BTC3150 Lecture Notes - Lecture 9: Environmental Protection, Capital Expenditure
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Week$9:$Capital$allowances$&$capital$works$
Chp$14!
Introduction!
• The!general!deduction!provision!prohibits!a!deduction!for!a!capital!item:!s!8-1(2)(a).!
• Specific!provisions!may!allow!a!deduction!over!the!period!of!time!that!the!expense!is!
expected!to!derive!a!benefit:!
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Depreciation$deductions$
• A!taxpayer!may!claim!a!deduction!equal!to!the!“decline$in$value”!of!a!“depreciating$asset”!
that!is!“held”:!s!40-25.!
–Deduction$usually$claimed$over$asset’s$estimated$useful$life.!
!!!!!!!!!!!!!!! !
• Depreciation!rules!do!not!apply!in!certain!circumstances,!eg:!
– Expenditure!on!capital!works!(ie!buildings)!under!Div!43.!!
– Car!expenses!where!deduction!is!calculated!in!accordance!with!the!“cents!per!
kilometre”!method!(must!be!work!related!travel)!
– Depreciating!assets!used!or!installed!in!residential!rental!premises!and!was!‘previously!
used’:!s!40-27.!!
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Depreciating$asset$
• Definition!of!a!“depreciating!asset”!(s!40-30(1))!
– An!asset!which!has!a!limited!effective!life!and!can!reasonably!be!expected!to!decline!in!
value!over!the!time!it!is!used.!
• Exclusions!to!definition:!
– Land!-!CGT!
– An!item!of!trading!stock;!or!
– Certain!intangible!assets,!unless!listed!in!s!40-30(2),!eg!in-house!software,!items!of!
intellectual!property.!
• Eg!Dep!assets!Common!depreciable!assets!include!computers,!furniture,!cars,!machinery,!
telephones,!etc.!
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Composite)items)pg469-pg470)
• Necessary!to!determine!if!components!making!up!a!depreciable!asset!are:!!
(i)!separate!depreciating!assets;!or!!
(ii)!one!whole!depreciating!asset.!
• Similarly,!for!buildings,!necessary!to!identify!if!capital!expenditure!relates!to!a!depreciable!
asset!or!capital!works.!
• Question!of!fact!and!degree:!s!40-30(4).!!Factors!include:!
– Item!capable!of!being!separately!identified!
– Functionally!complete!in!itself!–!can!operate!separately?!
– Definable,!identifiable!function.!
• See,!Tax!Rulings!94/11;!2007/9!and!2004/16.!
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Claiming$a$deduction$
!To!claim!a!deduction!under!s!40-25!in!respect!of!a!“depreciating!asset”,!it!is!necessary!to!!
determine:$
1.”Held”:$When$the$taxpayer$has$“held”$a$depreciating$asset$(taxpayer!has!to!hold!the!asset)$
2.Declne$in$value:$A$deduction$is$equal$to$the$“decline$in$value”$taking$into$account$“taxable$
purpose”(taxable!purpose!–!must!be!for!work!purposes!not!private)!
• Non-business!depreciable!assets!costing)less)than)$300!that!are!predominately!used!to!gain!
or!produce!assessable!income!may!be!claimed!immediately:!s!40-80(2).!
• Eg!non-business!dep!assets:!calculator!used!for!job!as!accounting,!only!used!in!accountant!
not!for!business,!can!get!deduction!as!not!for!business.!(used!as!part!of!work!–!income!
producing!not!owning!business)!
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1.$$Held$
o The!holder!of!an!asset!is!entitled!to!the!deduction!for!the!decline!in!value!of!a!depreciating!
asset:!s!40-25.!
– The!“holder”!is!described!in!s!40-40.!
– Jointly!held:!deduction!reflects!holder’s!interest:!s!40-35.!
o Generally!it!is!the!legal!owner,!but!in!certain!circumstances!it!may!the!economic!owner,!eg!in!
hire-purchase!arrangements:!
!
o Leasing!out!asset!.!pg!472!
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2.$$Decline$in$value$
Two!methods!to!work!out!the!decline!in!value:!s!40-65.!
o $Prime$cost$(straight$line):!!equivalent!to!“straight!line!method”!in!accounting!where!equal!
depreciation!deductions!each!year.!
o !Diminishing$value$(reducing$balance):!equivalent!to!“reducing-balance!method”!in!accounting!
where!greater!deductions!in!the!early!years.!
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o Choice!of!method!is!made!on!an!asset-by-asset!!basis:!
– A!different!method!can!be!chosen!for!each!asset.!
– Method!cannot!be!changed!once!chosen:!s!40-130,!exception!on!life!of!asset!
– Replacement!assets!do!not!need!to!follow!original!asset!
o Taxpayer!does!not!have!a!choice!in!certain!circumstances,!eg:!
– Assets!acquired!from!an!associate:!the!same!method!as!the!method!used!by!the!
associate!(s!40-65(2)).!
– Assets!allocated!to!a!low!value!pool!(s!40-65(5))-!apply!depreciation!on!one!pool!
!
Diminishing(value(method:(
o Formula!to!calculate!the!decline!in!value!under!the!diminishing!value!method:!
o Assets!held!pre-10$May$2006!(s!40-70):!!
Ø Base!value!–!usually!opening!adjusted!value!
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o Assets!held!on!or!after$10$May$2006$(s!40-72):!
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Example:!Diminishing!value!method!
Depreciable!asset!purchased!for!$6,000!(excluding!GST!–!RMB$TO$MINUS$GST)!on!1!July!2016!and!
has!an!effective!life!of!3!years.!
Document Summary
Introduction: the general deduction provision prohibits a deduction for a capital item: s 8-1(2)(a). Specific provisions may allow a deduction over the period of time that the expense is expected to derive a benefit: Depreciation deductions: a taxpayer may claim a deduction equal to the decline in value of a depreciating asset that is held : s 40-25. Deduction usually claimed over asset"s estimated useful life: depreciation rules do not apply in certain circumstances, eg: Expenditure on capital works (ie buildings) under div 43. Car expenses where deduction is calculated in accordance with the cents per kilometre method (must be work related travel) Depreciating assets used or installed in residential rental premises and was previously used": s 40-27. Depreciating asset: definition of a depreciating asset (s 40-30(1)) An asset which has a limited effective life and can reasonably be expected to decline in value over the time it is used: exclusions to definition:
