This appendix refers to the following uniform capital allowance (UCA) topics:
- balancing adjustment amounts
- deduction for decline in value of depreciating assets
- deduction for environmental protection expenses
- deduction for project pool
- electricity connections and telephone lines
- grapevines and horticultural plants
- hire-purchase agreements
- landcare operations and deductions for decline in value of water facility, fencing asset and fodder storage asset
- limited recourse debt
- loss on the sale of a depreciating asset
- low-value pools
- luxury car leases
- profit on the sale of a depreciating asset
- section 40-880 deduction
- the TOFA rules and UCA.
See also:
Small business entities
Eligible small business entities that choose to use the simplified depreciation rules calculate deductions for most of their depreciating assets under the specific small business entity depreciation rules.
Balancing adjustment amounts
If the trust ceases to hold or to use a depreciating asset, a balancing adjustment event may occur. For assets subject to the small business entity depreciation rules, see Step 5 Disposal of depreciating assets. For assets not subject to these rules, trust will need to calculate a balancing adjustment amount to include in its assessable income or to claim as a deduction.
Show an assessable balancing adjustment amount as an income add back at A Income reconciliation adjustments item 5. Show a deductible balancing adjustment amount as an expense subtraction at B Expense reconciliation adjustments item 5.
If the asset was used for both taxable and non-taxable purposes, reduce the balancing adjustment amount by the amount attributable to the non-taxable use. A capital gain or capital loss may arise which is attributable to that non-taxable use.
Show any profit or loss on the sale of a depreciating asset that has been included in the accounts of the trust as either an income subtraction at A Income reconciliation adjustments item 5 or an expense add back at B Expense reconciliation adjustments item 5.
See also:
If you have elected to use the hedging tax-timing method provided for in the TOFA rules and you have a gain or loss from a hedging financial arrangement used to hedge risks in relation to a depreciating asset, work out the gain or loss allocated under the TOFA rules and show the amount at A Income reconciliation adjustments or B Expense reconciliation adjustments when calculating the depreciating asset’s balancing adjustment amount.
Also include the gain or loss on the hedging financial arrangement at item 31 Taxation of financial arrangements (TOFA).
See also:
If a balancing adjustment event occurred to a depreciating asset of the trust during the income year, you may need to include an amount at H or I item 48.
Deduction for decline in value of depreciating assets
For assets subject to the small business entity depreciation rules, see Depreciation expenses, Small business entities. For assets not subject to the small business entity depreciation rules, the decline in value is generally worked out using either the prime cost or diminishing value method. Both methods are based on the effective life of an effective life or to adopt the Commissioner’s determination in TR 2015/2 Income Tax: effective life of depreciating assets (applicable from 1 July 2015).
The trust can deduct an amount equal to the decline in value of a depreciating asset for the period that it holds the asset during the income year. However, the deduction is reduced to the extent the asset is used or installed ready for use for other than a taxable purpose.
If you have elected to use the hedging tax-timing method provided for in the TOFA rules and you have a gain or loss from a hedging financial arrangement used to hedge risks in relation to a depreciating asset, then the amounts shown at A Income reconciliation adjustments and B Expense reconciliation adjustments will also need to take into account the effect of that gain or loss from the hedging financial arrangement.
Also include the gain or loss on the hedging financial arrangement at item 31 Taxation of financial arrangements (TOFA).
The decline in value of a depreciating asset costing $300 or less is its cost (but only to the extent the asset is used for a taxable purpose) if the asset satisfies all of the following requirements:
- it is used predominantly for the purpose of producing assessable income that is not income from carrying on a business
- it is not part of a set of assets acquired in the same income year that costs more than $300
- it is not one of any number of substantially identical items acquired in the same income year that together cost more than $300.
You can allocate certain assets that cost less than $1,000 or that have an opening adjustable value of less than $1,000 to a low-value pool to calculate the decline in value. You cannot allocate assets eligible for the immediate deduction to a low-value pool.
If the trust is not using the small business entity depreciation rules, show the deduction for decline in value of depreciating assets used in carrying on a business as an expense subtraction at B Expense reconciliation adjustments item 5.
This amount is often different from the amount of depreciation calculated for accounting purposes shown at K item 5, so you will need to include the amount at K as an expense add back at B Expense reconciliation adjustments item 5.
Show deductions for the decline in value of depreciating assets used to earn rental income, earn interest or dividends or used by the trust in the management of its tax affairs at H item 9, item 16 Deductions, Deductions relating to Australian investment income, or item 18 Other deductions, respectively.
For information about where to show deductions for depreciating assets in a low-value pool, see Low-value pools.
Foreign currency gains and losses
If you purchased a depreciating asset in foreign currency, the first element of the asset’s cost is converted to Australian currency. From 1 July 2003, if the foreign currency amount became due for payment within the 24-month period that began 12 months before the time when you began to hold the depreciating asset, any realised foreign currency gain or loss (referred to as a forex realisation gain or a forex realisation loss) can modify the asset’s cost, opening adjustable value, or the opening balance of your low-value pool, as the case may be.
However, if the foreign currency amount relates to the second element of the cost of a depreciating asset, the translation to Australian currency is made at the exchange rate applicable at the time you incurred the relevant expenditure and a 12-month rule instead of a 24-month rule applies. The 12-month rule requires that the foreign currency became due for payment within 12 months after the time you incurred the relevant expenditure. In some circumstances, you may be able to elect that forex gains and losses do not modify the asset’s cost, opening adjustable value or the opening balance of your low-value pool.
See also:
Water facility, fencing asset, fodder storage asset, grapevine or horticultural plant
If a trust can claim a deduction for the decline in value of a water facility, fencing asset, fodder storage asset, grapevine or a horticultural plant, the amount is part of the deduction for the decline in value of depreciating assets included either at K Depreciation expenses item 5 for small business entities using the simplified depreciation rules, or as an expense subtraction at Reconciliation items, B Expense reconciliation adjustments item 5. You will also need to include the amount of a deduction for the decline in value of a water facility, fencing asset or fodder storage asset at L item 48 Capital allowances. Landcare operations and deduction for decline in value of water facility, fencing asset and fodder storage asset.
For more information, see Landcare operations and Grapevines and horticultural plants.
To calculate the deduction for the decline in value of most depreciating assets, use worksheet 1 and worksheet 2 in the Guide to depreciating assets 2016.
Deduction for environmental protection expenses
The trust can deduct expenditure incurred for the sole or dominant purpose of carrying on environmental protection activities (EPA). EPA are activities undertaken to prevent, fight or remedy pollution or to treat, clean up, remove or store waste from the trust’s earning activity. The earning activity is one the trust’s carried on, carries on, or proposes to carry on for the purpose of:
- producing assessable income (other than a net capital gain)
- exploration or prospecting
- mining site rehabilitation.
The trust may claim a deduction for cleaning up a site on which a predecessor carried on substantially the same business activity.
The deduction is not available for:
- EPA bonds and security deposits
- expenditure for acquiring land
- expenditure for constructing or altering buildings, structures or structural improvements
- expenditure to the extent that the trust can deduct an amount for it under another provision.
Expenditure which forms part of the cost of a depreciating asset is not expenditure on EPA.
You can write off expenditure incurred on or after 19 August 1992 on certain earthworks constructed as a result of carrying out EPA at the rate of 2.5% per annum under the provisions for capital works expenditure.
You cannot claim a deduction for expenditure on an environmental assessment of a project of the trust as expenditure on EPA. If it is capital expenditure directly connected with a project, it could be a project amount for which a deduction would be available over the project life, see Deduction for project pool.
If the deduction arises from a non-arm’s length transaction and the expenditure is more than the market value of what it was for, the amount of the expenditure is instead taken to be that market value.
Include any recoupment of the expenditure as assessable income at G or H Other business income item 5, or as an income add back at A Income reconciliation adjustments item 5.
Include the deduction for environmental protection expenses at N item 5 or as an expense subtraction at A Expense reconciliation adjustments item 5.
Deduction for project pool
You can allocate certain capital expenditure incurred after 30 June 2001 directly connected with a project that is carried on, or proposed to be carried on, for a taxable purpose to a project pool and write it off over the project life.
A project is carried on if it involves a continuity of activity and active participation, however, merely holding a passive investment, such as a rental property, would not be regarded as carrying on a project.
The capital expenditure, known as a project amount, must be expenditure incurred:
- to create or upgrade community infrastructure for a community associated with the project, this expenditure must be paid, not just incurred, to be a project amount
- for site preparation for depreciating assets (other than in draining swamp or low-lying land or in clearing land for horticultural plants including grapevines)
- for feasibility studies for the project
- for environmental assessments for the project
- to obtain information associated with the project
- in seeking to obtain a right to intellectual property
- for ornamental trees or shrubs.
Project amounts include mining capital expenditure and transport capital expenditure.
The expenditure must not otherwise be deductible or form part of the cost of a depreciating asset.
If the expenditure incurred arises from a non-arm’s length dealing and is more than the market value of what it was for, the amount of the expenditure is taken to be that market value.
The deduction for project amounts allocated to a project pool commences when the project starts to operate.
If your project pool contains only project amounts incurred on or after 10 May 2006, and the project starts to operate on or after that date, your deduction is calculated as follows:
pool value x 200%
DV project pool life
Certain projects may be taken to have started to operate before 10 May 2006, for example, if a project is abandoned and then restarted on or after 10 May 2006 just so deductions can be calculated using the above formula.
For other project pools, the deduction is calculated using the following formula:
pool value x 150%
DV project pool life
The DV project pool life is the project life or, if that life has been recalculated, the most recently recalculated project life. Determine the project life by estimating how long (in years and fractions of years) it will be from when the project starts to operate until it stops operating. Generally, a project starts to operate when the activities that will produce assessable income start. The project life is estimated from the perspective of the trust, but the event used to determine when the project will stop operating must be something outside its control.
The pool value for an income year is broadly the sum of the project amounts allocated to the pool up to the end of that year, less the sum of the deductions claimed for the project pool in previous years, or that could have been claimed had the project operated wholly for a taxable purpose.
The pool value can be subject to adjustments.
If there is an entitlement to a GST input tax credit for expenditure allocated to a project pool, reduce the pool value by the amount of the credit. You will need to adjust the pool value for certain increasing or decreasing adjustments for expenditure allocated to a project pool.
The pool value can be subject to adjustment under the forex provisions. A relevant foreign exchange (forex) gain or loss may arise if, during an income year beginning on or after 1 July 2003, the trust ceased to have an obligation to pay foreign currency where the obligation was incurred as a project amount allocated to a project pool. If the amount was incurred after 30 June 2003 (or earlier, if so elected) and became due for payment within 12 months after it was incurred, then the pool value for the income year in which the amount was incurred is increased by any forex loss, and decreased by any forex gain. If the forex gain exceeds the pool value, reduce the pool value to zero and the excess gain is assessable, this is known as the 12 month rule. In limited circumstances, a trust may elect out of the 12 month rule.
For more information, see Forex: election out of the 12 month rule. If it has been elected that the 12 month rule should not apply, any forex gain will be assessable and any forex realisation loss will be deductible in accordance with the forex measures.
For more information, see Foreign exchange gains and losses.
The deduction for project amounts allocated to a project pool cannot be more than the amount of the pool value for that income year.
There is no need to apportion the deductions if the project starts to operate during the income year for project amounts incurred during the year. However, the deduction is reduced for the extent to which the project is operated for other than a taxable purpose during the income year.
If the project is abandoned, sold or otherwise disposed of, you can claim a deduction for the sum of the closing pool value of the prior income year (if any), plus any project amounts allocated to the pool during the income year, after allowing for any necessary pool value adjustments. A project is abandoned if it stops operating and will not operate again.
Any amount received for the abandonment, sale or other disposal of a project is assessable income.
If an amount of capital expenditure allocated to a project pool is recouped, or if a capital amount is derived in relation to a project amount or something on which a project amount was expended, include the amount in assessable income.
If any receipt arises from a non-arm’s length dealing and the amount is less than the market value of what it was for, the amount received is taken to be that market value.
