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Ruling

Subject: Small Business Investment Allowance

Question

Are assets purchased by a taxpayer in the business of renting such items to the general public 'substantially identical' for the purposes of subparagraph 41-10(4)(b)(ii) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following periods:

1 July 2008 to 30 June 2009.

1 July 2009 to 30 June 2010.

The scheme commences on:

1 July 2008

Relevant facts and circumstances

The taxpayer conducts a business of hiring certain assets to the general public and regularly purchases items for that purpose. They are never second hand.

New assets were purchased each month during the relevant period. They individually cost less than the relevant threshold in section 41-1 of the ITAA 1997.

The assets are not purchased for resale, and they form part of the plant and equipment used in the hiring business. They are depreciable assets.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 40-190

Income Tax Assessment Act 1997 Section 41-1

Income Tax Assessment Act 1997 Section 41-10

Income Tax Assessment Act 1997 Section 41-20

Income Tax Assessment Act 1997 Section 41-25

Income Tax Assessment Act 1997 Section 41-35

Reasons for decision

Unless otherwise stated, all references in the following Reasons for Decision are to the Income Tax Assessment Act 1997 (ITAA 1997).

Summary

It is considered that the assets are 'substantially identical' and can be grouped together for the purposes of subparagraph 41-10(4)(b)(ii). Where they are otherwise substantially identical, that state is maintained regardless of differences in the content of the individual items.

Detailed reasoning

Division 41 allows business entities to claim a deduction in respect of new investment in eligible tangible depreciating assets where that investment equals or exceeds the new investment thresholds in section 41-1. Under section 41-10, an amount of expenditure must be a recognised new investment amount in order to qualify for the allowance.

Section 41-20 defines what constitutes a recognised new investment amount. Paragraph 41-20(1)(b) states that an amount is a recognised new investment amount for the income year in relation to an asset if the relevant investment commitment time occurs in the period commencing 13 December 2008 and ending 31 December 2009.

Section 41-25 states that the investment commitment time for an asset is the time at which a taxpayer starts to construct an asset, enters into a contract under which they will hold the asset or when they otherwise start to hold the asset. In addition, paragraph 41-20(1)(c) specifies that the first use time of the asset must occur no later than 31 December 2010.

The new investment threshold in relation to an asset is $1,000 for an entity that is a small business entity during the relevant income year or otherwise it is $10,000. Subparagraph 41-10(4)(b)(ii) states that, for the purposes of meeting the new investment threshold, businesses can aggregate their investment in assets that are identical or substantially identical.

The terms identical and substantially identical are not defined in the ITAA 1997. Accordingly, in order to determine what constitutes substantially identical assets we must look to the ordinary meaning of the terms and to the ATO interpretation of them.

The Macquarie Dictionary defines identical as 'corresponding exactly in nature, appearance, manner, etc.; the very same'. It defines substantial as 'relating to the substance, matter, or material of a thing; or relating to the essence of a thing; essential, material, or important'.

On the basis of those definitions, assets will be identical if they are exactly the same in all respects. It follows that assets will be substantially identical if they are, in all substantial or essential respects, the same.

ATO interpretation of 'identical' and 'substantially identical' in Division 40

The expression 'identical or substantially identical' is also used to describe particular assets in Division 40. In explaining how the ATO interprets the expressions, the Guide to Depreciating Assets 2010-11 notes:

Items are identical if they are the same in all respects. Items are substantially identical if they are the same in most respects even though there may be some minor or incidental differences. Factors you would consider include colour, shape, function, texture, composition, brand and design.

An explanation is also offered in ATO Interpretative Decision ATO ID 2003/80 where the question of whether depreciating assets were substantially identical for the purposes of Division 40 was considered. In concluding that the assets were not substantially identical, the ATO ID states:

Whether depreciating assets are identical or substantially identical is a question of fact… The weighting of each factor may vary from asset to asset.

In ATO ID 2003/80 the material differences in construction, composition, operation, design and size supported the conclusion that the items were not almost the same thing.

The meaning of 'substantially identical' in Division 41 of the ITAA 1997

The meaning of the term 'substantially identical' for the purposes of subparagraph 41-10(4)(b)(ii) of the ITAA 1997 was considered in ATO Interpretative Decision ATO ID 2009/128 where the issue of whether arcade machines are substantially identical was considered. ATO ID 2009/128 states that in applying the ordinary meaning of the word, assets will be 'identical' if they are exactly the same in all respects and that 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.

It also noted that the meaning of the expression 'substantially identical' has been considered in court cases in other legislative contexts and concludes that case 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, that will support the conclusion that the assets are substantially identical. Assets can therefore be substantially identical despite having minor or inconsequential differences.

ATO ID 2009/128 concludes that the arcade machines are substantially identical because a side by side comparison of the machines essential or material features and characteristics shows that in all significant respects the machines are the same.

The comparison highlights common elements of design, construction and operation. The machines are made up of the same electronic and mechanical parts. They are constructed of the same materials and have identical dimensions and weight. The differences in the machines' visual and aural presentation were found to be only minor or inconsequential in nature and did not detract from the substantially identical nature of the assets.

Application to your circumstances

You have purchased, over the relevant period, a number of assets for the purpose of hiring them to the general public. The items have the same dimensions; they are made from the same material; they have the same element of design and construction; and they have the same method of operation. They have printed labels.

The cases for the items are typically of the same size, construction and design. The cases also display differing labels.

In accordance with ATO ID 2003/80, assets are substantially identical if they are the same in most respects even though there may be some minor or incidental differences. The factors that need to be considered are those referred to above. As stated, the weighting of each factor may vary from asset to asset.

A comparison of the physical and essential features of the assets highlights common attributes. Although the assets can be distinguished one from another, those differences are considered to be minor and do not detract from the substantially identical nature of the items.

The assets are in essence the same. It is considered that they are 'substantially identical' and can be grouped together for the purposes of subparagraph 41-10(4)(b)(ii) of the ITAA 1997.