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Ruling

Subject: Business deductions

Question 1

Will the aircraft that the entity proposes to purchase for use in their business be a depreciating asset in accordance with section 40-30 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Will the entity be entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the ongoing expenditure, such as insurance, hangar and airport charges, maintenance and other incidentals, that will be incurred in relation to the aircraft they propose to purchase and use solely for the purpose of their business?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commences on:

01 July 2011

Relevant facts and circumstances

The Taxpayer proposes to purchase an aircraft to be used by the business.

The Taxpayer has major clients all around country State and franchises in several locations.

The Taxpayer will use the aircraft to access country areas where they usually have had to drive, and to make areas more accessible and provide better service to customers with quicker turnaround times. There will be no private usage of the aircraft.

Relevant legislative provisions

Income Tax Assessment Act 1997

sections: 8-1, 40-30 and 40-105.

Reasons for decision

Reasons for decision

Issue 1

Question 1

Summary

It is considered that the aircraft is a depreciating asset in accordance with section 40-30 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Detailed reasoning

Discussion of law

As a general rule, you can claim deductions for expenses you incurred in gaining or producing your income (for example, in carrying on a business) but some expenditure, such as the cost of acquiring capital assets, is generally not deductible. However, you may be able to claim a deduction for the decline in value of the cost of capital assets used in gaining assessable income.

'Depreciating asset' is defined in section 40-30 of the ITAA 1997, subject to certain exceptions, as "an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used".

The term 'effective life' is defined by reference to the method of its calculation. Section 40-105 of the ITAA 1997 provides that you work out the effective life of an asset by estimating the period, in years, it can be used for a taxable purpose or for the purpose of producing exempt or non-assessable non-exempt income and, if relevant, having regard to the wear and tear you reasonably expect from the expected circumstances of your use, and assuming that it will be maintained in reasonably good order and condition.

Application of the law to your circumstances

The Taxpayer proposes to purchase an aircraft to be used by the business.

The Taxpayer has major clients all around country State along with several franchises.

The Taxpayer will use the aircraft to access country areas where they usually have had to drive, and to make areas more accessible and provide better service to customers with quicker turnaround times.

Conclusion

It is clear that the aircraft cannot be economically maintained in reasonably good order and condition for an indefinite period when it is to be utilised in servicing the customers of the business, and will consequently have a limited effective life and declining in value over the time it is used.

Therefore as none of the exceptions apply, it is considered that the aircraft will be a depreciating asset for the purposes of section 40-30 of the ITAA 1997.

Question 2

Summary

The entity will be entitled to a deduction under section 8-1 of the ITAA 1997 for the ongoing expenditure, such as insurance, hangar and airport charges, maintenance and other incidentals, that will be incurred in relation to the aircraft they propose to purchase and use solely for the purpose of their business.

Detailed reasoning

Discussion of law

Section 8-1 of the ITAA 1997 allows a general deduction for all losses or outgoings to the extent that they are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. However, no deduction is allowed to the extent that the losses or outgoings are of a capital, private or domestic nature or are necessarily incurred in gaining or producing exempt income.

A loss or outgoing must be incidental and relevant to operations or activities the taxpayer carries out to earn their income (Ronpibon Tin NL and Tongkah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236). There must be a sufficient connection (or nexus) between the loss or outgoing and the operations the taxpayer undertakes to earn assessable income.

Where a taxpayer is carrying on a business for the purpose of gaining or producing assessable income, the commercial and practical implementation of the term 'necessarily incurred', imply that voluntary expenditure incurred for business needs may be deductible. In determining if the expense is reasonable in light of the circumstances, consideration should be given to the business and the context of the expense. An expense need not be compulsory to meet this requirement as it may be voluntary or arise inevitably due to the nature of the business.

It is up to the taxpayer to decide what is necessarily incurred in carrying on their business [Federal Commissioner of Taxation v. Snowden & Wilson Pty Ltd (1958) 99 CLR 431; (1958) 11 ATD 463 (1958) 7 AITR 308 (Snowden's Case)]. This was further supported in Magna Alloys & Research Pty Ltd v. Federal Commissioner of Taxation (1980) 80 ATC 4542; (1980) 11 ATR 276; where the Court stated:

For practical purposes and within the limits of reasonable human conduct, it is for the man who is carrying on the business to be the judge of what outgoings are necessarily incurred.

Application of the law to your circumstances

The Taxpayer proposes to purchase an aircraft to be used by the business.

The Taxpayer has major clients all around country State along with several franchises.

The Taxpayer will use the aircraft to access country areas where they usually have had to drive, and to make areas more accessible and provide better service to customers with quicker turnaround times.

The proposed annual associated costs of the helicopter are: insurance; hangar and airport charges; maintenance; and other incidentals.

The Taxpayer will incur the above expenditure to operate the aircraft in the belief that they will receive the benefit of increased efficiencies in servicing their customers.

Conclusion

The nature of the expenditure to be undertaken in the conduct of their business (Snowden's Case) has been determined by the Taxpayer. The ongoing expenditure which includes: insurance; hangar and airport charges; maintenance and other incidentals; will be fully deductible under section 8-1 of the ITAA 1997 as it characteristic of an expense directed to enhance the efficiencies of the business activities of the Taxpayer.