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The investment allowance (or "small business and general business tax break", to those who like to waste words) is hot news right now, and many members have been coming to us to see how the law applies to real-life situations.

Some issues we have brought to the ATO's attention include:

• Can a partner in a partnership claim the allowance in respect of a partnership asset purchased in their own name?
• Does the 'cost' of pre-loaded software on a computer need to be excluded from the computer's cost when calculating the deduction, or can it be assumed that the software is free?
• Can it be assumed that a car using the 12% method (which must travel more than 5000 business kilometres in a year) will be used primarily for business purposes, or does the owner need something else to prove the asset is principally for business use?
• Is there an easy method to work out who can claim the deduction in respect of a leased asset? What about sale and leaseback arrangements?
• Can two businesses claim the allowance in respect of the same asset if the first business buys it after 13 December 2008, and then sells it to another business before 30 June 2009?
• In relation to demonstrator cars, what constitutes "reasonable trialling and testing"? (e.g., is a car still eligible if the test drives total 5,000 kms?)

The ATO has started answering some of these questions on their website: refer http://www.ato.gov.au/businesses/content.asp?doc=/content/00193790.htm.

In addition to these issues, we have received clarification in relation to the following.

The NTAA has become aware of some confusion regarding who is entitled to claim the Small Business and General Business Tax Break in respect of depreciating assets held under a chattel mortgage agreement.

By way of background, under a chattel mortgage arrangement, the purchaser of an asset borrows all or part of the purchase price of the asset and uses the funds to pay the vendor.

Generally, the legal title to the asset is transferred to the purchaser with the lender taking a charge over the asset.

A much less common form of this arrangement is where the legal title is transferred to the lender but the purchaser obtains possession of the asset.

The lender (i.e., the mortgagee) has recourse against the asset in the event that the borrower/purchaser (i.e., the mortgagor) defaults on the loan.

The Tax Break is claimed by the taxpayer that is entitled to deductions for the asset's decline in value - i.e., the 'holder' of the asset.

In many cases, the 'holder' is the legal owner of the asset.

In the case of a chattel mortgage, the mortgagor (i.e., the borrower) is generally the legal owner of the asset and is, therefore, taken to 'hold' the asset.

As such the borrower is entitled to claim the Tax Break (subject to satisfying the eligibility requirements for the deduction).

Even where the lender holds the legal title to the asset, the ATO still regards the borrower to be the holder of the asset - refer to Items 5 and 6 of the table in S.40-40 of the ITAA 1997 and the ATO's "Guide to small business and general business tax break".

Recent amendments to the small business CGT concessions (effective from 1 July 2007) enable taxpayers who own a CGT asset that is used by another entity in that other entity's business, to treat their spouse (or a child under 18) as their affiliate in determining whether the asset is an active asset (i.e., whether the other entity is a connected entity).

The new 'affiliate rule', or the conditions for being able to treat a spouse as an affiliate, are set out in S.152-47. In broad terms, the new rule treats an individual taxpayer's spouse as their affiliate where a CGT asset owned by the taxpayer is not used in a business they carry on but is, in fact, used in the business carried on by another entity.

The NTAA's Tax Team has received several queries regarding whether the new 'affiliate rule' in S.152-47 also applies when determining if the individual is a Small Business Entity ('SBE') and, therefore, eligible for the other non-CGT small business tax concessions that apply to an SBE (e.g., the simplified depreciation rules, deductibility of prepayments, etc).

In this regard, final legislation recently passed by both Houses confirms that the new 'affiliate rule' only applies for the purposes of determining an individual's eligibility for the CGT SBCs.

This means that, where the new 'affiliate rule' applies, an individual's spouse (or child under 18) will be treated as their affiliate for the purposes of the $6m maximum net asset value test, and when calculating aggregated turnover for the purposes of determining if the individual is an SBE.

That is, the new 'affiliate rule' does not apply for the purposes of determining whether the taxpayer can access the non-CGT small business tax concessions available to SBEs.