SENATE

Revised Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP) THIS MEMORANDUM TAKES ACCOUNT OF AMENDMENTS MADE BY THE HOUSE OF REPRESENTATIVES TO THE BILL AS INTRODUCED

Chapter 5 - Capital allowances for Simplified Tax System taxpayers

Outline of chapter

5.1 Subdivision 328-D contains the rules for calculating deductions for the decline in value of depreciating assets and including some amounts in assessable income for businesses in the STS.

5.2 This Subdivision provides an outright deduction for depreciating assets whose cost is less than $1,000, and pooling arrangements for other depreciating assets.

5.3 It also provides simplified arrangements for accounting for the:

•

private use of depreciating assets; and

•

disposal of depreciating assets.

[Schedule 1, item 1, section 328-170]

5.4 The STS rules apply for income years commencing on or after 1 July 2001.

Context of reform

5.5 Division 42 of the ITAA 1997 currently contains the provisions allowing a deduction for depreciation.

5.6 Under the current provisions, items are generally treated on an individual basis. The rate of depreciation is determined by the plants effective life. This can result in a multitude of depreciation rates. Hence, it is often a time consuming task having to calculate the depreciation deductions allowable each year.

5.7 If an item is used for both business and private purposes, apportionment calculations are required each year to determine the amount of depreciation that may be claimed. When items are disposed of, a separate calculation is also needed to determine any balancing charge. These requirements further increase the compliance burden for small business taxpayers.

5.8 The capital allowance provisions for STS taxpayers will result in compliance cost savings by removing much of the need to maintain individual asset schedules and perform separate calculations for each asset for deduction and balancing charge purposes.

Summary of new law

5.9 The capital allowance provisions for STS taxpayers will provide an immediate write-off for depreciating assets costing less than $1,000 and pooling arrangements for other depreciating assets. There are 2 STS pools; a general STS pool for depreciating assets with an effective life of less than 25 years and a long life STS pool for depreciating assets with an effective life of 25 years or more.

5.10 Each pool will be regarded as a single depreciating asset. The private use calculation will also be simplified by attributing only the business proportion of the depreciating asset to the general or long life pool. The need to calculate balancing charges is removed because only the business proportion of the termination value of the asset is deducted from the balance of the pool.

5.11 Businesses will also effectively maintain access to accelerated depreciation since assets in the general STS pool (with an effective life of less than 25 years) will qualify for deduction on a diminishing value basis of 30% of the pool balance each year. Assets with effective lives of 25 years or more will be allocated to the long life STS pool and the pools balance will qualify for deductions on a diminishing value basis of 5% of the pool balance per year.

5.12 Depreciating assets that an STS taxpayer first uses, or has installed ready for use, during an STS income year, qualify for deduction at half the pools normal rate, in that first income year. This is irrespective of when, during that first year, the asset is first used or installed ready for use. Depreciating assets that were used or installed ready for use prior to entering the STS, qualify for deduction at the full pool rate.

Comparison of key features of new law and current law

Detailed explanation of new law

General

5.13 STS taxpayers calculate deductions under Subdivision 328-D for depreciating assets held for a taxable purpose, and which would otherwise be deductible under proposed Division 40. This Subdivision will also require amounts to be included in a taxpayers assessable income where there is a negative pool balance or a low-cost asset is disposed of. Once the Subdivision applies to an asset, it continues to apply until that asset is disposed of. [Schedule 1, item 1, subsection 328-175(1)]

5.14 Assets, including buildings, that would not be deductible under proposed Division 40 are not deductible under the STS [Schedule 1, item 1, subsection 328-175(2)] . Where this Subdivision applies, proposed Division 40 will not. Proposed Division 40 will allow deductions for capital allowances.

5.15 One of the main features of the capital allowances regime for STS taxpayers in Subdivision 328-D is the pooling of assets. Generally, a pool consists of the costs, or in some cases a proportion of those costs, of the depreciating assets allocated to it. This will greatly simplify calculations because a pool is treated as a single asset and only one rate is used for all assets in that pool. [Schedule 1, item 1, subsection 328-185(1)]

5.16 There are 2 kinds of pools; a general STS pool for depreciating assets with an effective life of less than 25 years and a long life STS pool for depreciating assets with an effective life of 25 years or more [Schedule 1, item 1, subsection 328-185(2)] . The respective pool rates , on a diminishing value basis, are 30% and 5% of the pools opening balance [Schedule 1, item 1, subsection 328-190(1)] .

5.17 Depreciating assets are allocated to the respective pools according to the depreciating assets effective life at the latter of when the taxpayer becomes an STS taxpayer, or the income year in which the STS taxpayer first uses the depreciating asset, or installs it ready for use, for a taxable purpose. [Schedule 1, item 1, subsections 328-185(3) and (4)]

5.18 If a taxpayer leaves and later re-enters the STS, any unallocated business assets that the taxpayer has used, or installed ready for use, since last leaving the STS, must be allocated to a pool, unless the taxpayer can elect to claim deductions for the asset under proposed Division 40.

5.19 Once a depreciating asset has been allocated to a pool, it cannot be reallocated on the basis of effective life [Schedule 1, item 1, subsection 328-185(7)] . For example, a depreciating asset in a long life STS pool cannot be allocated to the general STS pool if its effective life falls below 25 years, even if the taxpayer subsequently re-enters the STS.

5.20 This Subdivision is dependent on the uniform capital allowances regime (proposed Division 40) being enacted prior to 1 July 2001 and contains a number of terms that are defined in proposed Division 40. Very broadly, these terms are defined as follows:

•

generally, a depreciating asset is an asset with a limited effective life and which can reasonably be expected to decline in value over the period it is used;

•

the effective life of an asset is determined at the time the asset is first used, or installed ready for use, for any purpose. Taxpayers will have the choice of using the Commissioners determination of effective life or working out their own effective life of the asset;

•

who holds a depreciating asset may sometimes be unclear. In such cases, it is usually the taxpayer who most uses the asset according to its primary function;

•

a taxable purpose is the purpose of producing assessable income;

•

an assets cost will usually be the amount(s) the taxpayer has paid to hold the asset (net of GST credits). An assets cost consists of 2 elements - the amount(s) you initially pay to hold the asset (the first element) and the amount(s) you are taken to have paid after you start to hold the asset (the second element) ^[F2] ;

•

an assets adjustable value is its cost less any amounts that the taxpayer has deducted, or could have deducted, for its decline in value since the asset was first used, or installed ready for use, for any purpose. Assets already held by the taxpayer on entering the STS are included in an STS pool at their adjustable value;

•

a balancing adjustment event occurs when a taxpayer ceases to hold a depreciating asset. For example, a balancing adjustment event occurs where the asset is disposed of, lost or destroyed; and

•

the termination value of a depreciating asset is broadly any proceeds received for disposing of the asset, including any insurance monies received.

Exceptions

Primary producers

5.21 A primary producer, who is an STS taxpayer for the year, is able to choose whether to claim deductions under the primary production provisions in proposed Subdivisions 40-F or 40-G, or use this Subdivision instead. For qualifying depreciating assets held prior to entering the STS the choice must be made on entry. For qualifying assets which are first used, or installed ready for use, for a taxable purpose in a later STS income year, the choice is made in that later income year. [Schedule 1, item 1, subsections 328-175(3) and (4)]

5.22 A choice is available in respect of each depreciating asset. However, once the choice is made the taxpayer cannot change it. For example, if a taxpayer who enters the STS elects to claim deductions for some assets under proposed Subdivisions 40-F or 40-G they cannot choose to allocate those assets to an STS pool in a later year of income, even if they re-enter the STS.

Horticultural plants

5.23 Horticultural plants, including grapevines, are specifically excluded from receiving a deduction under this Subdivision. STS taxpayers who incur expenditure on horticultural plants must use Subdivision 40-F to claim a deduction for these assets. [Schedule 1, item 1, subsection 328-175(5)]

Leases

5.24 Concessional STS treatment could be transferred to non-STS taxpayers if STS taxpayers received pool deductions for depreciating assets they lease to others. Therefore, depreciating assets let, or that will be let, predominantly on a depreciating asset lease are also specifically excluded from deduction under Subdivision 328-D. A depreciating asset is let, or will be let, predominantly on a depreciating asset lease if it is let, or is intended to be let, more than 50% of the time on a depreciating asset lease. [Schedule 1, item 1, subsection 328-175(5)]

5.25 Subsection 995-1(1) of the ITAA 1997 will define a depreciating asset lease as an agreement, or renewal of an agreement, under which a right to use a depreciating asset is granted. It does not include a short-term hire agreement or a hire purchase agreement (also defined in subsection 995-1(1)).

5.26 Subsection 995-1(1) will define a short-term hire agreement as an agreement for the intermittent hire of an asset on an hourly, daily, weekly or monthly basis. Short-term hirings of the same asset to the same entity, or associates of that entity, will not be regarded as a short-term hire agreement if they are reasonably continuous and total a period longer than a few months.

Low-value pools and software development pools

5.27 Depreciating assets a taxpayer has previously allocated to either a pool created under the former Subdivision 42-L, their low-value pool or a software development pool, are excluded from deduction under Subdivision 328-D [Schedule 1, item 1, subsection 328-175(7)] . Taxpayers must use the rules in proposed SubdDivision 40-E for assets allocated to a Subdivision 42-L or low-value pool prior to entering the STS. However, low-cost assets acquired after entering the STS will be subject to the STS low-cost asset rules in section 328-180.

5.28 Where a taxpayer has a software development pool on entry to the STS, the software development expenditure allocated to that pool remains subject to the rules in proposed Division 40. Further, where a taxpayer incurs software development expenditure after entering the STS, the software development expenditure must continue to be allocated to the software development pool according to the rules in proposed Division 40. Any depreciating assets that are created out of the expenditure allocated to a software development pool cannot be allocated to an STS pool or receive an outright deduction under the STS. [Schedule 1, item 1, subsection 328-175(8)]

5.29 Taxpayers who do not have a software development pool on entry to the STS, and who incur software development expenditure whilst an STS taxpayer, may create software development pools under proposed Division 40 and allocate all future software development expenditure to such pools (see paragraph 5.28). Alternatively, taxpayers may choose not to create a software development pool, in which case they will allocate the depreciating asset, the software, to an STS pool in the income year it is first used, or installed ready for use, for a taxable purpose, provided they are still an STS taxpayer.

5.30 Off the shelf software and the like which is acquired by an STS taxpayer for use in their business is deductible under the STS in accordance with this Subdivision. For example, software costing less than $1,000 will qualify for an outright deduction.

Low-cost depreciating asset

5.31 An outright deduction is available for low-cost depreciating assets. These are defined as depreciating assets whose total cost is less than $1,000 at the end of the income year in which the taxpayer starts to use it for a taxable purpose. The deduction is limited to the taxable purpose proportion of the assets adjustable value and is available in the year the depreciating asset is first used, for a taxable purpose, provided the person is an STS taxpayer for that year and the year the asset was first held. Such a depreciating asset is never allocated to a pool. [Schedule 1, item 1, section 328-180]

5.32 Where the depreciating asset is not used for private purposes, the deduction will usually be the assets cost. Where the cost is less than $1,000 and the depreciating asset is used partly for private purposes, the deduction is limited to the proportion of the assets adjustable value which is used for producing assessable income.

Example 5.1: Deduction for the taxable purpose proportion of low-cost assets

For the 2001-2002 income year, Lindsay is an STS taxpayer. Lindsay bought a tool set for $800. As its cost was less than $1,000 it qualifies for a deduction as a low-cost asset. Lindsay estimates that it will be used for business purposes 70% of the time. Multiplying the cost of the asset by this percentage, results in the amount of $560 being allowed as an immediate deduction under the STS.

If the cost had been $1,300, Lindsay would not have been able to claim an immediate deduction even though the 70% business use estimate would have brought the amount ($910) below $1,000.

5.33 Further, where a depreciating asset is acquired after the taxpayer enters the STS and is first used solely for private purposes, the business use proportion of the assets adjustable value (at that time) becomes deductible in the first year the asset is used, or installed ready for use, for a taxable purpose, providing the taxpayer is still an STS taxpayer.

5.34 Low-cost depreciating assets that were held, or used for a taxable purpose, prior to the taxpayer entering the STS, do not qualify for the immediate deduction for low-cost assets, even if the assets cost was less than $1,000. This is because the immediate deduction is only available for business assets acquired by taxpayers after joining the STS. However, such assets may be pooledallocated to an STS pool, provided they have not previously been allocated to a Division 40 low-value pool by the taxpayer.

Opening pool balance

5.35 A taxpayer in the STS must first calculate the opening balance of each pool in order to determine the amount on which annual deductions will be calculated. For the first year that the taxpayer enters the STS, the opening pool balance of a pool is the sum of the taxable purpose proportions of the adjustable value of each depreciating asset that is allocated to that pool. [Schedule 1, item 1, subsection 328-195(1)]

5.36 For a later income year, the opening pool balance will be the pools closing pool balance from the previous year, unless an adjustment is made to reflect the changed business use of a pooled asset (section 328-225). [Schedule 1, item 1, subsection 328-195(2)]

5.37 Where a taxpayer leaves and later re-enters the STS, the opening pool balance of an STS pool will be the closing pool balance of that pool for the previous year plus the taxable purpose proportion of the adjustable value of any depreciating assets not yet allocated to a pool (excluding assets to which an exception applies - section 328-175). This means that on re-entry, an STS taxpayer will need to allocate, to the appropriate pool, assets they have begun to use, or have installed ready for use, for a taxable purpose since last leaving the STS. [Schedule 1, item 1, subsection 328-195(3)]

Taxable purpose proportion

5.38 STS taxpayers must estimate how much they will use a depreciating asset for a taxable purpose. For example, if a taxpayer estimates that the asset is to be used solely for a taxable purpose, the estimate of taxable use is 100% for that income year. This will be the case, even if the asset is used for minor incidental private purposes. [Schedule 1, item 1, subsections 328-205(1) and (2)]

5.39 For business assets the taxpayer initially brings into the STS, the estimate will be made at the end of in the income year in which the taxpayer first enters the STS. For business assets acquired during an STS income year, the estimate will usually be made at the end of that income year. Where a taxpayer leaves and later re-enters the STS, the estimate will need to be made at the end of in the year of re-entry for business assets not yet allocated to a pool which the taxpayer has acquired while outside the STS.

