Edited version of private advice

Authorisation Number: 1052072802750

Date of advice: 21 December 2022

Ruling

Subject: Temporary full expensing

Question

For the income years ended 30 June 20XX and 30 June 20XX does the Taxpayer satisfy subparagraph 40-160(1)(d)(i) of the Income tax (Transitional Provisions) Act 1997 (IT(TP)A)?

Answer

Yes.

This ruling applies for the following periods:

Income year ended 30 June 20XX

Income year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Trust and Trustee

The Trust is a discretionary trust which owns a commercial real estate property and was established by trust deed.

The Trust has a corporate trustee (the Taxpayer).

The Property

The Taxpayer originally purchased 50% the Property and later purchased the remaining 50% of the Property.

The Taxpayer is funded partly by bank debt and partly by injection of capital from beneficiaries.

The Property was originally acquired with tenants, although the leases were due to expire in the short term. The Property was old and worn and required significant improvements at the time of purchase.

The Taxpayer has provided business planning details including financing and cash contribution costs, and a projected cash flow analysis.

The Taxpayer is motivated to ensure the profitability of the activity continues to grow and the property rental activities have always been profitable.

The Property has been maintained and been updated to keep up with current trends to ensure maximum profits are obtained.

When the taxpayer owned the Property in a partnership (prior to acquiring the residual ownership interest) the Property produced positive net rent amounts on a yearly basis.

The Property has undergone progressive refurbishment.

The Taxpayer has provided a summary of works undertaken of the Property and a list of plant and equipment for the Property.

The intention in holding the Property is to generate a profit each year. The Taxpayer operates in such a way as to provide the greatest return to its beneficiaries.

Management of the Property

The Taxpayer engages a building property manager who undertakes the invoicing, collects the rent and manages the day-to -day operations that the Taxpayer can't attend due to the geographical location of the Property.

The Taxpayer and the property manager have a formal management agreement and the property manager provides a monthly report to the Taxpayer detailing financial and tenant data.

The Taxpayer has provided minutes of meetings with property manager, in which the Taxpayer has made decisions and reported responsibility for property maintenance issues.

Management of the Taxpayer

The Taxpayer is managed by a related party of the Trust. This arrangement is documented in a management agreement between the two entities. The cost of the management entity is allocated to the Taxpayer.

The managing entity also manages other commercial properties within the same privately owned group. All properties are held for the purpose of deriving long-term commercial rental returns.

The commercial property portfolio of the privately owned group is held across a range of discretionary trusts. The trusts are controlled by one individual and the affairs of the group are conducted as a single integrated business. notwithstanding the separate legal ownership structures which exist for commercial risk management purposes.

The Taxpayer manages its own bank account for distributions to beneficiaries and payments to third parties for professional advice or meeting regulatory requirements.

Controlling Individual

The Taxpayer's Controlling Individual's only source of income is from the distributions received from the discretionary trusts which hold the commercial properties.

The Controlling Individual has expertise in strategic property management, property development, property leasing and property maintenance and is responsible for the leasing, maintenance and enhancement of the Property, refurbishments and capital expenditure matters.

Other matters

To clarify that subsection 40-155(a) of the IT(TP)A is relevant to the Taxpayer's circumstances it has been confirmed that the Taxpayer's 'aggregated turnover' (for the purposes of section 328-115 of the Income Tax Assessment Act 1997 (ITAA 1997)) for the income year ended 30 June 20XX was less than $10 million.

Assumption

To clarify that subsection 40-155(a) of the IT(TP) Act is relevant to the Taxpayer's circumstances you have agreed to the inclusion of an Assumption that the Taxpayer's 'aggregated turnover' (for the purposes of section 328-115 of the ITAA 1997) for the income year ended 30 June 20XX will be less than $10 million.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 Subdivision 328-C

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

Income Tax Assessment Act 1997 section 328-115

Income Tax Assessment Act 1997 section 995-1

Income tax (Transitional Provisions) Act 1997 Subdivision 40-BB

Income tax (Transitional Provisions) Act 1997 section 40-155

Income tax (Transitional Provisions) Act 1997 subsection 40-155(a)

Income tax (Transitional Provisions) Act 1997 subsection 40-155(b)

Income tax (Transitional Provisions) Act 1997 subparagraph 40-160(1)(d)(i)

Summary

For the income years ended 30 June 2022 and 30 June 2023 the Taxpayer satisfies subparagraph 40-160(1)(d)(i) of the IT(TP)A as it satisfies the requirements of section 40-155 (about businesses with turnover under $5 billion).