Include any deduction for a project pool as an expense subtraction at B Expense reconciliation adjustments item 5. You must show the deduction at J Deduction for project pool, item 48 Capital allowances.
The trust must add back any capital expenditure allocated to the pool that has been included as an expense at item 5. Show the amount as an expense add back at B Expense reconciliation adjustments item 5.
Include assessable income at G or H Other business income item 5 or as an income add back at A Income reconciliation adjustments item 5.
Electricity connections and telephone lines
A trust can claim a deduction over 10 years for capital expenditure incurred in connecting:
- mains electricity to land on which a business is carried on, or in upgrading an existing connection to that land
- a telephone line to land being used to carry on a primary production business.
Show the deduction as an expense subtraction at Reconciliation items, B Expense reconciliation adjustments item 5.
The trust must add back any capital expenditure on electricity connections and phone lines included as an expense at item 5. Show the amount as an expense add back at B Expense reconciliation adjustments item 5.
Include any recoupment of the expenditure as assessable income at G or H Other business income item 5, or as an income add back at A Income reconciliation adjustments item 5.
Grapevines and horticultural plants
Any grapevines planted and used in a primary production business prior to 1 October 2004 are deductible using an annual rate of 25%.
For grapevines planted on or after 1 October 2004:
- Deductions for the decline in value of a grapevine can only be claimed from the income year in which the grapevine’s first commercial season starts, not when it is first used in a primary production business.
- The decline in value of a grapevine will not be worked out at an annual rate of 25%, but will be based on the effective life of the grapevine.
The Commissioner has determined the effective life for grapevines.
Table 6.1 |
|
|---|---|
Horticultural plants |
Effective life (years) |
Grapevines, dried grapes |
15 |
Grapevines, table grapes |
15 |
Grapevines, wine grapes |
20 |
The income tax law provides an annual write-off rate of 13% for a horticultural plant with an effective life of 13 to fewer than 30 years.
Alternatively, a taxpayer can estimate their own effective life for grapevines.
The deduction for the decline in value of grapevines and horticultural plants is part of the deduction for decline in value of depreciating assets which is included either at K Depreciation expenses item 5 if the trust is using the small business entity depreciation rules, or as an expense subtraction at Reconciliation items, B Expense reconciliation adjustments item 5.
If the trust has included any expenditure on establishing grapevines or horticultural plants as an expense at item 5, include that amount as an expense add back at B Expense reconciliation adjustments item 5.
Hire-purchase agreements
Hire-purchase and instalment-sale agreements of goods are treated as a sale of the property by the financier (or hire-purchase company) to the hirer (or instalment purchaser).
The sale is treated as being financed by a loan from the financier to the hirer at a sale price of either their agreed cost or the arm’s length value of the property. The periodic hire-purchase (or instalment) payments are treated as payments of principal and interest under the notional loan. The hirer can claim a deduction for the interest component, subject to any reduction required under the thin capitalisation rules.
In relation to the notional sale, the hirer of a depreciating asset may be entitled to claim a deduction for the decline in value. The cost of the asset for this purpose is taken to be the agreed cost or value, or the arm’s length value if the dealing is not at arm’s length. For assets subject to the small business entity depreciation rules, see Small business entities. For assets not subject to the small business entity depreciation rules, see Deduction for decline in value of depreciating assets.
If the trust has included any hire-purchase charges for the goods at item 5, include the amount at B Expense reconciliation adjustments item 5 as an expense add back. Include the deduction for the interest component of the hire-purchase payments as an expense subtraction at B.
Landcare operations and decline in value of water facility, fencing asset and fodder storage asset
A trust can claim deductions for landcare operation expenditure and expenditure for water facilities, fencing assets and fodder storage assets, see Landcare operations, Water facilities, Fencing assets and Fodder storage assets.
Include the deduction for landcare operations either at N All other expenses item 5 or as an expense subtraction at B Expense reconciliation adjustments item B.
The deduction for decline in value of a water facility, fencing asset and fodder storage asset is part of the trust’s deduction for decline in value of depreciating assets which is included either at K Depreciation expenses item 5 for small business entities using the simplified depreciation rules, or as an expense subtraction at B Expense reconciliation adjustments item 5.
