ATO ID 2009/69: Capital Allowances: tax break - investment commitment time - option to delay construction
Date of decision: 8 July 2009
Year of income: Year ended 30 June 2009
Business line: Public Groups and International

Issue
For the purposes of working out the investment commitment time under subparagraph 41-25(1)(a)(i) of the Income Tax Assessment Act 1997 (ITAA 1997), is the taxpayer's option under a purchase contract to delay the time at which construction of a depreciating asset commences an option to which subsection 41-25(4) of the ITAA 1997 applies?

Decision
No. The taxpayer's option to delay the time at which construction of the depreciating asset commences is not an option to which subsection 41-25(4) of the ITAA 1997 applies. It is not an option to enter into a contract under which the taxpayer holds the asset. The purchase contract is the contract under which the taxpayer will hold the asset.

Facts
The taxpayer entered into a contract in August 2008 to acquire a new depreciating asset. Under the purchase contract, the taxpayer had the option to delay the time at which the manufacturer started to construct the asset. Under the purchase contract, when construction was complete, the taxpayer started to hold the depreciating asset as the legal owner under item 10 of the table in section 40-40 of the ITAA 1997.

Reasons for decision
Summary: (All legislative references are to the ITAA 1997 unless otherwise stated) Subparagraph 41-25(1)(a)(i) states that the investment commitment time for an amount, which is included in the first element of cost, is the time at which you enter into a contract under which you hold the asset at the time, or will hold at a later time. However, subsection 41-25(4) states that, for the purposes of section 41-25, you do not enter into a contract under which you hold an asset merely because you acquire an option to enter into such a contract. Therefore, if a taxpayer enters into a contract which includes an option to enter into a contract to become the holder of a depreciating asset at a later point in time, the investment commitment time is deemed to be when the option is exercised, rather than the date of the original contract. In this case, the taxpayer entered into a purchase contract in August 2008 under which they would hold the depreciating asset as the legal owner at a later time. The option under the purchase contract was not an option to enter into a contract to become the holder of the depreciating asset at a later point in time. The exercise of the option would merely delay the time at which the construction of the asset would commence. Therefore, the taxpayer's option under the purchase contract to delay the time at which construction of the depreciating asset would commence is not an option to which subsection 41-25(4) applies. The investment commitment time is when the taxpayer entered into the purchase contract in August 2008.

Legislative references: Income Tax Assessment Act 1997 section 41-25 subparagraph 41-25(1)(a)(i) subsection 41-25(4) section 40-40
Subject references: Capital Allowances CoE Investment allowances