5.40 The original estimate is multiplied by the assets adjustable value to determine the taxable purpose proportion of the assets adjustable value [Schedule 1, item 1, paragraph 328-205(3)(a)] . After the year for which the original business use estimate is made, for each later income year that the taxpayer holds the asset, they must estimate the amount they will use the asset for a taxable purpose [Schedule 1, item 1, subsection 328-225(1)] .

5.41 However, subsequent estimates will not require an adjustment to the pool balance unless the estimate varies from the original estimate by more than 10 percentage points. In that case, an adjustment is required under section 328-225 to reflect the significant change in the business use of the asset. Likewise, if a present years estimate of business use for an asset varies by more than 10 percentage points from the last estimate that resulted in an adjustment under section 328-225, a further adjustment to the business use estimate will be required under section 328-225. [Schedule 1, item 1, subsection 328-225(1A)]

5.42 If a STS taxpayer incurs further expenditure in relation to an asset, the taxable purpose proportion of the amount included in the second element of cost will be based on the original estimate, except where an adjustment has been made to the business use estimate. In that case, the taxable purpose proportion of an amount included in the second element of cost will be based on the most recent business use estimate that resulted in an adjustment under section 328-225. [Schedule 1, item 1, paragraph 328-205(3)(b)]

5.43 However, the need to make an adjustment to the pool balance and the need to estimate the business use of an asset in income years after the year in which the asset is allocated to an STS pool, is limited to the 3 years after the asset is allocated to a general STS pool, and to 20 years after the asset is allocated to a long life STS pool. [Schedule 1, item 1, paragraph 328-225(5)(a)]

5.44 The taxable purpose proportion of an assets termination value is based on the original business use estimate of the asset unless this estimate has been adjusted under section 328-225. Where an assets business use estimate has been adjusted under section 328-225, the taxpayer must use the average of the assets current and previous business use estimates to work out the taxable purpose proportion of the assets termination value. [Schedule 1, item 1, subsection 328-205(4)]

Example 5.2: Determining the taxable purpose proportion of the adjustable value of STS assets

Eugene is an STS taxpayer from for the 2001-2002 income year. He owns 2 assets which are used in his print shop business.

He has a van. It has an effective life of 8 years and the adjustable value is $25,000. Eugenes estimate of how much he will uses the van 70% of the time for the purpose of producing assessable income in the year it is allocated to the pool is 70%. This means the taxable purpose proportion of the vans adjustable value is $17,500 (70% of $25,000).

The other asset is a printing press. It has an effective life of 2 years and the adjustable value is $5,000. The press is used solely for the purpose of producing assessable income. Eugene expects this rate of usage to continueThis means the taxable purpose proportion of the press adjustable value is $5,000 (100% of $5,000).

As the effective life of each asset is less than 25 years, they are both allocated to the general STS pool. The STS general pools opening balance for the 2001-2002 income year is:

$17,500 (the taxable purpose proportion of the van)

+ $5,000 (the taxable purpose proportion of the press)

= $22,500

Pool deductions

5.45 A taxpayer in the STS will calculate the annual deduction for pooled depreciating assets by multiplying the opening balance of the pool by the pools deduction rate [Schedule 1, item 1, subsection 328-190(1)] . (Note that if the pool has a low-value for an income year, an amount can be claimed under section 328-210 instead of calculating the annual pool deduction.)

Example 5.3: Calculating the annual pool deduction for an STS pool

Eugene calculates the deduction for the general STS pool by multiplying its opening pool balance by the general STS pool rate of 30%:

$22,500 * 30% = $6,750


This results in a deduction of $6,750 for the pool for the year.

5.46 Depreciating assets that are first used, or installed ready for use, for a taxable purpose during an STS income year, qualify for a deduction at half the normal pool rate for that income year. Such assets are allocated to a pool at the end of the year in which they are first used, or installed ready for use, for a taxable purpose [Schedule 1, item 1, subsection 328-185(4)] . For assets with an effective life of less than 25 years, the rate to be applied is 15%. For assets with an effective life of 25 years or more, the rate is 2.5% [Schedule 1, item 1, subsection 328-190(2)] .

