Edited version of private ruling

Authorisation Number: 1011886738299

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Ruling

Subject : Tax break - Investment allowance - new investment

Question

Does the fishing vessel you purchased qualify for the tax break deduction under section 41-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Advice/Answers

Yes

This ruling applies for the following period

1 July 2009 to 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

The sellers of the vessel are boat builders. Their vessels may be purpose built for clients but the majority are built on 'spec'. These vessels are used for trials until sold. The amount of sea trials a particular vessel undertakes is dependant upon the level of interest and number of prospective buyers. The vessels constructed, including the vessel, are prepared for sale, not for operation. As they are built on spec they are fitted out to a certain level but are not generally completed.

The vessel did not have a completed fish room - it was clad but not insulated. There was no refrigerator for the fish room, and a new generator was required as the existing one was not adequate for a fishing vessel. The vessel was marketed as a new vessel, completed to the extent required for sea trials.

The vessel was a 'work in progress' when it was launched in a few years ago.

It was first advertised for sale shortly after construction. It was advertised as an unfinished vessel.

During the interim period the boat was kept in working order. It was trialled by prospective buyers during this period. The boat was not used for fishing.

You purchased the vessel from the manufacturer/builder within the relevant time for Tax Break purposes.

You paid the seller an additional amount in addition to the purchase price to complete the fit out as a commercial fishing vessel.

Assumptions

Nil

Relevant legislative provisions

Income Tax Assessment Act 1997 subdivision 40-B
Income Tax Assessment Act 1997 Division 41

Income Tax Assessment Act 1997 section 41-10
Income Tax Assessment Act 1997 subsection 41-20(3)

Reasons for decision

Summary

The fishing vessel you purchased is considered to be a 'new' investment for the purposes of the tax break deduction under section 41-10 of the Income Tax Assessment Act 1997.

Detailed reasoning

Small business tax break

The object of Division 41 of the ITAA 1997 is to provide a temporary business tax break for Australian businesses using assets in Australia, with a view to encouraging business investment and economic activity. A deduction is available for eligible expenditure on new investment in tangible, depreciating assets and for new expenditure on existing assets.

The taxpayer, as the holder of the asset, must use the asset for the principal purpose of carrying on a business if they are to claim the Tax Break.

Eligible assets

The general rule is that the tax break is only available for investment in new assets for which a deduction is available under Subdivision 40-B of the ITAA 1997. To qualify, the asset must not have been previously used or installed ready for use for any purpose either by the taxpayer or another entity for any purpose. This means that second-hand assets are not eligible for the Tax Break.

An asset will also be excluded from the tax break if it has previously been used for a non-business purpose and is then converted to business use. However, an asset will not be excluded from the tax break because you purchased it from someone who held it as trading stock or held it ready for sale.

An asset will still be considered to be new if it has only been used for the purposes of reasonable testing and trialling (by any entity) (subsection 41-20(3) of the ITAA 1997).

Reasonable testing and trialling

ATO ID 2009/101 discusses the concept of 'reasonable testing and trialling'. To come within the scope of the exception for reasonable testing and trialling, not only must the use satisfy the description of testing or trialling, the nature and extent of that use must also be reasonable.

An asset can still be considered new despite it having been used for testing and trialling, if the nature and extent of that use is consistent with the asset retaining the essential attributes of what would be regarded as a new asset. Accordingly, if the testing and trialling results in the asset losing the quality of what is essentially a new asset, then it is considered that the use will mean the asset is ineligible for the tax break.

New investment in existing assets

New expenditure on existing assets may also qualify for the Tax Break.

Your eligibility for the Tax Break deductions in respect of the additional expenditure incurred to complete the fit out as a commercial fishing vessel has not been considered in this ruling.

Application to your circumstances

You purchased the fishing vessel directly from the manufacturer. It was previously tested by prospective buyers only, but was not marketed as a 'demonstrator' vessel, nor is there evidence of a reduction in value as a result of this use. Although the vessel was launched some years prior, it was not a completed vessel at that time. When purchased, additional fit out was required to complete the vessel for use in your commercial fishing enterprise.

Although at the time of purchase the vessel was 4 years old, it had not been used for any purpose other than sea trials. Additionally, the fit out was minimal, reducing the usefulness of the vessel during the period it was held by the manufacturer.

It is unclear when a vessel is considered to be 'new'. It may be new at the date it is launched, when it is first advertised for sale, when it is first used. The first use in this case would appear to be reasonable testing of soundness - which would not preclude entitlement to the tax Break. Subsequent use was testing by prospective buyers. This testing would also appear to be reasonable and not preclude entitlement to the Tax Break. Testing was of the vessel for the purpose of purchasing the vessel. The vessel was not used as a demonstrator for the purposes of promoting the sale of like vessels, but of the individual vessel tested.

On the balance, the vessel was not a 'used' vessel when purchased. It as held by the original boat builder as trading stock, manufactured by that company and held for the purposes of sale in the ordinary course of their business. As such, the vessel will be eligible for the tax break.