Capital Allowances: tax break - used for the principal purpose of carrying on a business

Is it reasonable to conclude, at the first use time, that the taxpayer will use the asset for the principal purpose of carrying on a business for the purposes of section 41-20 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. As it is reasonable to conclude, at the first use time, that the taxpayer will use the asset for more than 50 per cent of the time for the purpose of carrying on a business, it is reasonable to conclude that the taxpayer will use the asset for the principal purpose of carrying on a business for the purposes of section 41-20 of the ITAA 1997.

The taxpayer purchased a depreciating asset being a laptop computer.

When the taxpayer first uses the computer, it is reasonable to conclude that the taxpayer will use the computer in carrying on their business for 40 hours a week and for 10 hours a week for private purposes, that is, not for the purpose of carrying on the business. On that basis, the computer would be used 80 per cent of the time for the purpose of carrying on the business.

(All legislative references are to the ITAA 1997 unless otherwise stated).

Under section 41-20, at the first use time, it must be reasonable to conclude that 'you' will use the asset for the principal purpose of carrying on a business.

The term 'principal' is not defined in the ITAA 1997. However, the Macquarie Dictionary defines the adverb 'principally' as 'chiefly' or 'mainly'. Therefore, for the computer in this case to be used for the principal purpose of carrying on a business, it is considered that it must be used for the chief or main purpose, but not necessarily the sole purpose, of carrying on a business.

In the present case, the computer is to be used partly for the purpose of carrying on a business and partly not for the purpose of carrying on a business. It is necessary to establish the appropriate basis to compare the two uses in order to determine whether the principal purpose of the taxpayer's use of the asset is the purpose of carrying on a business.

In Federal Commissioner of Taxation v. FH Faulding & Co Ltd (1950) 83 CLR 594; (1950) 9 ATD 201, the High Court examined whether two cordials produced by the taxpayer were 'essences, concentrates and cordials, consisting wholly or principally of juices of Australian fruits'. In doing so, the court noted that whether the phrase 'principally' was referring to a quantitative or other measure was determined by the context in which it was used. In this case the High Court took a quantitative approach to its meaning; Fullager J. concluded that: The natural meaning of the words 'consist ... principally' is emphasised in item 36(3) by the presence of the words 'wholly or'. The reference must be to quantity.

Latham C.J. concluded: ... the words 'consisting principally of' must be read as referring to quantity expressed in terms of either volume or weight of substance of the cordial...

Taxation Ruling TR 2003/4 considers whether a boat owner uses or holds a boat 'mainly' for letting it on hire in the ordinary course of business. Paragraph 103 of that ruling concludes that a quantitative approach may be appropriate to measure how an asset is 'mainly used' because how it is actually used is readily quantifiable based on time. However, it is necessary to look at all the factors surrounding the use of the asset, including the pattern of use. Other factors may be present which indicate that a simple time analysis will not give a correct analysis.

In the present case, the period of time for which the computer will be used can be measured across both its use for the purpose of carrying on a business and its use not for the purpose of carrying on a business. Therefore, it is considered that time is the most appropriate measure of use in this context.

If a taxpayer will use an asset for more than 50 per cent of the time for the purpose of carrying on a business, it is accepted that the taxpayer will use the asset for the principal purpose of carrying on a business.

In the present case, at the first use time, it is reasonable to conclude that the taxpayer will use the computer for more than 50 per cent of the time for the purpose of carrying on their business. Therefore, it is reasonable to conclude, at the first use time, that the taxpayer will use the computer for the principal purpose of carrying on a business for the purposes of section 41-20.