5.47 This rate applies to depreciating assets irrespective of when, during the income year, the asset is first used, or installed ready for use, for a taxable purpose. For example, it does not matter whether the asset is first used, or installed ready for use, for a taxable purpose at the beginning or the end of an income year. Such a rule avoids the need to apportion the assets business use over its first income producing year. The rate is multiplied by the taxable purpose proportion of the assets adjustable value (determined at the time the asset is first used, or installed ready for use, for a taxable purpose).

Example 5.4: Treatment of assets that are first used, or installed ready for use, during an STS income year

In the 2001-2002 income year, Eugene acquires and begins to use a new millennium press in place of the old press. The millennium press costs $20,000. The press has an effective life of less than 25 years.

Eugene estimates it will be used only for business purposes, so the taxable purpose proportion of the adjustable value of the millennium press is $20,000 (100% of $20,000).

In the first year the millennium press is used to produce assessable income, the deduction is 15% of the taxable purpose proportion of the assets adjustable value:

$20,000 * 0.15 = $3,000


Eugene claims $3,000 in respect of the millennium press in the 2001-2002 income year. (The press is then allocated to the general STS pool in the 2001-2002 closing pool balance calculation.)

5.48 If a depreciating asset has an effective life of more than 25 years and was first used, or installed ready for use, for a taxable purpose before 1 July 2001, an STS taxpayer may choose not to allocate that asset to the long life STS pool. In that case, the taxpayer would claim deductions for the asset under proposed Division 40. The choice is irrevocable and is made for the first income year a person is an STS taxpayer. [Schedule 1, item 1, subsections 328-185(5) and (6)]

Second element of cost

5.49 If an STS taxpayer incurs, in respect of a depreciating asset pooled in an STS pool in a previous income year, an amount that is included within the second element of cost (as worked out under proposed section 40-190) this amount (the cost addition amount ) is allocated to the STS pool to which the asset is allocated. [Schedule 1, item 1, subsection 328-190(3)]

5.50 For assets with effective lives of less than 25 years, and which have been allocated to a general STS pool in an earlier income year, the deduction is 15% of the taxable purpose proportion of the cost addition amount in the year the amount is incurred. For assets with an effective life of 25 years or more, and which have been allocated to a long life STS pool in an earlier income year, the deduction is 2.5% of the taxable purpose proportion of the cost addition amount in the year the expenditure is incurred. [Schedule 1, item 1, subsection 328-190(4)]

Disposal of depreciating assets

5.51 When a balancing adjustment event occurs for a depreciating asset that has been, or will be, allocated to a pool, the depreciating assets termination value is subtracted from the pool. If the asset has not been used exclusively for a taxable purpose, the assets termination value is reduced because only the taxable purpose proportion of the assets termination value is deducted from the pool [Schedule 1, item 1, section 328-200] . This taxable purpose proportion is determined by the taxpayers business use estimate of the asset.

Example 5.5: Calculating the taxable purpose proportion of assets disposed of during the year

During the 2001-2002 income year Eugene sells his old press for $2,000.

The taxable purpose proportion of the assets termination value is $2,000 (because Eugenes business use estimate is 100%).

5.52 Where a pooled depreciating assets business use estimate has previously been adjusted under section 328-225, the taxable purpose proportion of the assets termination value must reflect the average of the business use estimates made for that asset. In other words, the taxable purpose proportion of an assets termination value is only averaged if the taxpayers original business use estimate for a depreciating asset has changed by more than 10 percentage points. [Schedule 1, item 1, subsection 328-205(4)]

5.53 For assets in the general STS pool this average is calculated having regard to each of the 3 years the taxpayer holds the asset after the year in which the asset was allocated to that pool. For assets in the long life STS pool, this average is calculated having regard to each of the 20 years the taxpayer holds the asset after the year in which the asset was allocated to that pool [Schedule 1, item 1, paragraphs 328-205(4)(b) and (c)] . For example, if a taxpayer had previously estimated that the business use estimate of an asset in the general STS pool was 80% in year 1 (original estimate), 60% in year 2, 40% in year 3 and 100% in year 4 (the last 3 adjustments having been made under section 328-225), the average business use estimate would be 70%.

Closing pool balance

5.54 The closing pool balance calculation incorporates all the additions and subtractions to the pool for the income year. For each year after the first year as an STS taxpayer, the opening pool balance is the closing pool balance of the immediately preceding income year [Schedule 1, item 1, subsection 328-195(1)] . However, the opening pool balance, on which the deductions for the year are calculated, may need to be adjusted to reflect changes in a taxpayers estimate of a depreciating assets use for business purposes (section 328-225) [Schedule 1, item 1, subsection 328-195(2)] . Such an adjustment is made prior to calculating the closing pool balance for an income year [Schedule 1, item 1, subsection 328-225(2)] .