Also show the amount of deductions for landcare operations and the decline in value of a water facility, fencing asset and fodder storage asset at L, item 48 Landcare operations and deduction for decline in value of water facility, fencing asset and fodder storage asset.
If any capital expenditure on water facilities, fencing assets and fodder storage assets is included as an expense at item 5, you will need to include that amount as an expense add back at B Expense reconciliation adjustments item 5.
Include any recoupment of expenditure on landcare operations, water facilities, fencing assets or fodder storage assets as assessable income at G or H Other business income item 5, or as an income add back at A Income reconciliation adjustments item 5.
Landcare operations
Landcare operations cover what were previously known as land degradation measures. The trust can claim a deduction in the year it incurs capital expenditure on a landcare operation for land in Australia.
Unless the trust is a rural land irrigation water provider, the deduction is available to the extent the trust uses the land for either:
- a primary production business
- in the case of rural land, a business for the purpose of producing assessable income from the use of that land, except a business of mining or quarrying.
The trust may claim the deduction even if it is only a lessee of the land.
The deduction for landcare operations has been extended to rural land irrigation water providers for certain expenditure they incur on or after 1 July 2004. A rural land irrigation water provider is an entity whose business is primarily and principally supplying water to entities for use in primary production businesses on land in Australia or businesses (except mining or quarrying businesses) using rural land in Australia. The supply of water by using a motor vehicle is excluded.
If the trust is a rural land irrigation water provider, it can claim a deduction for capital expenditure on a landcare operation for:
- land in Australia that other entities use at the time for carrying on primary production businesses
- rural land in Australia that other entities use at the time for carrying on businesses for a taxable purpose from the use of that land (except a business of mining or quarrying), being entities supplied with water by the trust.
A rural land irrigation water provider’s deduction is reduced by a reasonable amount to reflect an entity’s use of the land for other than a taxable purpose after the water provider incurred the expenditure.
A landcare operation is one of the following:
- erecting fences to separate different land classes in accordance with an approved land management plan
- erecting fences primarily and principally to keep out animals from areas affected by land degradation to prevent or limit further damage and assist in reclaiming the areas
- constructing a levee or similar improvement
- constructing drainage works (other than the draining of swamps or low-lying land) primarily and principally to control salinity or assist in drainage control
- an operation primarily and principally for eradicating or exterminating animal pests from the land
- an operation primarily and principally for eradicating, exterminating or destroying plant growth detrimental to the land
- an operation primarily and principally for preventing or combating land degradation other than by the use of fences
- an extension, alteration or addition to any of the assets described in the first four dot points or an extension of an operation described in the fifth to seventh dot points.
The meaning of landcare operation has been extended to apply to expenditure incurred on or after 1 July 2004 on:
- a repair of a capital nature to an asset which is deductible under a landcare operation
- constructing a structural improvement that is reasonably incidental to levees or drainage works deductible under a landcare operation
- a repair of a capital nature, or an alteration, addition or extension to a structural improvement that is reasonably incidental to levees (or similar improvements) or drainage works deductible under a landcare operation.
An example of a structural improvement that may be reasonably incidental to drainage works is a fence constructed to prevent livestock entering a drain that was constructed to control salinity.
The trust cannot claim a deduction if the capital expenditure is on plant, unless it is on certain fences, dams or other structural improvements.
Water facilities
The trust can claim a deduction for the decline in value of a water facility. A water facility is plant or a structural improvement, or an alteration, addition or extension to plant or a structural improvement, that is primarily or principally for the purpose of conserving or conveying water, examples of water facilities are dams, tanks, tank stands, bores, wells, irrigation channels, pipes, pumps, water towers and windmills. The meaning of water facility has been extended to include certain other expenditure incurred on or after 1 July 2004:
- a repair of a capital nature to plant or a structural improvement that is primarily or principally for the purpose of conserving or conveying water, for example, if the trust purchases a pump that needs substantial work done to it before it can be used in the business, the cost of repairing the pump may be treated as a water facility
- a structural improvement, or an alteration, addition, extension, to a structural improvement, that is reasonably incidental to conserving or conveying water
- a repair of a capital nature to a structural improvement that is reasonably incidental to conserving or conveying water.
