ATO Interpretative Decision

ATO ID 2003/225

Income Tax

• This document has changed over time. View its history.

Issue

Is the cost of the taxpayer's interest in a depreciating asset that they hold and which forms part of the common property of a residential unit complex located in the Australian Capital Territory (ACT) so much of the amount the taxpayer paid for the unit as is, pursuant to section 40-195 of the Income Tax Assessment Act 1997 (ITAA 1997), reasonably attributable to the depreciating asset?

Decision

Yes. The cost of the taxpayer's interest in a depreciating asset that they hold and which forms part of the common property of a residential unit complex located in the ACT is, pursuant to section 40-195 of the ITAA 1997, so much of the amount the taxpayer paid for the unit as is reasonably attributable to the asset.

Facts

The taxpayer acquired a unit in a residential complex located in the ACT after 6 October 2001. The unit has been used to produce rental income since its acquisition.

Under this type of strata title development, the owners corporation becomes the holder of an estate of leasehold in the common property on registration of the units plan. The unit owners are members of the owners corporation which is a separate legal entity with specified powers, authorities, duties and functions.

Common property is that part of a strata plan not comprised in any owner's lot and includes both fixed and moveable property and facilities intended for common use. The common property may include depreciating assets and buildings and other structures.

The enactment of the Unit Titles Act 2001 (ACT) (UTA 2001), with effect from 6 October 2001, resulted in the estate of leasehold in the common property, including existing common property, in strata title developments in the ACT being held by the owners corporation as agent for the unit owners as tenants in common. Under the former act, Unit Titles Act 1970 (ACT) (UTA 1970), common property was held by the owners corporation (formerly body corporate) as trustee for the unit owners as tenants in common.

Reason for Decision

Broadly speaking, section 40-25 of the ITAA 1997 allows to a holder of a depreciating asset an annual deduction for the decline in value of the asset.

After the enactment of the UTA 2001, a unit owner holds a depreciating asset forming part of the common property. As the taxpayer acquired the unit after the enactment of the UTA 2001, they started to hold their interest in such assets on the acquisition of the unit.

Subsection 40-35(1) of the ITAA 1997 applies to a depreciating asset that is held by more than one entity. It treats each entity's interest in the underlying asset as if the interest were itself the underlying asset. This means that the taxpayer's interest in a depreciating asset that forms part of the common property is treated as if that interest is the underlying asset. One consequence of this is that the taxpayer must work out the cost of the depreciating asset that is their interest.

The amount of the decline in value of a deprecating asset is worked out by reference to the cost of the asset. Cost consists of two elements, first and second element, and is worked out under Subdivision 40-C of the ITAA 1997. The first element of cost is worked out as at the time when the asset starts to be held while the second element is worked out after that time.

The first element of cost is, in certain circumstances, an amount specified in the table in section 40-180 of the ITAA 1997 or, more generally, the amount taken to have been paid under section 40-185 of the ITAA 1997.

No item in the table in subsection 40-180(2) of the ITAA 1997 applies to the taxpayer's circumstances. The amount the taxpayer is taken to have paid to hold their interest in a depreciating asset forming part of the common property must, therefore, be worked out under section 40-185 of the ITAA 1997.

Item 1 of the table in subsection 40-185(1) of the ITAA 1997 includes an amount paid to hold a depreciating asset in the cost of the asset. The taxpayer clearly paid an amount for a depreciating asset forming part of the common property because they started to hold the asset when they acquired the unit and the value of the asset is reflected in the purchase price.

If an amount is paid for two or more things that include at least one depreciating asset, the cost of the depreciating asset must take into account that part of the amount paid that is reasonably attributable to the depreciating asset (section 40-195 of the ITAA 1997). This means that the taxpayer must reasonably attribute the purchase price to their interest in the depreciating asset forming part of the common property that they hold.

Year of income:  Year ended 30 June 2002

Legislative References:
Income Tax Assessment Act 1997
   section 40-25
   subsection 40-35(1)
   section 40-180
   subsection 40-180(2)
   section 40-185
   subsection 80-185(1)
   section 40-195
   subdivision 40-C

Related Public Rulings (including Determinations)
Taxation Ruling IT 2505

Related ATO Interpretative Decisions
ATO ID 2003/224
ATO ID 2003/226
ATO ID 2003/227
ATO ID 2003/228
ATO ID 2003/229

Other References:
Unit Titles Act 2001 (ACT)
Unit Titles Act 1970 (ACT)

Keywords
Capital allowances CoE
Cost of a depreciating asset
Cost of plant
Decline in value
Deduction for depreciating assets
Depreciation deduction
First element of cost
Holder of an item of plant
Second element of cost
Uniform capital allowance system

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  4 April 2003

ISSN: 1445-2782