5.55 The closing pool balance for a year of income is calculated in the following way. The taxpayer adds to the opening balance of the pool for the income year:

•

the taxable purpose proportion of the adjustable value of each depreciating asset that was first used, or installed ready for use, for a taxable purpose during the income year; and

•

the taxable purpose proportion of the cost addition amount which has been incurred in that income year and which relates to assets allocated to that pool in a previous income year.

5.56 The taxpayer then subtracts from the resulting amount:

•

the taxable purpose proportion of the termination values of each depreciating asset disposed of during the income year which has been allocated to the pool (subsection 328-205(4)). Taxpayers will also need to subtract the taxable purpose proportion of a depreciating assets termination value if the asset was held for less than 12 months (e.g. where the asset began to be used and was disposed of within the same income year);

•

the deduction allowable for the pool calculated under subsection 328-190(1);

•

the deduction allowable for depreciating assets first held by the taxpayer during the income year as calculated under subsection 328-190(2); and

•

the deduction allowable for the cost addition amount incurred in the income year as calculated under subsection 328-190(3).

5.57 The result is the closing balance of the pool for the income year. [Schedule 1, item 1, section 328-200]

Example 5.6: Calculating the closing pool balance

Eugene calculates the general STS pools 2001-2002 closing pool balance in the following order:

1. Eugene must add the taxable purpose proportion of the adjustable value of the millennium press (acquired during 2001-2002) to the pools 2001-2002 opening balance:

$22,500

+ $20,000 (100% business purpose estimate for the millennium press)

= $42,500

(Eugene has incurred no cost addition amounts.)

2. Eugene then subtracts from $42,500 the following amounts:

$2,000 (termination value of old press - see Example 5.5)

$6,750 (pool deduction - see Example 5.3)

$3,000 (15% deduction for the millennium press Eugene began to hold in 2001-2002 - see Example 5.4)

= $30,750

3. Therefore, the final closing pool balance for Eugenes general STS pool in 2001-2002 is $30,750.

The opening pool balance for Eugenes 2002-2003 general STS pool will be $30,750.

5.58 If an asset is removed from the pool due to a balancing adjustment event, the closing pool balance may be a negative amount. Where this occurs, the amount below zero is included in assessable income [Schedule 1, item 1, paragraph 328-215(2)(a)] . The closing pool balance then becomes zero, rather than the negative amount [Schedule 1, item 1, subsection 328-215(3)] .

Low-pool value

5.59 Instead of claiming an annual deduction for an STS pool under section 238-190, an STS taxpayer may be able to claim a low pool value deduction. An STS taxpayer may only claim this deduction if the value of the pool would be a positive amount less than $1,000. To work out this amount, the taxpayer adds to the opening balance of the pool for the income year:

•

the taxable purpose proportion of the adjustable value of assets that are first used, or installed ready for use, for a taxable purpose during the year; and

•

the taxable purpose proportion of the cost addition amounts incurred in the income year in respect of assets allocated to the pool in an earlier income year.

5.60 The taxpayer then subtracts from the resulting amount the taxable purpose proportion of the termination value of assets disposed of during the year. Where a low pool value deduction is available, the pools closing pool balance for that income year is zero. [Schedule 1, item 1, section 328-210]

5.61 If, as a result of a balancing adjustment event the low pool value calculation (subsection 328-210(2)) results in a negative amount, the amount below zero is included in assessable income [Schedule 1, item 1, paragraph 328-215(2)(b)] . In such cases, the pools closing balance then becomes zero, rather than the negative amount [Schedule 1, item 1, subsection 328-215(3)] .

5.62 If a balancing adjustment event occurs in respect of a depreciating asset which was immediately deductible (because the asset cost less than $1,000), the taxable purpose proportion of the assets termination value is included in the taxpayers assessable income. [Schedule 1, item 1, subsection 328-215(4)]

Change in the assets taxable purpose proportion

5.63 Under the current Division 42 of the ITAA 1997, where a taxpayer apportioned a depreciating assets use between business and private purposes, a calculation was required each year to reduce the depreciation allowed by the private use proportion. The taxpayer could change the business/private use apportionment from year to year. However, the assets written down value would be reduced by an amount equivalent to the asset having been used solely for business purposes.

