Private ruling: Is the entity entitled to claim for depreciating assets under section 328-180 of the Income Tax Assessment Act 1997
Date of advice: 23 August 2017
Published: December 2017
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Is the entity entitled to a deduction for expenses incurred in buying assets which are leased back to the former owner under s328-180 of the Income Tax Assessment Act 1997 ? | A1: No

Relevant facts and circumstances: The entity is currently involved in investment activities. The investment activities include holding units and shares in publicly-listed entities. The entity entered into an agreement with a third party to buy depreciating assets which will be hired back to the third party. At the end of the leasing period the assets will be bought back from the entity by the third party for the original purchase price. The entity will receive hiring fees for the assets from the third party. During the term of the agreement the third party will supply and service the assets while they are in place. The lessee of the asset will pay rent to the third party and at the end of a set period the third party will pay the rent to the entity.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 328-180(1) | Income Tax (Transitional Provisions) Act 1997 subsection 328-180(4) | Income Tax Assessment Act 1936 section 6(1)

Reasons for decision: Summary: Under subsection 328-180(1) of the Income Tax Assessment Act 1997 (ITAA 1997) you can deduct the taxable purpose proportion of the adjustable value of a depreciating asset for the income year in which you start to use the asset, or have it installed ready for use, for a taxable purpose if: (a) you were a small business entity for that year and the year in which you started to hold it; and (b) (ab) you chose to use this Subdivision for each of those years; and (c) the asset is a depreciating asset whose cost as at the end of the income year in which you start to use it, or have it installed ready for use, for a taxable purpose is less than $1,000. Note: This threshold is $20,000 for assets you first acquire between 12 May 2015 and 30 June 2018 (see subsection 328-180(4) of the Income Tax (transitional Provisions) Act 1997 .) You are a small business entity for an income year (the current year) if: (a) you carry on a business in the current year; and (b) one or both of the following applies: (i) you carried on a business in the income year (the previous year) before the current year and your aggregated turnover for the previous year was less than $10 million; (ii) your aggregated turnover for the current year is likely to be less than $10 million. Passive income is defined under section 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) as: (a) dividends and non-share dividends paid to the taxpayer (b) unit trust dividends (c) a distribution treated as a dividend under s47, i.e. a distribution made by a liquidator in the course of winding up a company (d) deemed dividends under s47A (i.e. distributions of controlled foreign company (CFC) income to an associated entity), former s 108 (i.e. private company loans, etc., to an associated person) or Div 7A (i.e. private company distributions to a shareholder or a shareholder's associate) (e) interest income (f) annuities (g) rental income. Rent is defined in s317 as any consideration paid or given by a lessee under a lease and includes consideration (whether paid or given by a lessee or another person) in the nature of rental consideration (h) royalties (i) consideration received by a taxpayer for the assignment in whole or in part of any copyright, patent, design, trade mark or other similar property or right (j) any profits or gains of a capital nature that accrued to the taxpayer (k) passive commodity gains, and (l) amounts included in the taxpayer's assessable income under the following provisions: ● s102AAZD (attributable income of a non-resident trust estate) ● s456 (attributable income of a CFC) ● s457 (attributable income arising from a change in the country of residence of a CFC) ● s459A which acts as an anti-avoidance provision for s456 to 459 so that attribution of income under those provisions is not avoided by using interposed entities, or ● former s 529 which, prior to the 2010/11 income year, provided for foreign investment fund (FIF) income of a FIF or FLP to be included in assessable income. In order for the entity to be entitled to claim an immediate deduction of up to $20,000 for each depreciating asset it must be a small business entity (SBE). In order for the entity to be a SBE it must carry on a business. The entity is currently only in receipt of passive income being share and unit trust dividends and in the future it will also be in receipt of rental income from the depreciating assets it purchased and will rent back to the third party. As the entity is only in receipt of passive income it is not carrying on a business therefore it cannot be a SBE. As the entity is not a SBE it is not entitled to claim an immediate deduction for the depreciating assets up to the value of $20,000 each under s328-180 of the ITAA 1997 .