ATO Interpretative Decision
ATO ID 2004/958
Income Tax
Capital allowances: depreciating asset - use for a purpose other than a taxable purposeFOI status: may be released
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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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Does the taxpayer use their depreciating assets for a purpose other than a taxable purpose if they grant to a partnership of themself and another entity the exclusive use of the assets to enable the partnership to provide each partner with a service that each partner separately uses wholly for a taxable purpose as defined in paragraph 40-25(7)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. The taxpayer does not use their depreciating assets for a purpose other than a taxable purpose because granting the exclusive use of the assets to the partnership to enable the taxpayer to access a service that they use wholly in carrying on their business for the purpose of producing assessable income is a use of the assets by the taxpayer for a taxable purpose.
Facts
As part of an arrangement, the taxpayer and an unrelated entity become joint holders of various depreciating assets. They also constitute a general law partnership to manage the arrangement. The taxpayer and the other entity provide the exclusive use of their jointly held depreciating assets as well as other depreciating assets they separately hold to the partnership. The combination of assets enables the partnership to provide services to each of the partners. None of the assets are partnership assets under item 7 of the table in section 40-40 of the ITAA 1997.
The taxpayer uses the services provided by the partnership to provide, as an integral part of its on-going business, a product to its retail customers.
Reasons for Decision
Subsection 40-25(1) of the ITAA 1997 allows a taxpayer to deduct an amount for the decline in value of a depreciating asset they hold. The deduction is reduced, under subsection 40-25(2) of that Act, in respect of any use of the asset by the holder for a purpose other than a taxable purpose.
A taxable purpose is defined in subsection 40-25(7) of the ITAA 1997 and includes the 'purpose of producing assessable income' (paragraph 40-25(7)(a) of the ITAA 1997). This phrase is defined in subsection 995-1(1) of the ITAA 1997 to effectively require the depreciating asset to be used either:
- •
- for the purpose of gaining or producing assessable income; or
- •
- in carrying on a business for the purpose of gaining or producing assessable income.
The taxpayer uses their depreciating assets by granting the partnership exclusive use of the assets. The taxpayer's use of their assets in this way secures for them a service that they use in the course of carrying on their business. There is, therefore, a clear and direct connection between the taxpayer's use of the assets and the carrying on of their business for the purpose of producing assessable income. The use of the assets in these particular circumstances comes within the second limb of the definition of 'purpose of producing assessable income' in subsection 995-1(1) of the ITAA 1997.
The taxpayer uses their assets wholly in this way and, therefore, wholly for a taxable purpose as defined in paragraph 40-25(7)(a) of the ITAA 1997. Therefore, the taxpayer does not use their depreciating assets for a purpose other than a taxable purpose.
Date of decision: 16 November 2004Year of income: Year ended 30 June 2005
Legislative References:
Income Tax Assessment Act 1997
subsection 40-25(1)
subsection 40-25(2)
subsection 40-25(7)
paragraph 40-25(7)(a)
section 40-40
subsection 995-1(1)
ATO ID 2004/957
Keywords
Capital Allowances CoE
Deductions for depreciating assets
Taxable purpose
ISSN: 1445-2782
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