ATO ID 2004/146: Capital Allowances: installed ready for use - aircraft requiring major repairs
Date of decision: 28 January 2004
Year of income: Year ended 30 June 2002
Business line: Private Groups and High Wealth Individuals

Issue
Was a charter aircraft installed ready for use for the purpose of applying subsection 40-60(2) of the Income Tax Assessment Act 1997 (ITAA 1997), although it required major repairs prior to being able to be made available for use?

Decision
No. The aircraft was not installed ready for use under subsection 40-60(2) of the ITAA 1997 until the major repairs were completed and the aircraft was able to be made available for charter.

Facts
A taxpayer purchased an aircraft to be let on a charter basis for the purpose of producing assessable income. The aircraft was purchased with a certificate of airworthiness which provided that it was ready to fly. However, soon after purchase it was discovered that the aircraft was in need of major repairs. The aircraft was not used for any private or income producing purpose from the time of purchase until the major repairs were undertaken. The major repairs were completed and the aircraft was placed into charter.

Reasons for decision
Summary: Section 40-25 of the ITAA 1997 states that you can deduct an amount equal to decline in value for an income year of a depreciating asset that you held for any time during the year. A depreciating asset starts to decline in value from when its start time occurs (Subsection 40-60(1) of the ITAA 1997). Subsection 40-60(2) of the ITAA 1997 provides that the start time of a depreciating asset occurs when it is when it is first used, or installed ready for use, for any purpose. The aircraft is a depreciating asset that is held by the taxpayer. The requirement to be installed ready for use was considered in (1956) 6 CTBR (NS) Case 24 , where a majority of the Board of Review held that an incomplete item of plant could not satisfy the requirement of being 'installed ready for use'. Mr McCaffery, a member of the board, stated: It is therefore possible for a taxpayer to hold an asset, without the 'start time' occurring with respect to that asset, in cases where the taxpayer has not prepared the asset for immediate use. Thus, an asset will not be 'used' or 'installed ready for use' if it remains in its shipping container or is not fully assembled. For the purpose of applying section 40-60 of the ITAA 1997, the aircraft was not used or installed ready for use until the major repairs were completed and the aircraft was able to be made available for charter. The depreciating asset's start time occurred when the aircraft was able to be made available for charter because it was installed ready for use at that time.

Legislative references: Income Tax Assessment Act 1997 section 40-25 section 40-60 subsection 40-60(1) subsection 40-60(2)
Case references: Case 24 (1956) 6 CTBR (NS) 154
Subject references: Aircraft Plant installed ready for use Start time Uniform capital allowances system