Edited version of private advice

Authorisation Number: 1052036678643

Date of advice: 20 September 2022

Ruling

Subject: Temporary full expensing

Question

Is the taxpayer eligible to claim the cost of the specified assets located at XXXX under the temporary full expenses of depreciating assets contained in Subdivision 40-BB of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997)?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

1.            You operate a sole trader business.

2.            Your aggregated turnover is less than $XX million.

3.            You purchased land.

4.            You engaged an architect to design a large format retail centre on the site.

5.            Planning approval was granted by council on XX/XX/XXXX for a retail centre comprising of seven stores.

6.            A commercial real estate agent put the project on the market seeking tenants before commencement started,

7.            Feedback from the market was not receptive to the design as it locked the proposed back stores in a corner and was not free flowing.

8.            You then engaged professionals to explore more ideas for the centre and it was then redesigned with three large format stores in the front and two large warehouses in the back.

9.            Council approved the plan, and a further permit was issued.

10.          You engaged a builder to build the centre.

11.          You could not obtain bank finance at this time as it was your first project and you had not secured any pre-leases.

12.          You paid for preliminary building works and then obtained approval for a Business Construction Loan with Westpac.

13.          Total construction costs were more than the loan amount and you personally funded the difference.

14.          As construction commenced, four leases were secured.

15.          The construction of the retail precinct was completed in XX/XXXX.

16.          Practical completion on the units was completed in XX/XXXX.

17.          Following completion of the buildings you engaged an agent to manage the precinct on your behalf.

18.          The remaining store is still being marketed for lease.

19.          You provide services for your tenants, and they reimburse you for these services.

20.          You advised which items you wished to claim which are located at the precinct

Information provided

21.              You have provided information in a number of documents in relation to your ruling, including:

(a)          your private ruling application.

(b)          supplementary information provided

Relevant legislative provisions

Income Tax (Transitional Provisions) Act 1997, Subdivision 40-BB of the

Income Tax (Transitional Provisions) Act 1997, Subsection 40-30(1)

Income Tax (Transitional Provisions) Act 1997, Section 40-145

Income Tax (Transitional Provisions) Act 1997, Subsections 40-150(1)

Income Tax (Transitional Provisions) Act 1997, Subsection 40-150(3)

Income Tax (Transitional Provisions) Act 1997, Paragraph 40-150(3)(a)

Income Tax (Transitional Provisions) Act 1997, Section 40-155

Income Tax (Transitional Provisions) Act 1997, Subsection 40-160(1)

Income Tax Assessment Act 1997, Paragraph 40-25(7)(a)

Income Tax Assessment Act 1997, Subsection 40-30(1)

Income Tax Assessment Act 1997, Subdivision 328-D

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

Income Tax Assessment Act 1997, Paragraph 328-110(1)(a)

Income Tax Assessment Act 1997, Subparagraph 328-110(1)(b)(i)

Income Tax Assessment Act 1997, Subsection 328-175(1)

Income Tax Assessment Act 1997, Paragraph 328-175(1)(a)

Income Tax Assessment Act 1997, Paragraph 328-175(1)(b)

Income Tax Assessment Act 1997, Subsection 328-175(6)

Income Tax Assessment Act 1997, Subsection 995-1(1)

Reasons for decision

1.            Subsection 328-175(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states:

You can choose to calculate your deductions and some amounts of assessable income under this Subdivision instead of under Division 40 for an income year for all the *depreciating assets that you *hold if:

(a) you are a *small business entity for the income year; and

(b) you started to use the assets or have them *installed ready for use, for a *taxable purpose during or before that income year.

This subsection has effect subject to subsections (2) to (10).

2.            The meaning of 'small business entity' is stated in subsection 328-110(1) of the ITAA 1997 as:

You are a small business entity for an income year (the current year) if:

(a)          you carry on a *business in the current year; and

(b)          one or both of the following applies:

(i) you carried on a business in the income year (the previous year) before the current year and your *aggregated turnover for the previous year was less than $10 million;

(ii) your aggregated turnover for the current year is likely to be less than $10 million

3.            As you carry on a sole trader business and have an aggregated turnover of under $10 million, you satisfy the meaning of a small business entity pursuant in paragraph 328-110(1)(a) and subparagraph 328-110(1)(b)(i) of the ITAA 1997.

4.            A 'taxable purpose' is defined in paragraph 40-25(7)(a) of the ITAA 1997 as the purpose of producing assessable income. The construction of the commercial precinct finished in XX/XXXX, and you entered into leases for four of the premises from XX/XXXX. As you derive rental income from these premises, this is considered as assessable income to you. Therefore, you satisfy the conditions in paragraphs 328-175(1)(a) and (b) and may be entitled to claim deductions under these provisions unless an exception applies.

5.            The relevant exception that could apply is subsection 328-175(6) of the ITAA 1997, which states:

You cannot deduct amounts for a depreciating asset under this Subdivision if the asset is being or might reasonably be expected to be let predominantly on a depreciating asset lease.

6.            A 'depreciating asset lease' is defined in subsection 995-1(1) of the ITAA 1997 as follows:

A depreciating asset lease is an agreement (including a renewal of an agreement) under which the entity that holds the depreciating asset grants a right to use the asset to another entity. ...

7.            You hold the assets at the commercial precinct but grant the rights to use these assets to your tenants. These assets will fall within the definition of a depreciation asset lease. Therefore, the Commissioner will exclude these assets from the simplified depreciation rules in Subdivision 328-D of the ITAA 1997.

