ATO Interpretative Decision
ATO ID 2009/81
Income Tax
Capital Allowances: tax break - investment commitment time - depreciating asset subject to hire purchase agreementFOI status: may be released
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
If a depreciating asset is subject to a hire purchase agreement, is the investment commitment time under paragraph 41-25(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) the time at which the hire purchase agreement is entered into?
Decision
Yes. If a depreciating asset is subject to a hire purchase agreement, the investment commitment time under paragraph 41-25(1)(a) of the ITAA 1997 is the time at which the hire purchase agreement is entered into as this is the contract under which the taxpayer holds the asset.
Facts
The taxpayer placed an order with a supplier in August 2008 for a new depreciating asset and paid a deposit at that time.
The asset was delivered to the taxpayer in April 2009. 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.
Reasons for Decision
All legislative references are to the ITAA 1997 unless otherwise stated.
Paragraph 41-25(1)(a) states that the investment commitment time for an amount which is included in the first element of cost of a depreciating asset is 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.
Under item 6 of the table in section 40-40, the hirer of a depreciating asset subject to a hire purchase agreement will be the holder if they:
- •
- possess the asset or have a right to do so immediately, and
- •
- have a right to become the legal owner and it is reasonable to expect that they will become the legal owner or that the asset will be disposed of for their benefit.
In this case, the right of possession and the right to become the depreciating asset's legal owner are rights acquired by the taxpayer under the hire purchase agreement. Therefore, the taxpayer became the holder of the depreciating asset under item 6 of the table in section 40-40 when they entered into the hire purchase agreement.
By entering into the hire purchase agreement, the taxpayer has entered into a contract under which they hold the asset for the purposes of subparagraph 41-25(1)(a)(i).
The taxpayer may become the legal owner of the asset in the future and, therefore, hold the asset under item 10 of the table in section 40-40, by exercising their right as against the financier to acquire the asset. However, the purchase order is not the contract under which they hold the asset at that time. The taxpayer's right 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.
Therefore, the purchase order placed with the supplier in August 2008 is not a contract under which the taxpayer holds the depreciating asset or will hold at a later time.
The taxpayer did not construct the asset (subparagraph 41-25(1)(a)(ii)) and, as they entered into a contract under which they hold the asset, they did not start to hold the asset in 'some other way' (subparagraph 41-25(1)(a)(iii)). Only subparagraph 41-25(1)(a)(i) is relevant in this case.
Accordingly, the investment commitment time is when the taxpayer entered into the hire purchase agreement in April 2009 as that is the time at which the taxpayer entered into the contract under which they hold the depreciating asset.
Date of decision: 21 July 2009Year of income: Year ended 30 June 2009
Legislative References:
Income Tax Assessment Act 1997
section 40-40
paragraph 41-25(1)(a)
subparagraph 41-25(1)(a)(i)
subparagraph 41-25(1)(a)(ii)
subparagraph 41-25(1)(a)(iii)
Keywords
Investment allowances
ISSN: 1445-2782