For the income years ended 30 June 2022 and 30 June 2023 the Taxpayer:

•         Is carrying on a business for the purposes of paragraph 328-110(1)(a) of the ITAA 1997; and

•         The 'aggregated turnover' requirements in Subdivision 328-C of the ITAA 1997 are satisfied.

Reasons for decision

Temporary full expensing

To be able to claim the temporary full expensing (TFE) of depreciating assets under Subdivision 40-BB of the IT(TP)A, the relevant taxpayer must be an eligible entity.

In this regard, Law Companion Ruling LCR 2021/3: Temporary full expensing provides that:

PART A - ELIGIBLE ENTITIES

14. An entity will be eligible for TFE if it:

•         satisfies a test based on aggregated turnover, referred to in this Ruling as the eligible entity test, or

•         is a corporate tax entity and satisfies a test based on total income, referred to in this Ruling as the alternative income test.

Eligible entity test

15. Under the eligible entity test, an entity must satisfy the definition of 'small business entity' in Subdivision 328-C of the ITAA 1997 to be eligible for TFE for an income year, or satisfy it on the basis that each reference to $10 million in Subdivision 328-C of the ITAA 1997 (about aggregated turnover) was instead a reference to $5 billion.

16. This requirement means that an entity will need to carry on business in the income year and determine that its aggregated turnover is under the $5 billion threshold in accordance with the provisions of Subdivision 328-C of the ITAA 1997.

This guidance is based upon the legislative provisions contained in paragraph 40-160(1)(d) and section 40-155 of the IT(TP)A.

Paragraph 40-160(1)(d) of the IT(TP)A provides that:

... you are covered for the current year by any of the following:

(i)            section 40-155 (about businesses with turnover under $5 billion);

(ii)           section 40-157 (about corporate tax entities with income under $5 billion);...

Section 40-155 (Businesses with turnover under $5 billion) of theIT(TP)A is relevant to your circumstances and provides that:

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.

Therefore, to be an 'eligible entity' the Taxpayer must satisfy two requirements in respect of the income year:

(i)            it must carry on a business; and

(ii)           it must meet the 'aggregated turnover' requirement.

Application to your circumstances

Subsection 40-155(a) of the IT(TP)A is relevant to your circumstances.

Carrying on a business

The definition of small business entity under paragraph 328-110(1)(a) of the ITAA 1997 requires the entity to 'carry on a business' in the current year.

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

Paragraph 17 of LCR 2021/3 relevantly provides that:

Whether the conduct of an entity amounts to carrying on a business depends on facts and circumstances. The indicators of whether an entity or persons are carrying on a business are well-established and outlined in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production?

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.

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 overall 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).

The following information is considered to be relevant in terms of the factors listed in paragraph 13 of TR 97/11:

• Whether the activity has a significant commercial purpose or character

It has been established that the Property and the nature of the activity has significant commercial purpose or character.

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

The Taxpayer is motivated to ensure the profitability of the activity continues to grow and the intention in holding the Property is to generate a profit each year. The Taxpayer operates in such a way as to provide the greatest return to its beneficiaries.

• Whether there is regularity and repetition of the activity

There is regularity and repetition of the activity with the Taxpayer liaising with the managing agent as evidenced by the minutes of meetings between the Taxpayer and the managing agent.

The minutes report that the Taxpayer has made decisions and reported responsibility for property maintenance and tenant issues.

The Taxpayer has an overseeing and strategic role, it liaises with the managing agent about rentals received, and capital expenditure commitments.

• 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

A professional property manager is engaged by the Taxpayer in making decisions to actively improve and maintain the Property and improve its capital value. These activities are considered to be of the same kind and carried on in a similar manner to those in the same 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 Taxpayer maintains financial records for the Property and oversees activities that the managing agent undertakes, such as the planning, organising and carrying on the commercial activities to generate profit.

• The size, scale and permanency of the activity

The size, scale and permanency of the Property has been established.

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

The Taxpayer's activity cannot be described as a hobby, a form of recreation or sporting activity.

Wider economic group

In some cases, it is necessary to consider a taxpayer's wider economic group to determine whether it is carrying on a business.

As highlighted by Western Gold Mines N.L. v. Commissioner of Taxation (W.A.) (1938) 59 CLR 729 (Western Gold Mines), it is required that:

'[i]n considering whether a profit arising from a transaction is of an income or capital nature, it is necessary to make both a wide survey and an exact scrutiny of the taxpayer's activities'.

