Edited version of your written advice

Authorisation Number: 1051322194008

Date of advice: 20 December 2017

Ruling

Subject: Small business entity (SBE) asset write off

Question 1

Is the partnership entitled to an immediate deduction for the cost of each asset purchased if they cost less than $20,000 each (inclusive of GST) under section 328-180 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following periods

1 July 2016 – 30 June 2017

1 July 2017 – 30 June 2018

The scheme commences on

1 July 2016

Relevant facts and circumstances

The partnership offers services to the general public.

You state that the partnership meets the criteria to be a small business entity (SBE).

There is also a related entity being a company. Both entities operate from the same premises. Both entities cross refer their respective client bases.

The two partners in the partnership are employees and directors of the company.

The partners have purchased general office equipment such as office chairs, computer equipment, sundry office equipment and fit out acquisitions.

In the future the partnership may need to look at an upgrading of their telephone system and file server.

As a small business the partnership buys equipment as needed or as the opportunity arises.

These assets being purchased are being used in both businesses as described above.

The assets in question were purchased between 1 July 2016 and June 30 2018.

The cost of the acquisitions vary, most are less than $1,000 each.

The company has budgeted $20,000 for the file server and telephone system.

Recarpeting of the office cost $6,500.

Assets will be acquired in the name of the partnership.

The assets will be used 100% by the partnership.

The assets are paid for outright by the partners.

Payment for these assets will be made by the partners of the partnership and the company will reimburse the partners for the expenses incurred.

Assets start to be used immediately upon acquisition.

Relevant legislative provisions

Income Tax (Transitional Provisions) Act 1997 subsection 328-180(4)

Income Tax Assessment Act 1997 Section 328-180

Income Tax Assessment Act 1997 Subdivision 328-D

Income Tax Assessment Act 1997 Subsection 328-205(3)

Income Tax Assessment Act 1997 Subsection 328-180(1)

Income Tax Assessment Act 1997 Subsection 328-110(1)

Income Tax Assessment Act 1997 Section 40-30

Income Tax Assessment Act 1997 Subsection 40-30(2)

Income Tax Assessment Act 1997 Section 40-40

Reasons for decision

As a general rule you can claim deductions for expenses incurred in gaining or producing assessable income. The cost of acquiring capital assets is generally not deductible. You might be able to claim a deduction for the decline in value of the cost of capital assets used in gaining assessable income.

A small business entity that has elected to use the small business entity capital allowance rules in Subdivision 328-D of the ITAA 1997 for an income year may immediately write off the taxable use portion of the cost of an asset acquired for less than the threshold amount.

The taxable use of a depreciating asset is the portion of an asset’s use in an income year that is for the purposes of producing assessable income (subsection 328-205(3) of the ITAA 1997). The deduction for the assets that cost less than the threshold is claimed in the income year in which the asset was first or installed ready for use.

The threshold is $20,000 for assets first acquired between 12 May 2015 and 30 June 2018 (subsection 328-180(4) of the Income Tax (Transitional Provisions) Act 1997).

The conditions for the application of the immediate write off for assets costing less than $20,000 are set out in subsection 328-180(1) of the ITAA 1997, namely:

a) The taxpayer was a small business entity for the year in which the deduction is claimed and the year in which the taxpayer started to hold the asset;

b) The taxpayer chooses to use the simplified depreciation system for small business entities;

c) The asset is a depreciating asset whose cost at the end of the income year in which was used or was installed ready for use for a taxable purpose is less than $20,000.

The taxpayer advised that they are a small business entity for the purpose of subsection 328-110(1) of the ITAA 1997, and will chose to apply the small business entity capital allowance rules in subdivision 328-D, and that the assets listed in the facts will have a cost of less than $20,000.

A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used (section 40-30 of the ITAA 1997). Land, trading stock and intangible assets not listed in subsection 40-30(2) of the ITAA 1997 are not depreciating assets.

It follows that the assets listed in the facts are depreciating assets. Any costs relating to the installation of the assets will form part of the cost of this depreciating asset. Provided that the assets are a depreciating asset and have a cost of less than $20,000 at the end of the income year ending 30 June 2018, the taxpayer will be entitled to claim an immediate write off under section 328-180 of the ITAA 1997.

Holder of Asset

A deduction for the decline in value of a depreciating asset for an income year can only be claimed by a person who “held” the asset at any time during the income year. The general rule is that the owner (or the legal owner, if there is both a legal and an equitable owner) holds the asset. Section 40-40 of the ITAA 1997, discusses this fully.

As the partnership is the legal owner of the assets, the Commissioner considers that the partnership is “holding” the assets for the required period and is therefore entitled to the immediate asset right off as outlined in Subdivision 328-D of the ITAA 1997.