Examples of structural improvements that are reasonably incidental to conserving or conveying water include a bridge over an irrigation channel, a culvert (a length of pipe or multiple pipes that are laid under a road to allow the flow of water in a channel to pass under the road), or a fence preventing livestock from entering an irrigation channel.
If the trust incurred the expenditure from 7.30pm (AEST), 12 May 2015 it claims the full amount in the year it was incurred. If the trust incurred the expenditure before this time, it deducts one-third of the amount in the income year in which it was incurred, and one-third in each of the following two years.
Unless the trust is an irrigation water provider, the expenditure must be incurred primarily and principally for conserving or conveying water for use in a primary production business the trust conducts on land in Australia. The trust may claim the deduction even if it is merely a lessee of the land.
The deduction is reduced where the facility is not wholly used for either:
- carrying on a primary production business on land in Australia
- a taxable purpose, for example, producing assessable income.
The deduction for water facilities has been extended to irrigation water providers for expenditure incurred on or after 1 July 2004. An irrigation water provider is an entity whose business is primarily and principally the supply of water to entities for use in primary production businesses on land in Australia. The supply of water by using a motor vehicle is excluded.
If the trust is an irrigation water provider, it must incur the expenditure primarily and principally for the purpose of conserving or conveying water for use in primary production businesses conducted by other entities on land in Australia, being entities supplied with water by the trust. The deduction is reduced if the facility is not used wholly for a taxable purpose.
Fencing assets
The trust can claim a deduction for the decline in value of a fencing asset. A fencing asset includes a structural improvement, a repair of a capital nature, or an alteration, addition or extension, to a fence.
If the trust incurred the expenditure from 7.30pm (AEST), 12 May 2015 it claims the full amount in the year it was incurred. If the trust incurred the expenditure before this time (or if the expenditure relates to a stockyard, pen or portable fence), the trust can claim for the decline in value of the fencing asset based on its effective life.
The expenditure must be incurred by the trust on the construction, manufacture, installation or acquisition of a fencing asset that is used primarily and principally in a primary production business it conducts on land in Australia. The trust may claim the deduction even if it is merely a lessee of the land. The deduction is reduced where the fencing asset is not wholly used for either:
- carrying on a primary production business on land in Australia, or
- a taxable purpose, for example, producing assessable income.
Fodder storage assets
The trust can claim a deduction for the decline in value of a fodder storage asset. A fodder storage asset is an asset that is primarily and principally for the purpose of storing fodder. It includes a structural improvement, a repair of a capital nature, or an alteration, addition or extension, to an asset or structural improvement, that is primarily and principally for the purpose of storing fodder.
Fodder refers to food for livestock, usually but not exclusively dried, such as grain, hay or silage. Fodder can include liquid feed and supplements. Examples of typical fodder storage assets include:
- silos
- liquid feed supplement storage tanks
- bins for storing dried grain
- hay sheds
- grain storage sheds, and
- above-ground bunkers.
If the trust incurred the expenditure from 7.30pm (AEST), 12 May 2015 it deducts one-third of the amount in the income year in which it was incurred, and one-third in each of the following two years. If the trust incurred the expenditure before this time, the trust can claim for the decline in value of the fodder storage asset based on its effective life.
The expenditure must be incurred by the trust on the construction, manufacture, installation or acquisition of a fodder storage asset that is used primarily and principally in a primary production business it conducts on land in Australia. The trust may claim the deduction even if it is merely a lessee of the land. The deduction is reduced where the fodder storage asset is not wholly used for either:
- carrying on a primary production business on land in Australia, or
- a taxable purpose, for example, producing assessable income.
Limited recourse debt
Under Division 243 of the ITAA 1997 (the limited recourse debt rules) you must include excessive deductions for capital allowances as assessable income if expenditure on property has been financed or refinanced wholly or partly by limited recourse debt. This will generally occur if:
- the limited recourse debt is terminated after 27 February 1998, but has not been paid in full by the debtor, and
- because the debt has not been paid in full, the capital allowance deductions allowed for the expenditure exceed the deductions that would be allowable if the unpaid amount of the debt was not counted as capital expenditure of the debtor. Special rules apply in working out whether the debt has been fully paid.
