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For the purposes of subsection 328-175(6) of the Income Tax Assessment Act 1997 (ITAA 1997), if an asset is not let predominantly on a depreciating asset lease in the year it is first used, or is installed ready for use, for a taxable purpose by an STS taxpayer: • at what point in time is the expected use of that asset to be determined; and • what period of time is relevant to determining whether that asset 'might reasonably be expected to be let predominantly on a depreciating asset lease'?

For the purposes of subsection 328-175(6) of the ITAA 1997, a taxpayer must determine the expected use of assets: • held prior to becoming an STS taxpayer - in the first STS year; or • acquired while the taxpayer is an STS taxpayer - at the end of the year of acquisition.

The relevant period over which the expected use of a depreciating asset should be determined is not set out in the legislation. The relevant period will need to be determined by an STS taxpayer on a case by case basis. No one period of time will be relevant to all STS taxpayers.

An entity elects to become an STS taxpayer (as defined in section 328-435 of the ITAA 1997) in the income year ended 30 June 2002. The STS taxpayer carries on a business of leasing commercial premises to clients.

In January 2003, the STS taxpayer acquires office furniture. The furniture is installed in an office which is to be used in the conduct of the leasing business. In May 2003, the business is restructured and the taxpayer advertises the office and the furniture to clients on a depreciating asset lease basis. In June 2003, the office and furniture are let for a two year period with an option for the client to lease the office and furniture for a further two years.

At the end of the 2003 income year, the STS taxpayer considers it is reasonable to expect that the office furniture will be predominantly let on a depreciating asset lease in future years.

Subdivision 328-D of the ITAA 1997 provides the rules for STS taxpayers in calculating deductions for depreciating assets. Certain types of depreciating assets are however specifically excluded from Subdivision 328-D of the ITAA 1997.

Subsection 328-175(6) states: You cannot deduct amounts for a *depreciating asset under this Subdivision if the asset is being or might reasonably be expected to be let predominantly on a *depreciating asset lease. Note: * denotes a term defined in subsection 995-1(1) of the ITAA 1997.

A 'depreciating asset lease' is defined in subsection 995-1(1) of the ITAA 1997 as follows: a depreciating asset lease is an agreement (including a renewal of an agreement) under which the entity that *holds the *depreciating asset grants a right to use the asset to another entity. However, a depreciating asset lease does not include a *hire purchase agreement or a *short-term hire agreement. Note: * denotes a term defined in subsection 995-1(1) of the ITAA 1997.

In summary, if an STS taxpayer will predominantly grant a right to another entity to use a depreciating asset held by the STS taxpayer, for a period of time, that asset may be excluded from Subdivision 328-D of the ITAA 1997. This exclusion does not apply if the right to use the asset is granted as a hire purchase agreement or a short term-hire agreement.

In this context, a depreciating asset will be let 'predominantly' on a depreciating asset lease if it is or might reasonably be expected to be let more than 50% of the time on a depreciating asset lease. This interpretation is supported by paragraph 5.24 of the Explanatory Memorandum to the New Business Tax System (Simplified Tax System) Act 2001.

Section 328-185 of the ITAA 1997 prescribes when depreciating assets, held and used, or installed ready for use, for a taxable purpose, are to be allocated to STS pools. Consequently, for the purposes of subsection 328-175(6) of the ITAA 1997, a taxpayer must determine the expected use of assets: • held prior to becoming an STS taxpayer - in the first STS year (see subsection 328-185(3) of the ITAA 1997); or • acquired while the taxpayer is an STS taxpayer - at the end of the year of acquisition (see subsection 328-185(4) of the ITAA 1997).

At either point in time an STS taxpayer is required to make a judgement as to whether it is reasonable to expect that an asset will be let predominantly on a depreciating asset lease over the relevant period (see Attorney-General's Department & Anor v. Cockroft (1986) 10 FCR 180. The relevant period over which the expected use of a depreciating asset should be determined is not set out in the legislation. Therefore, based on the facts of their circumstances an STS taxpayer is required to establish the relevant period over which the expected use of that asset will be determined. No one period of time will be relevant to all STS taxpayers.

In this case, the office furniture is not let predominantly on a depreciating asset lease during the income year ended 30 June 2003. It was let out for less than 50% of the period from January to June 2003. However, at the end of the year of acquisition, the taxpayer must determine whether it is reasonable to expect the office furniture will be let predominantly on a depreciating asset lease in future years.

At the end of the year of acquisition the STS taxpayer considers it is reasonable to expect that the office furniture will be predominantly let on a depreciating asset lease in future years. On this basis, the office furniture is excluded from Subdivision 328-D by subsection 328-175(6) of the ITAA 1997.

The STS taxpayer can calculate a deduction for the decline in value of the office furniture under Division 40 of the ITAA 1997.