Private ruling: Accelerated depreciation measures
Date of advice: 6 May 2020
Published: June 2020
Ruling period: Year ending 30 June 2020
Date scheme commenced: 1 July 2019

Ruling: Q1: Does the purchased asset qualify for the accelerated depreciation under subdivision 40-BA of the Income Tax (Transitional Provisions) Act 1997 ? | A1: No.

Relevant facts and circumstances: You have an aggregated turnover of less than $500 million for the 2020 and 2021 income years. On a date pre March 2020 you signed a purchase contract for an asset. The purchase contract contained an acknowledgement that you promise to pay the balance due on or before delivery of the asse t. It states despite physical delivery of the product, title shall remain in the seller until the foregoing was accomplished. The tax invoice issued on a date pre March 2020. The Finance contract was signed post March 2020. The asset was delivered in April 2020 and was installed ready for use on that date. The asset was a new asset and not a second hand asset. The asset will be located in Australia. There has been no deductions claimed under the instant asset write off rules in section 40-82 of the Income Tax Assessment Act 1997 (ITAA 1997). The decline in value of the asset is not worked out under Subdivision 40-E or Subdivision 40-F of the ITAA 1997.

Relevant legislative provisions: Income Tax (Transitional Provision) Act 1997 section 40-120 | Income Tax (Transitional Provision) Act 1997 subsection 40-120(1) | Income Tax (Transitional Provision) Act 1997 subsection 40-120(2) | Income Tax (Transitional Provision) Act 1997 subsection 40-120(3) | Income Tax (Transitional Provision) Act 1997 section 40-125 | Income Tax (Transitional Provision) Act 1997 subsection 40-125(1) | Income Tax (Transitional Provision) Act 1997 subsection 40-125(2) | Income Tax (Transitional Provision) Act 1997 paragraph 40-125(2)(a) | Income Tax (Transitional Provision) Act 1997 subsection 40-125(5) | Income Tax (Transitional Provision) Act 1997 subsection 40-125(7) | Income Tax (Transitional Provision) Act 1997 subsection 40-125(10)

Reasons for decision: Summary: You cannot access the accelerated depreciation measures in Subdivision 40-BAof the Income Tax (Transitional Provisions) Act 1997 (ITTP 1997) in relation to the asset . | Detailed Reasoning - Detailed reasoning: Under section 40-120(1) of the ITTP1997, the decline in value of a depreciating asset for an income year is worked out under section 40-130 of the ITTP. This provides an accelerated rate of deprecation for businesses with aggregated turnover of less than $500 million in an income year. Generally an entity is eligible for accelerated depreciation deductions if: - The income year is the year that the entity starts to use the asset, or has it installed ready for use for a taxable purpose; - The entity has aggregated turnover of less than $500 million for the income year; and - The asset is a qualifying asset. However the entity is not eligible to claim the accelerated depreciation deductions: - If the decline in value of the asset has already been deducted under the instant asset write-off rules in section 40-82 of the Income Tax Assessment Act 1997 (ITAA 1997) - If the decline in value of the asset is worked out under Subdivision 40-E of the ITAA 1997 or Subdivision 40-F of the ITAA 1997, Generally, a depreciating asset is a qualifying asset if, between March 2020 and 30 June 2021 (inclusive): - The entity starts to hold the asset; and - The asset was first used, or installed ready for use for a taxable purpose. However there are exclusions to qualifying assets under the general rules These include: - A commitment to the asset was entered into before March 2020 - The asset is a second hand asset; - Division 40 does not apply to the asset; or - The asset would not be in Australia | Detailed Reasoning - Commitment previously entered into: Subsection 40-125(2) of the ITTP 1997 provides that you are not covered by the general rule if before March 2020 you: a) Entered into a contract under which you would hold the asset; or b) Started to construct the asset c) Started to hold the asset in some other way However under subsection 40-125(5) of the ITTP, for the purposes of the section, 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. Due to this being new legislation, there has been no case law or ATO view interpreting the section However subsection 41-25(1) of the ITAA 1997 that considered the definition of investment commitment time contains similar words. The section is as follows: 1) The investment commitment time for the amount is: a) If the amount is included in the first element of the asset's cost - the time at which you: i) Enter into a contract under which you hold the asset at that time, or will hold the asset at a later time; or ii) Start to construct the asset; or iii) Start to hold the asset in some other way; or b) If the amount is included in the second element of the asset's cost - the time at which you enter into a contract, or start construction, for the economic benefit in relation to which the amount becomes, or will become, included in that element under paragraph 40-190(2)(a). ATO Interpretive Decision ATO ID 2009/81 Income Tax, Capital Allowances: tax break - investment commitment time - depreciating asset subject to hire purchase agreemen t considered section 41-25 in relation to hire purchase agreements. In that scenario, a taxpayer placed an order with a supplier for a new depreciating asset and paid a deposit at that time. The asset was delivered to the taxpayer at a later date. At that time, the taxpayer entered into the hire purchase agreement with a financier for the asset. The taxpayer did not become the legal owner of the asset prior to entering into the hire purchase agreement. When the hire purchase agreement was entered into, the taxpayer became the holder of the asset under item 6 of the table in section 40-40 of the ITAA 1997. In the reasoning of that ATO ID, it was stated that the purchase order is not the contract under which they would hold the asset at that time. The taxpayer's right in this instance to become the legal owner at that time is not a right exercised under the purchase order and the taxpayer does not become the legal owner of the asset at that time under the purchase order. However ATO Interpretive Decision ATO ID 2009/69 Income tax, Capital Allowances: tax break - investment commitment time - option to delay construction which considers the same section considered the situation of where there is a purchase contract, which is the same situation as yours. It reasoned that the taxpayer entered into a contract in August 2008 under which they would hold the depreciating asset as the legal owner at a later time. The taxpayer had an option under the contract to delay the time at which the manufacturer started to construct the asset. It was found that this option was not an option to enter into a contract to become the holder of the depreciating asset at a later point in time, which was one of the exceptions to the general rule. Therefore the taxpayer's investment commitment time was when the taxpayer entered into the purchase contract in August 2008. The Explanatory Memorandum to the Coronavirus Economic Response Package Omnibus Bill 2020 (EM) states at paragraph 2.34 The measure does not apply to assets where commitments to hold, construct or use the asset were entered into before March 2020. The incentive is intended to stimulate new investment rather than benefiting investment that has already been committed to. In your situation, you entered into a purchase contract on XX XXXX 2020 that stated you would become legal owner once the balance of the asset cost was paid off. This date is the date for which you entered into the commitment to the asset. The contract you entered into was not an option to enter into the contract. The date you entered into the contract was before March 2020. ATO ID 2009/69, despite considering another provision, indicates that it is the time of entering the purchase contract that will be taken as the applicable date as it is that date in which you enter into a commitment to hold the asset. This view is in line with the views in the EM where it states that the incentive is to stimulate new investment, not investment that has already been committed to. You had already committed to holding the asset prior to March 2020. Accordingly, you are not able to apply the accelerated depreciation rules to the purchased asset.