8.            However, paragraph 145 in Law Companion Ruling: Temporary full expensing LCR 2021/3 states:

Exclusion of these assets from the simplified depreciation rules does not mean that decline in value deductions cannot be obtained for these assets under other rules. A small business entity may still access TFE for such an asset under Subdivision 40-BB of the IT(TP)A if eligibility requirements are met.

9.            The government introduced new measures to support business investment as part of its Economic Stimulus Package in response to COVID-19. In particular, the temporary full expensing (TFE) measure provides a temporary tax incentive to support new investment and deliver significant cash flow benefits by allowing eligible businesses to immediately deduct the full cost of eligible depreciating assets that are first held, and first used or installed ready for use for a taxable purpose, between 2020 Budget time and 30 June 2022.

10.          The TFE provisions were enacted by the Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Act 2020 and amended by the Treasury Laws Amendment (2020 Measures No. 6) Act 2020.

11.          If TFE applies to work out the decline in value of a depreciating asset, no other method of working out that decline in value applies.[1]

12.          For businesses with a turnover under $5 billion, section 40-155 states:

This section covers you for an income year if:

(a)          you are a small business entity for the income year; or

(b)          you would be a small business entity for the income year if:

(i) each reference in Subdivision 328-C of the Income Tax Assessment Act 1997 (about what is a small business entity) to $10 million were instead a reference to $5 billion; and

(ii) the reference in paragraph 328-110(5)(b) of that Act to a small business entity were instead a reference to an entity covered by this section"

13.          As determined earlier, you would meet the requirement to be a small business entity, as you carry on a business in the relevant year and your aggregated turnover is under $10 million. Therefore, the requirement in section 40-155 is satisfied, meaning the business is eligible to be considered for temporary full expensing.

Eligible assets

14.          A depreciating asset[2] qualifies for TFE if it is:

(a)          first held, and first used, or installed ready for use, for a taxable purpose, between the 2020 budget time and 30 June 2023,[3] and

(b)          located in Australia and principally used in Australia for the principal purpose of carrying on a business (TFE is not available if it is reasonable to conclude the asset will never be located in Australia or it is not reasonable to conclude the asset will be principally used in Australia for business purposes).[4]

15.          The construction of the commercial precinct was completed in XX/XXXX, and the five units were practically completed on XX/XXXX. As such the assets were first held by you after the 2020 Budget time and used or installed ready for use by you for a taxable purpose between the 2020 Budget time and 30 June 2023.

16.          However, for the depreciating assets that you are looking to qualify for TFE requires the assets to be located in Australia and principally used in Australia for the principal purpose of carrying on a business.[5]

17.          The depreciating assets are installed in the five units at the commercial precinct and therefore are located in Australia. Whilst you are carrying on a business, the relevant depreciating assets are not used in this business. Therefore, it needs to be determined if you are carrying on a commercial leasing business at the commercial precinct.

18.          Subsection 995-1(1) of the ITAA 1997defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'.

19.          The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the particular facts. As stated in Martin v Federal Commissioner of Taxation (1953) 90 CLR 470; 10 ATD 226; (1953) 5 AITR 548:

The test is both subjective and objective: it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and... the determination is eventually based on the large or general impression gained.

Taxation Ruling TR 97/11

20.          Taxation Ruling TR 97/11 Income Tax: Am I carrying on a business of primary production? (TR 97/11) provides guidance to determine if a taxpayer is in business for tax purposes. TR 97/11 states at paragraph 13 that the courts have determined that the following factors are considered important in determining the question of business activity:

•                     whether the activity has a significant commercial purpose or character

•                     whether the taxpayer has more than just an intention to engage in business

•                     whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

•                     whether there is regularity and repetition of the activity

•                     whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business

•                     whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit

•                     the size, scale and permanency of the activity, and

•                     whether the activity is better described as a hobby, a form of recreation or sporting activity.

21.          No one indicator is decisive. The indicators must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression gained from an examination of the facts (Martin v Federal Commissioner of Taxation (1953) 90 CLR 470; 10 ATD 226; (1953) 5 AITR 548).

22.          In determining whether you were carrying on a business, it is acknowledged the activity undertaken had a profit purpose and was characterised by regular and repetitive activity over a significant period of time. There are characteristics that aligned the activity as a business rather than a hobby.

23.          Your activities had 'significant commercial purpose or character'. There were business premises, professionals engaged to assist, and your time given to the activity with an intention to carry on business.

24.          You carried on the activities in a similar manner to ordinary traders in the same industry with a permanency to the activities.

25.          There was a high degree of involvement in the day-to-day activities by you, and an engagement of professionals to fulfill a wide array of practical and administrative tasks. These factors all create the impression of the existence of a business.

26.          There was a significant market value of assets used, as well as this the quantum of both income and expenditure from the activities displays a commercial purpose and character having the size, scale and permanency to evidence the existence of a business.

27.          After weighing up the factors outlined above, it is considered that you were carrying on a commercial leasing business. Thus, you satisfy the final part of the requirement for the assets to be depreciating asset for TFE.[6] Therefore, you are entitled to claim the cost of assets for the assets located at the commercial precinct under the TFE measures contained in Subdivision 40-BB.

[1] Section 40-145.

[2] Subsection 40-30(1) of the ITAA 1997 explains that a 'depreciating asset' is an asset that has a limited 'effective life' and can reasonably be expected to decline in value over the time.

[3] Subsections 40-150(1) and 40-160(1).

[4] Subsection 40-150(3).

[5] Paragraph 40-150(3)(a).

[6] Paragraph 40-150(3)(a).