5.64 The following calculation works in exactly the same way, except it has been simplified so that the adjustment is made to the pool balance, which reflects only business use, instead of the annual depreciation deduction. hat as only the business use proportion of the asset is allocated to the STS pool, wWhere a taxpayers estimate of an assets use for a taxable purpose for the present income year increases or decreases by more than 10 percentage points from the original estimate, or the estimate that last resulted in an adjustment under this section, an adjustment to the opening balance of the pool must be made to reflect the changed business use of one of the assets allocated to it [Schedule 1, item 1, subsection 328-225(1A)] . No adjustment s able tocan be made for an asset whose business use estimate changes by 10 percentage points or less. [Schedule 1, item 1, paragraph 328-225(5)(b)] .

5.65 The adjustment must be made in the income year for which the change occurs and it must be made to the pools opening balance prior to calculating the pools closing pool balancededuction for the pool for that income year. The adjustment will ensure that the deduction for the pool for the income year is based on the depreciating assets correct business use estimate for the present, and future, income years [Schedule 1, item 1, subsections 328-225(1A) and (2)] . The adjustment is:

reduction factor * asset value * (present year estimate - last estimate)


5.66 The reduction factor provides the depreciating asset with its value in the pool for that income year. Basically, it will determine the taxable purpose proportion of the pooled assets adjustable value at the start of the income year.

5.67 The reduction factor for depreciating assets first used, or installed ready for use, for a taxable purpose while the taxpayer was an STS taxpayer is:

[1 - (rate / 2)] * [(1 - rate)n - 1]


5.68 The formula requires half the rate of the appropriate pool, (i.e. 00 for the general STS pool and 00 for the long life STS pool) to be deducted from 1. The result is then multiplied by the following: 1 minus the full pool rate (i.e. 00 for the general STS pool or 00 for the long life STS pool) raised to the power of n - 1. [Schedule 1, item 1, paragraph 328-225(4)(a)]

5.69 In the equation, n represents the number of years, including part years, for which the taxpayer has, or could have, deducted an amount for the depreciating asset under Subdivision 328-D, excluding the present year. [Schedule 1, item 1, subsection 328-225(4)]

5.70 For assets that were first used, or installed for use, for a taxable purpose while the taxpayer was an STS taxpayer, the reduction factor for assets in the general STS pool is:

•

0.85 in the second year deductions are calculated under this Subdivision;

•

0.595 in the third year deductions are calculated under this Subdivision; and

•

0.417 in the fourth year deductions are calculated under this Subdivision.

5.71 The reduction factor for depreciating assets first used, or installed ready for use, for a taxable purpose while the taxpayer was not an STS taxpayer is:

(1 - rate)n


5.72 Taxpayers must deduct from 1 either 00 (for assets in the general STS pool) or 00 (for assets in the long life STS pool). The result is raised to the power n. [Schedule 1, item 1, paragraph 328-225(4)(b)]

5.73 For assets that were first used, or installed ready for use, for a taxable purpose while the taxpayer was not an STS taxpayer, the reduction factor for assets in the general STS pool is:

•

0.70 in the second year deductions are calculated under this Subdivision;

•

0.49 in the third year deductions are calculated under this Subdivision; and

•

0.343 in the fourth year deductions are calculated under this Subdivision.

5.74 The asset value for a depreciating asset that was first used, or installed ready for use, for a taxable purpose while the taxpayer was an STS taxpayer, will be the assets adjustable value at the time the asset was first used, or installed ready for use, for a taxable purpose. For a depreciating asset that was first used, or installed ready for use, for a taxable purpose while the taxpayer was not an STS taxpayer, the asset value is its adjustable value at the start of the income year in which the asset was allocated to a pool.. [Schedule 1, item1, subsection 328-225(3)] In each case, an assets adjustable value is increased by any amounts of expenditure (amounts included in the second element of cost) the taxpayer has incurred in respect of the asset in an income year after the year the asset was allocated to the pool. [Schedule 1, item 1, subsection 328-225(3)]

5.75 The difference between the present year estimate and the last estimate reflects the change in a taxpayers estimate of how much an asset will be used to produce assessable income. [Schedule 1, item 1, subsection 328-175(3)]

5.76 The completed adjustment will reflect the change in the taxable purpose proportion of the pooled assets adjustable value and will ensure that the pools deduction for the year is based on the assets revised estimate of business use. If the adjustment is a negative amount it will reduce the pools opening pool balance. If it is a positive amount it will increase the pools opening pool balance.

Example 5.7: Change in an assets taxable purpose proportion

In September 2002 Eugene estimates that the taxable purpose proportion of his van increases from 70% to 85%. Before Eugene can calculate the 2002-2003 deduction for the general STS pool, Eugene must adjust the 2002-2003 opening pool balance to reflect the vans new business use estimate.

