Edited version of private ruling

Authorisation Number: 1011872836255

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Ruling

Subject: Tax break - investment allowance - hire purchase agreement - investment commitment time

Question 1:

If a depreciating asset is subject to a hire purchase agreement, is the investment commitment time under paragraph 41-25(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) the time at which the hire purchase agreement is accepted?

Answer: Yes.

Question 2:

Are you entitled to receive the small business tax break for your expenditure on equipment under the hire purchase agreement?

Answer: No.

This ruling applies for the following period

1 July 2010 to 30 June 2011.

The scheme commenced on

1 July 2010.

Relevant facts and circumstances

The rulee operates a business at various locations.

The rulee organised a fitout and set up two new business locations.

The equipment was installed and ready for use in July 20XX and September 20XX respectively.

The rulee entered into a Master Asset Finance Facility in October 20XX. This agreement required the rulee to sign a Goods schedule or Goods Mortgage Facility Details and deliver to the bank for acceptance each time the rulee wanted to lease, hire or be provided with loans for the equipment.

The rulee provided copies of the Hire Purchase Agreements with the bank for the equipment for the two business locations, both of which were signed by the rulee on 30 September 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 41-1.
Income Tax Assessment Act 1997 Section 40-25.
Income Tax Assessment Act 1997 Section 328-110.
Income Tax Assessment Act 1997 Section 40-40.
Income Tax Assessment Act 1997 Paragraph 40-30.

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.auand 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

The Tax Laws Amendment (Small Business and General Business Tax Break) Act 2009 received Royal Assent on 22 May 2009. This has been inserted into the ITAA 1997 as Division 41.

Small business entities are now able to claim a bonus tax deduction for 50% for eligible assets costing $1,000 or more (exclusive of GST) 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. This generally means that the taxpayer is carrying on a business and has an annual turnover of less than $2 million.

Businesses can commit to investing in an asset by:

· entering into a contract under which they will hold the asset, or

· starting to construct the asset.

Eligible assets

The tax break is available for new tangible, depreciating assets for which a deduction is available under Subdivision 40-B of the ITAA 1997 and new investment in existing eligible assets.

Section 40-25 of the ITAA 1997 allows you to deduct from your assessable income an amount equal to the decline in value of a depreciating asset you hold to the extent in which it is used to produce assessable income. Whether you hold a depreciable asset is determined by applying section 40-40 of the ITAA 1997. Paragraph 10 of Taxation Ruling TR 2005/20 provides that the default or general rule is that a taxpayer holds an asset when he, she or it is the owner of the asset.

A depreciating asset, under section 40-30 of the ITAA 1997, is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used. There are exceptions to that rule such as land, an item of trading stock and some intangible assets.

Under section 40-25 of the ITAA 1997 a deduction from your assessable income is only available for depreciating assets that you hold.

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 13 December 2008 and 31 December 2009.

Where an amount is included in an asset's first element of cost, the investment commitment time will be the time at which you:

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

· start to construct the asset, or

· start to hold the asset in some other way (section 41-25 of the ITAA 1997).

Hire purchase arrangements

Under item 6 of the table in section 40-40 of the ITAA 1997, the hirer of a depreciating asset subject to a hire purchase agreement will be the holder if they:

· possess the asset or have a right to do so immediately, and

· have a right to become the legal owner and it is reasonable to expect that they will become the legal owner or that the asset will be disposed of for their benefit.

The right of possession and the right to become the depreciating asset's legal owner are rights acquired by the taxpayer under the hire purchase agreement. Therefore the taxpayer becomes the holder of the depreciating asset under item 6 of the table in section 40-40 of the ITAA 1997 when they enter into the hire purchase agreement.

Therefore for hire purchase arrangements, the investment commitment time is when you enter into the arrangement, not when an order contract is made with the supplier.

Application to your circumstances

Question 1

The right to hold the depreciating asset is the right acquired by you under the hire purchase arrangement. The offer was accepted and the contract took effect during September 2010.

In this case the investment commitment time is when the offer of the hire purchase agreement was accepted. The offer was accepted during September 20XX and this is the time at which you entered into the contract under which you hold the asset (section 40-40 of the ITAA 1997).

Whilst you signed a Master Asset Finance Facility with the bank in October 20XX, this agreement did not give you the right to hold the asset. Under this agreement you were required to sign a Goods schedule or Goods Mortgage Facility Details if you wished to lease, hire, or be provided with loans for the equipment. Such a document was signed in September 20XX.

In order for an amount to be a recognised new investment amount, the investment commitment time must be between 13 December 2008 and 31 December 2009. In your case the investment commitment time is 30 September 20XX.

Question 2

As the investment commitment time is after 31 December 20XX you will not be entitled to claim the small business tax break for the equipment.

There is no discretion in the relevant legislation that would allow an entity to claim the tax break if they did not meet the requirements of the investment commitment time.