identity recognises that the identity is not absolute but, as is clear from Shell, the question involves a consideration of the essential elements of the mark.

It is considered that this line of authority supports the interpretation that to be described as substantially identical, assets must be the same in all essential and material respects. In making a judgement about whether assets are substantially the same, the material attributes or characteristics of the assets need to be identified and then compared. If these material characteristics are common to each asset, then this will support the conclusion that the assets are substantially identical. Assets can therefore be substantially identical despite having minor or incidental differences.

What is an eligible asset

The tax break is available for new tangible, depreciating assets for which a deduction is available under Subdivision 40-B.

Subdivision 40-B does not apply to depreciating assets that are capital works (such as expenditure on construction of a building) for which an amount is deductible under Division 43.

However, paragraph 43-70(2)(e) specifically excludes expenditure on plant from being construction expenditure. As a result a deduction for decline in value of plant is available under Division 40.

Plant

Generally, to define an item as plant requires an examination of its functionality. If the function is to provide the setting or environment within which income producing activities are conducted (that is, a building) an item will generally not qualify as plant.

An item qualifies as plant if its function is essentially the permanent means or apparatus used to produce the income, for example machines or manufacturing equipment. This is regardless of whether the item is fixed or movable.

If an item's function is to provide the setting or environment within which income producing activities are conducted then the item does not qualify as plant. In deciding whether an item is part of the setting or environment, the following must be considered:

· whether the item appears visually to retain a separate identity

· the incompleteness of the structure without it

· the degree of permanence with which it has been attached, and

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

There may be some instances in which items used in the setting qualify as plant. This is discussed in further detail in Taxation Ruling TR 2007/9 Income tax: circumstances when an item used to create a particular atmosphere or ambience for premises used in a cafe, restaurant, licensed club, hotel, motel or retail shopping business constitutes an item of plant. Paragraph 25 of TR 2007/9 provides the following example:

25. A retail clothing store has redecorated in order to stay abreast of the current fashion. This included painting the walls in a soft pastel colour and adding matching ceramic tiles. The purpose of the restyling is to provide customers with an impression of exclusiveness. While the paint and the ceramic tiles attached to the walls do contribute to the atmosphere of the store, they form part of the premises. The tiles and paint lose their separate identity, are permanently attached and add to the completeness of the building. These factors outweigh any intention to replace the tiles and paint in response to changes in fashion. They are therefore not plant.

Buildings and capital works

You cannot claim deductions under Division 40 if you can claim deductions for capital works under Division 43. As such, if a capital works deduction under Division 43 is available to you, you will not be able to apply the tax break.

Deductions for capital works

Section 43-10 allows you to claim a deduction for capital expenditure incurred in constructing buildings, or extensions, alterations or improvements to buildings.

Assets which form part of a premises will be included in calculating a building's capital works deduction.

The deduction is generally spread over a period of 40 years and is limited to 100% of the construction expenditure. No deduction is allowable until the construction is completed.

Deductions may only be claimed for the period during the year a property is used for income producing purposes.

Application to your situation

The entity commenced carrying on a business of operating a retail outlet in the 2009-10 financial year.

The entity entered into a contract for an entire shop fit out of fixtures and fittings so as to market itself as the outlet.

The fixtures and fittings included shelving, racking, displays, counter, light fittings and so on and was a completely new fit out of empty retail premises.

A detailed supplier invoice was provided listing a description of the fit out.

The items listed on the Supplier Invoice do not form part of a set. It may be that they can be used together in one environment, similar to a computer and printer or some garden tools, but many of the items are used for a different purpose and they are not specifically designed to be used with each other. They are not customarily regarded as a collection.

Single items that you have purchased that cost more than $1,000 will be able to be claimed for the tax break.

Items that are identical or substantially similar may be aggregated for the purpose of meeting the new investment threshold.

Several items that were listed on the supplier invoice are not considered to be plant as they are items that form part of the building. They are not eligible for decline in value deductions under Subdivision 40-B and as a result are ineligible for the tax break.