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Is an STS taxpayer able to claim a capital allowance deduction for a depreciating asset they have previously leased, and subsequently acquired seconds before they sell the asset, under subdivision 328-D of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. An STS taxpayer is unable to claim a deduction for a depreciating asset under Subdivision 328-D of the ITAA 1997 where that asset is held, but not used or installed ready for use, in the year in question.

An STS taxpayer leased an asset that was used wholly in their business operations.

The asset satisfied the definition of a depreciating asset and was not trading stock of the taxpayer.

Throughout the term of the lease, the taxpayer was not the holder of the asset according to the table in section 40-40 of the ITAA 1997.

As part of a pre-arranged transaction, the STS taxpayer acquired the asset from the lessor for the agreed value of the asset. Immediately after the acquisition, the taxpayer disposed of the asset to a third party.

The asset was acquired for the sole purpose of selling it for a profit to a third party and the asset was acquired seconds before it was sold. There was no intention by the taxpayer to use the asset in their business operations.

Subsection 328-175(1) of the ITAA 1997 requires an STS taxpayer to calculate their deductions for a depreciating asset that they hold for an income year under Subdivision 328-D, where they first start to use that asset, or have it installed ready for use for a taxable purpose, either during or before, the current year of income.

Section 40-40 of the ITAA 1997 explains the meaning of 'hold a depreciating asset'. A taxpayer that buys a depreciating asset used in the business will ordinarily hold that asset as soon as they become the owner of the asset under the relevant contract of sale. 'Taxable purpose' is defined in section 995-1 of the ITAA 1997 as having the meaning given to it in section 40-25 of the ITAA 1997.

The meaning of the word 'use' will depend on the context in which the word is employed and the purpose for which the thing in question has been acquired or created (see Newcastle City Council v. Royal Newcastle Hospital (1956) 96 CLR 493). In the context of Divisions 328 and 40 of the ITAA 1997, the use of a depreciating asset requires the employment of the asset in such a way that it can reasonably be expected to decline in value through and over the time of that use (see the definition of depreciating asset in subsection 40-30(1)). In this sense 'use' includes 'installed ready for use', which is defined in section 995-1 as meaning installed ready for use but held in reserve.

For a tangible physical asset, physical or active employment of the asset might ordinarily be expected. This could include employment as a decorative instrument or as advertising for the asset. For an intangible depreciating asset, employment of the asset may not be physical and may be more passive. In considering the nature of use of an asset in the context of Subdivision 328-D of the ITAA 1997, exploitation of the inherent character of the asset would generally be expected. This would provide the necessary connection between the use of the asset and a reasonable expectation of its decline in value through that use.

Where an asset is never touched nor displayed and does nothing at all in the brief time it is owned by the STS taxpayer, then it is neither 'used' nor 'installed ready for use' by the STS taxpayer. The acquisition of the asset, by the taxpayer, solely for the purpose of its immediate sale, does not involve any exploitation of the inherent character of the asset. The asset is not used in a manner that would be expected to give rise to a decline in its value, in the context of Subdivision 328-D of the ITAA 1997.

In such circumstances, the STS taxpayer is unable to claim a capital allowance deduction for this asset, for the purposes of Subdivision 328-D of the ITAA 1997, because the asset is neither used nor installed for use by the taxpayer in the year of income.