A limited recourse debt is a debt where the rights of the creditor against the debtor in the event of default in payment of the debt or of interest are limited wholly or predominantly to the property that has been financed by the debt, or is security for the debt, or rights in relation to such property. A debt is a limited recourse debt if, notwithstanding that there may be no specific conditions to that effect, it is reasonable to conclude that the creditor’s rights against the debtor are capable of being limited in that way.
A limited recourse debt includes a notional loan under a hire-purchase or instalment-sale agreement of goods to which Division 240 of the ITAA 1997 applies (see section 243-20 of the ITAA 1997).
The rules in section 243-75 apply where Divisions 243 and 245 (commercial debt forgiveness, see Appendix 4 of the ITAA 1997) both apply to the same debt.
Loss on the sale of a depreciating asset
Any such loss included in the accounts will differ from the balancing adjustment amount taken into account for taxation purposes.
If the accounts show a loss on the sale of a depreciating asset under N item 5 show that amount as an expense add back at B Expense reconciliation adjustments item 5, see Balancing adjustment amounts.
Low-value pools
If the trust has allocated depreciating assets used for different income-producing purposes to its low-value pool (for example, some assets that are used for producing rental income and others that are used in carrying on a business) show the low-value pool deduction at item 18 Other deductions. However, if all the depreciating assets in the low-value pool are used for the same income-producing purpose, show the deduction for decline in value of the assets in the pool as follows:
- depreciating assets used in carrying on a business – show the deduction as an expense subtraction at B Expense reconciliation adjustments item 5
- depreciating assets used to produce rental income – show the deduction at H item 9
- depreciating assets used to produce Australian investment income – show the deduction at P item 16 Deductions relating to Australian investment income.
To calculate the deduction for decline in value of depreciating assets in a low-value pool, use worksheet 2 in the Guide to depreciating assets 2016.
Luxury car leases
Luxury car leasing arrangements (other than genuine short-term hire arrangements) are treated as a notional sale and loan transaction.
A leased car, either new or second-hand, is a luxury car whose market value exceeds the car limit at the start of the lease.
For the notional loan, divide the actual lease payments into notional principal and finance charge components. Depending on how much the car is used for a deductible purpose, the lessee can claim a deduction for that part of the finance charge component for the notional loan applicable for the particular period (the accrual amount), subject to any reduction required under the thin capitalisation rules.
For the notional sale, the lessee is treated as the holder of the luxury car and may be entitled to claim a deduction for the decline in value of the car.
For the purpose of calculating the deduction, the cost of the car is limited to the car limit for the income year in which the lease is granted. The car limit for 2015–16 is $57,466. For information about where to show the deduction for decline in value, see Deduction for decline in value of depreciating assets.
Alternatively, if the lessee is using the small business entity depreciation rules for the income year in which the lease is entered into, the lessee allocates the car to its general small business pool. For the purpose of calculating the deduction under the small business entity depreciation rules, the cost of the car is limited to the car limit for the income year in which the lease is granted.
In summary, the lessee is entitled to deductions equal to:
- the accrual amount, and
- the decline in value of the luxury car, based on the applicable car limit, unless the car is allocated to the general small business pool.
Both deductions are reduced to reflect any use of the car for other than a taxable purpose.
If the car is allocated to the general small business pool with the cost based on the applicable car limit, calculate the deduction under the small business entity depreciation rules.
If the lease terminates or is not extended or renewed and the lessee does not actually acquire the car from the lessor, the lessee is treated under the rules as disposing of the car by way of sale to the lessor, this constitutes a balancing adjustment event. If the car is not subject to the small business entity depreciation rules, you must determine any assessable or deductible balancing adjustment amount for the lessee. If the car has been allocated to the lessee’s general small business pool, see Step 5 Disposal of depreciating assets.
If you included luxury car lease payments at G Lease expenses item 5, include the amount at B Expense reconciliation adjustments item 5 as an expense add back. Include the deduction for the accrual amount as an expense subtraction at B Expense reconciliation adjustments item 5.
