Issue
In determining whether it is 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 paragraph 41-20(1)(d) of the Income Tax Assessment Act 1997 (ITAA 1997), is it only relevant to have regard to the taxpayer's use of the asset during the period it is held by the taxpayer?
Decision
No. To determine whether it is reasonable to conclude, at the first use time, that the taxpayer will use the asset for the principal purpose of carrying on a business, the taxpayer's use of the asset while it holds the asset together with the taxpayer's use while it is not the holder need to be considered.
Facts
The asset will be held by the taxpayer under item 10 of the table in section 40-40 of the ITAA 1997 as the legal owner for a period of one month and will be used by the taxpayer during this period for the sole purpose of carrying on its business.
At the end of this period the taxpayer proposes to sell the asset to a financier and then lease the asset back. While the taxpayer is the lessee, the asset will continue to be used by the taxpayer for the sole purpose of carrying on its business although it will no longer hold the asset for the purposes of section 40-40 of the ITAA 1997.
Reasons for Decision
All legislative references are to the ITAA 1997.
Under paragraph 41-20(1)(d), it must be reasonable to conclude, when the taxpayer starts to use the asset or installs it ready for use (the 'first use time'), that the taxpayer will use the asset principally in Australia for the principal purpose of carrying on a business. The words 'for the principal purpose of carrying on a business' in paragraph 41-20(1)(d) are known as the 'purpose test'.
The words 'the taxpayer will use the asset' in paragraph 41-20(1)(d) are clear and unambiguous and do not limit the application of the purpose test to the taxpayer's use of the asset while the taxpayer holds it for the purposes of section 40-40.
Therefore, in determining whether the purpose test is satisfied in this case, it is relevant to have regard to the taxpayer's use of the asset both during the period when it holds the asset and subsequently when it becomes the lessee and no longer holds the asset.
The taxpayer proposes to use the asset for the sole purpose of carrying on its business. After the asset is sold to the financier and leased back it will continue to be used solely for the same purpose.
The purpose test is therefore satisfied having regard to the taxpayer's proposed use of the asset at the first use time.