Private ruling: Conservation tillage refundable tax offset
Published: March 2014
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 2013

Ruling: Q1: In the year ended 30 June 20XX, is the conservation tillage refundable tax offset available to the taxpayer, as lessee, where the eligible no-till seeder and cart are financed using a finance lease? | A1: No

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. The taxpayer carried on a business of primary production. The taxpayer is finalising the purchase of an eligible no-till seeder and cart (seeder) which will be delivered prior to 30 June 20XX. The seeder is new and has not been used previously. The seeder meets the eligibility criteria for the conservation tillage refundable tax offset. The seeder will be installed and ready to use in the taxpayer' primary production business prior to 30 June 20XX. The taxpayer will apply for a research participation certificate prior to 30 June 20XX. The taxpayer intends to finance the purchase of the seeder by a two year finance lease through its bank. The taxpayer will have the option of acquiring the seeder at the end of the lease term. The taxpayer intends to exercise this option. The residual at the end of the two year term will meet the minimum cost requirements as outlined in IT 28. The seeder will not be deprecated by the taxpayers during the term of the lease. The taxpayer indicates that the proposed arrangement with the taxpayer's bank is a sale and leaseback where the bank would ordinarily claim deductions under Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997) during the term of the lease on the basis that it is the legal owner of the seeder, and it is only upon the taxpayer paying the residual at the expiration of the lease that the taxpayer becomes the legal owner of the seeder.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 40-40 and | Income Tax Assessment Act 1997 section 385-175.

Reasons for decision: Summary: According to section 385-175 of the ITAA 1997: | Detailed Reasoning - 385-175(1): You are entitled to a *tax offset under this section (the conservation tillage offset ) for an income year in respect of a *depreciating asset if: (a) the asset is an *eligible no-till seeder; and (b) the income year is: (i) the 2012-13 income year; or (ii) the 2013-14 income year; or (iii) the 2014-15 income year; and (c) at a particular time during the income year, you: (i) start to use the asset to carry on a *primary production business (without previously having the asset *installed ready for use); or (ii) have the asset installed ready for use to carry on a primary production business; and (d) at the time mentioned in paragraph (c), you *hold the asset; and (e) the time mentioned in paragraph (c) is not: (i) before 1 July 2012; or (ii) after 30 June 2015; and (f) the *Agriculture Secretary has issued a Research Participation Certificate to you under section 385-190 for the income year; and (g) you claim the offset in your *income tax return for the income year. | Detailed Reasoning - 385-175(2): You are not entitled to the conservation tillage offset if the *depreciating asset has, at any time before the time mentioned in paragraph (1)(c), been used, or *installed ready for use, by: (a) you; or (b) any other entity. Section 385-235 of the ITAA 1997 sets out the definition of a no-till seeder. In this case, the issue which arises is whether the taxpayer will hold the seeder at the particular time in the income year (paragraph 385-175(1)(d) of the ITAA 1997). The particular time is the time in the income year when the taxpayer starts to use the seeder or has it installed ready for use in the taxpayer's primary production business (paragraph 385-175(1)(c)). On the facts presented by the taxpayer, the Commissioner is satisfied that all other requirements of subsection 385-175(1) and (2) would be satisfied, provided a research participation certificate is issued to the taxpayer for the year ended 30 June 20XX. Hold Paragraph 386-175(1)(d) of the ITAA 1997 contains the asterisk term hold . Paragraph (b) of the definition of hold in subsection 995-1(1) of the ITAA 1997 states ' hold a depreciating asset has the meaning given by section 40-40'. The table in section 40-40 of the ITAA 1997 sets out 10 items under which a taxpayer is taken to hold a depreciating asset. The general or 'default' rule is that the taxpayer holds an asset when they are the owner of the asset (item 10). Other items provide that a taxpayer holds an asset in various other circumstances even though they are not the asset's owner. In the scheme of section 40-40 of the ITAA 1997 the earlier items can be seen as special cases that are, in effect, exceptions to the general rule in item 10, and which apply in priority to it. One exception to the general holding rule is in item 6. Broadly, item 6 applies where: • a taxpayer has possession, or an immediate right to possession, of the depreciating asset combined with a right, the exercise of which would make it the holder (for example an option to acquire); and • it is 'reasonable to expect' that the taxpayer will become the asset's holder by exercising that right or that the asset will be disposed of at their direction and for their benefit. The effect of item 6 applying to an arrangement is that the entity in possession, or with a right to immediate possession, of the asset is the holder of the depreciating asset for the purposes of Division 40 and the legal owner is not. In this case, the taxpayer advised that the proposed arrangement with the bank is a sale and leaseback and the taxpayer will not be claiming depreciation under Division 40 of the ITAA 1997 during the term of the lease agreement. In these circumstances it is considered that the taxpayer's bank, as lessor, will be the legal owner of the seeder under item 10 of the table in section 40-40 of the ITAA 1997 at the time that the taxpayer starts to use the seeder, or have it installed ready for use in their primary production business. The taxpayer has also advised that it intends to exercise an option to acquire the seeder at the end of the lease term, subject to the taxpayer paying the residual under the lease. In addition, the taxpayer has advised that it will not claim depreciation during the term of the lease. It is considered that there is insufficient evidence that the taxpayer will hold the seeder under item 6 of the table in section 40-40 of the ITAA 1997 at the particular time that the taxpayer starts to use the seeder or has it installed ready for use in the taxpayer's primary production business. This is supported by the taxpayer's advice that it would not claim depreciation during the term of the lease. It is the Commissioner's view that for the purpose of paragraph 386-175(1)(d) of the ITAA 1997 the taxpayer will not hold the seeder at the particular time. In these circumstances the taxpayer will not satisfy paragraph 385-175(1)(d) of the ITAA 1997 and is not entitled to the conservation tillage RTO in the year ended 30 June 2014. Limited application of 'holding' rules The Commissioner's view that the taxpayer will not hold the seeder has been reached by considering the facts as presented in the private ruling application and is made solely in the context of consideration of whether the taxpayer will hold the seeder for the purposes of the conservation tillage refundable tax offset. It is not indicative of whether or how Division 40 of the ITAA 1997 may apply to the taxpayer. It is not indicative of a characterisation by the Commissioner of the arrangement contemplated between the taxpayer and its bank. These are further issues for you to consider which are outside the scope of the issue you asked to be considering in the private binding ruling. If you need further clarification, you may find TR 2006/13 Income tax: sale and leasebacks and TR 2005/20 Income tax: the interaction of deemed ownership under Division 240 of the Income tax Assessment Act 1997 with the 'holding' rules in Division 40 may provide you with guidance on these issues. Alternatively, you may ask for a further ruling in relation to any further issues arising from the contemplated arrangement. Repeal of the conservation tillage refundable tax offset The taxpayer is requested to note that The Clean Energy Legislation (Carbon Tax Repeal) Bill 2013 has been passed by the House of Representatives and is currently before the Senate. If this legislation is enacted the conservation tillage refundable tax offset is to be removed from 1 July 2014. For more information on The Clean Energy Legislation (Carbon Tax Repeal) Bill 2013 you may visit the conservation tillage offset page at www.ato.gov.au and follow the links to the relevant legislation.