Profit on the sale of a depreciating asset
Any such profit included in the accounts will differ from the balancing adjustment amount taken into account for taxation purposes.
If the accounts show a profit on the sale of a depreciating asset under G or H Other business income item 5, include that amount as an income subtraction at A Income reconciliation adjustments item 5. See Balancing adjustment amounts.
Immediate deductibility for start-up costs
Section 40-880 allows for certain start-up expenses, including costs associated with raising capital, to be immediately deductible where they are incurred by a small business entity or an entity that is not in business. These provisions apply from 2015-16 and onwards.
Expenses can be fully deductible in the year in which the expenditure is incurred if the expenditure relates to a small business that is proposed to be carried on and is either:
- incurred in obtaining advice or services relating to the proposed structure or the proposed operation of the business
- a payment to an Australian government agency of a fee, tax or charge incurred in relation to setting up the business or establishing its operating structure
See also:
Section 40-880 deduction
If the deduction relates to an earlier income year, or does not meet the criteria set out above, the previous rules apply, which is a five-year write-off for certain business-related capital expenditure incurred by the trust in relation to a past, present or proposed business.
As part of the tax treatment for black hole expenditure, rules apply to business-related capital expenditure incurred after 30 June 2005. Section 40-880 deductions are no longer limited to seven specific types of business-related capital expenditure. The trust may now be able to claim a deduction for capital expenditure it incurs after 30 June 2005:
- in relation to its business
- in relation to a business that it used to carry on, such as capital expenses incurred in order to cease the business
- in relation to a business it proposes to carry on, such as the costs of feasibility studies, market research or setting up the business entity
- as a shareholder, beneficiary or partner to liquidate or deregister a company or to wind up a trust or partnership, provided that the company, trust or partnership carried on a business.
If the trust incurs the relevant capital expenditure in relation to its existing business, a former business or a proposed business, the expenditure is only deductible to the extent the business is, was, or is proposed to be carried on for a taxable purpose.
The trust cannot deduct expenditure in relation to an existing business that is carried on by another entity or a proposed business unless it is proposed to commence within a reasonable time. However, it can deduct expenditure it incurs in relation to a business that used to, or is proposed to be, carried on by another entity. Such expenditure is only deductible to the extent that the:
- business was, or is proposed to be, carried on for a taxable purpose, and
- the expenditure is in connection with
- business that was or is proposed to be carried on, and
- assessable income being derived from that business by the trust.
A section 40-880 deduction cannot be claimed for capital expenditure to the extent that it:
- can be deducted under another provision of the income tax laws
- forms part of the cost of a depreciating asset the trust holds, used to hold or will hold
- forms part of the cost of land
- relates to a lease or other legal or equitable right
- would be taken into account in working out an assessable profit or deductible loss
- could be taken into account in working out a capital gain or a capital loss from a CGT event
- would be specifically not deductible under the income tax laws if the expenditure was not capital expenditure
- is specifically not deductible under the income tax laws for a reason other than that the expenditure is capital expenditure
- is of a private or domestic nature
- is incurred in relation to gaining or producing exempt income or non-assessable non-exempt income
- is excluded from the cost or cost base of an asset because, under special rules in the UCA or capital gains tax regimes respectively, the cost or cost base of the asset was taken to be the market value
- is a return of or on capital (for example, distributions by trustees) or a return of a non-assessable amount (for example, repayments of loan principal).
The trust deducts 20% of the qualifying capital expenditure in the year it is incurred and in each of the following four years.
Show the section 40-880 deduction as an expense subtraction at B Expense reconciliation adjustments item 5. Also show the amount at K item 48 section 40-880 deduction.
If you have included any of the expenditure incurred for the income year as an expense at item 5 show this amount as an expense add back at B Expense reconciliation adjustments item 5.
TOFA rules and UCA
The TOFA rules contain interaction provisions which may modify the cost and termination value of a depreciating asset acquired by a trust to which the TOFA rules apply. This will be the case where the consideration (or a substantial proportion of it) is deferred for greater than 12 months after delivery.
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