This principle was further extended by such cases as GRE insurance Limited and Unitraders Investments Pty Ltd v FCT (1992) 92 ATC 4089 and Grollo Nominees Pty Ltd v FC of T 97 ATC 4585 (Grollo) which specifically demonstrates that the Commissioner not only can, but he must consider the relationship that the entity/taxpayer in question has with the wider economic/family group, when determining this type of case.

In determining whether a receipt is on revenue or capital account, the authorities establish that it is necessary to conduct "a wide survey and an exact scrutiny of the taxpayer's activities": Commissioner of Taxation v Stone (2005) 222 CLR 289 at [19]; Federal Commissioner of Taxation v Montgomery (1999) 198 CLR 639 at 663 [69]; both citing Western Gold Mines (729 at 740) per Dixon and Evatt JJ:

This 'wide survey' is particularly important where the sale of the asset is by a taxpayer conducting a business. Jacobs J noted in London Australia at 127:

The identification and characterization of the business carried on by the taxpayer is the essential task.

Under the principle in Grollo there will be occasions when it is appropriate to consider the activities of the broader group of which the taxpayer is a part. In that case the Full Federal Court decided it would not be correct to treat a single purpose entity's activity in isolation of those of the other entities of a group.

In Doyle v FC of T 2020 ATC 10-522, the Applicant controlled each of the Trustee companies and the Doyle Group as a whole. He described himself as the "controlling mind of the Doyle Group". The Applicant took a hands-on approach to managing these entities, personally dealing with the Doyle Group's legal advisers, finance provider, investors (and potential investors) and other entities that conducted business with the Doyle Group. Accordingly, the Applicant's intention with respect to each property was found to be the intention of the Trustee company, and that his intention may be inferred from the actions of the Doyle Group and his own words and actions.

In this case, the controlling mind of the Taxpayer has significant property purchasing and leasing experience and the individual also conducts these activities for other commercial properties held by special purpose investment vehicles within the privately owned group. Consistent with the relevant cases (as cited above) it is relevant to consider the wider economic group activities of the Taxpayer's controlling mind.

Conclusion as to whether the Taxpayer is carrying on a business

Based on the information provided and weighing up all the factors provided for in TR 97/11, the activities of the Taxpayer support a conclusion that it carried on a business during the income year ended 30 June 2022 and will be carrying on a business during the income year ended 30 June 2023.

Aggregated turnover

To clarify that subsection 40-155(a) of the IT(TP)A is relevant to the Taxpayer's circumstances:

• it has been confirmed that the Taxpayer's 'aggregated turnover' (for the purposes of section 328-115 of the ITAA 1997 for the income year ended 30 June 20XX was less than $10 million; and
• an Assumption has been included that the Taxpayer's 'aggregated turnover' (for the purposes of section 328-115 of the ITAA 1997) for the income year ended 30 June 20XX will be less than $10 million.

As such, it is considered that, during the income years ended 30 June 20XX and 30 June 20XX:

• subsection 40-155(a) does apply to the Taxpayer's circumstances;
• subsection 40-155(b) does not apply to the Taxpayer's circumstances;
• the Taxpayer satisfies the aggregated turnover requirement.

Overall conclusion

To be an 'eligible entity' the Taxpayer must satisfy two requirements in respect of the income year:

(i) it must carry on a business; and

(ii) it must meet the 'aggregated turnover' requirement.

For the reasons outlined, above, it is considered that:

• for the income year ended 30 June 20XX, the Taxpayer was carrying on a business and met the aggregated turnover requirement; and
• for the income year ended 30 June 20XX, the Taxpayer will be carrying on a business and will meet the aggregated turnover requirement.

As such, for the income years ended 30 June 20XX and 30 June 20XX the Taxpayer satisfies subparagraph 40-160(1)(d)(i) of the IT(TP)A as it satisfies the requirements of subsection 40-155(a).

Other relevant comments

For clarity, this private ruling only rules on whether the Taxpayer is an eligible entity for TFE purposes. It has not considered whether particular assets are eligible depreciable assets for TFE purposes.

Temporary full expensing is only available in respect of eligible assets and is not available for any capital work assets that are deductible under Division 43 of the ITAA 1997. It is also not available in respect of an asset to which section 40-45 states is an asset that Division 40 does not apply to (subsection 40-150(2) of the IT(TP)A).