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Ruling

Subject: Small Business Investment Allowance - Tax Break

Question

Is the taxpayer entitled to a deduction pursuant to Division 41 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The taxpayer has been engaged in a certain industry for a number of years. The activities involve utilizing certain equipment.

The taxpayer has engaged in research and development in relation to the design, construction and operation of an improved tool. The design involves various novel features. The new equipment rests on the ground but is not attached to the ground.

The new asset was manufactured with the assistance of a number of firms who provided components and systems. All parts used in manufacturing the asset were new parts. An order was placed for the purchase of a component in December 2009. You state that the new asset was completed and operational by 31 December 2010. The taxpayer contracted with a client to perform work; however, the client was unable to proceed with the job before the end of that calendar year.

The application states that the taxpayer is a small business entity for the purposes of Division 41 of the ITAA 1997. There are no entities affiliated or connected with the taxpayer for the purposes of Subdivision 328-C of the ITAA 1997. The aggregated turnover of the taxpayer for the years ended 30 June 2009, 2010 and 2011 was less than $2 million for each year. A deduction is available under section 40-25 of the ITAA 1997 in respect of the asset.

Relevant legislative provisions

Division 41 Income Tax Assessment Act 1997

Reasons for decision

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

Summary

The asset will qualify as new investment for the purposes of Division 41. An order for component parts of the constructed asset, placed by the taxpayer within the investment commitment time, constitutes the commencement of construction for the purposes of sub-paragraph 41-25(1)(a)(ii).

Detailed reasoning

To qualify for the fifty per cent rate of deduction available under the Small Business Investment Allowance, a taxpayer needs to meet the definition of a small business entity in section 328-110. That generally means that the taxpayer is carrying on a business and has an annual turnover of $2 million or less which you have stated applies in the present case.

Section 41-10 states the circumstances in which you have entitlement to a deduction for new investment. Paragraph 41-10(1)(d) states that the recognised new investment amount must exceed the new investment threshold to qualify and the cost of the asset under consideration exceeds that threshold.

Sub-paragraph 41-20(1)(b)(i) states that an amount is a recognised new investment amount for the income year in relation to an asset if the investment commitment time occurs in the period commencing 13 December 2008 and ending 31 December 2009. Sub-paragraph 41-25(1)(a)(ii) states that the investment commitment time is the time at which you start to construct the asset.

Consequently, in order for the cost of the asset to qualify for the investment allowance its construction must have commenced no later than 31 December 2009. In the application, you state that construction commenced with the placing of an order for the purchase of a part on 14 December 2009.

The question of what constitutes expenditure in respect of the construction of an asset for Division 41 purposes is considered in ATO Interpretative Decision 2009/113. It states that under subsection 41-25(3A) a taxpayer is treated as having started to construct assets at the time the taxpayer first incurs expenditure in respect of the construction of the assets. It goes on to conclude that "it follows that this is the investment commitment time for the purposes of subparagraph 41-25(1)(a)(ii)".

Paragraph 41-20(1)(c) specifies that for an amount of expenditure to be a recognised new investment amount the first use time for the asset must be no later than 31 December 2010. Section 41-30 states that the first use time for an amount that is included in the first element of an asset's cost is the time when the taxpayer starts to use the asset or has it installed ready for use. Installed ready for use is defined in subsection 995-1(1) to mean installed ready for use and held in reserve.

Your application states that that requirement was fulfilled in respect of the asset in question by virtue of the asset being installed ready for use and available to service clients within that time.

The information supplied in your application indicates that the asset met the requirements for entitlement in section 41-10, the amount of the deduction satisfied the new investment threshold in section 41-15 and constituted recognised new investment for the purposes of section 41-20 including falling within the required investment commitment time in section 41-25 and the first use time in section 41-30. As a result, the acquisition will qualify for the Investment Allowance under Division 41.