The closing pool balance for 2001-2002 is $30,750. This is the opening pool balance for 2002-2003. The adjustment that is required to be made is:

reduction factor * asset value * (present year estimate - last estimate)


Eugene was depreciating the van prior to entering the STS. The reduction factor is therefore:

(1 - rate)n


Excluding this year (2002-2003), a deduction was allowed for the van under this Subdivision in the 2001-2002 income year. Therefore n = 1 and the reduction factor is:

(1 - 0.3) = 0.70


The asset value of the van is $25,000 (its adjustable value when Eugenes print shop joined the STS).

The present year estimate less the last estimate is:

0.15(0.85 - 0.70)


As a result the calculation is:

0.70 * $25,000 * 0.15 = $2,625


The 2002-2003 opening pool balance of Eugenes general STS pool needs to be increased by this amount. Thus, the adjusted opening pool balance is:

$30,750 (2002-2003 opening pool balance)

+ $ 2,625 (positive adjustment to the 2002-2003 opening pool balance)

= $33,375

Once Eugenes 2002-2003 general STS opening pool balance has been adjusted, the 2002-2003 pool deduction can be calculated.

The deduction is:

30% * $33,375 = $10,013


As Eugene has not acquired or disposed of any assets during 2002-2003, the closing balance calculation is as follows:

$33,375 (2002-2003 adjusted opening pool balance)

- $10,013 (general STS pool deduction: 30% * $33,375)

= $23,362

The opening pool balance for Eugenes 2003-2004 general STS pool will also be $23,362.

5.77 No business use estimate or adjustment need be made , however, where the change in the business use estimate occurs at leastmore than 3 income years after an asset is allocated to the STS general pool. Similarly, no estimate or adjustment need be made where a change in the business use estimate occurs at leastmore than 20 income years after the asset is allocated to the STS long life pool. [Schedule 1, item 1, paragraph 328-225(5)(a)]

Deduction prohibited by another provision

5.78 If a deduction would be calculated under this Subdivision but another provision of the ITAA 1936 or ITAA 1997, outside this Division, denies that deduction, this Subdivision will deem an STS taxpayer as having made a business use estimate of zero for that depreciating asset for the income year. [Schedule 1, item 1, section 328-230]

5.79 This treatment will generally trigger an adjustment under section 328-225. Where this deeming provision applies in a year and a deduction is not denied by another provision of the Act in a later income year, a further business use adjustment may be made in the time permitted under section 328-225. The further adjustment would add back to the pool the taxable purpose proportion of the assets adjustable value, based on the taxpayers business use estimate of the asset for that later income year.

Example 5.8: Deduction prohibited by another provision

Eugene allocates a vehicle to his general STS pool in 2001-2002 and uses the logbook method to claim deductions for his car expenses. In 2003-2004 he begins to use the cents per kilometre method instead. As this method denies a claim for depreciation of the vehicle for the income year, an adjustment under section 328-225 is required.

5.80 Taxpayers subject to sections 85-10 and 86-60 of the ITAA 1997 can deduct amounts for depreciating assets under the STS provided they meet all the STS requirements. However, in accordance with sections 86-60 and 86-70, these taxpayers cannot allocate more than one vehicle with a private use component to an STS pool. [Schedule 1, item 1, section 328 - 235]

Ceasing to be an STS taxpayer

5.81 If a taxpayer elects to leave the STS or is ineligible to remain, the taxpayer continues to claim deductions under this Subdivision for the general and long life STS pools. However, depreciating assets that are first used, or installed ready for use, for a taxable purpose while the taxpayer is not an STS taxpayer cannot be added to either pool until the taxpayer re-enters the STS [Schedule 1, item 1, section 328-220] . Further, iImmediate deductions for low-cost depreciating assets a taxpayer begins to use to produce assessable income (section 328-180) are no longer available.

5.82 Further, where a taxpayer sells a business and there is a remaining pool balance after the assets have been disposed of, that balance continues to be written-off according to this Subdivision notwithstanding that the taxpayer is no longer in business. This provides similar treatment to situations where, for example, an STS taxpayer disposes of a single asset that has been allocated to a general STS pool and an amount of the assets value remains in the pool. In both situations it is the existence of a pool balance that attracts a deduction, rather than whether the taxpayer stills holds individual assets.

Example 5.9: Treatment when ceasing to be an STS taxpayer

In 2003-2004, Eugene elects to leave the STS. Eugenes general STS pool is frozen when the opening pool balance is $23,362. Eugene continues to apply the STS rules as far as they apply to assets already in the pool. In 2003-2004 Eugene does not dispose of any of these assets. Although Eugene acquires 3 new items of plant in the 2004-2005 income year, these are not added to the general STS pool.

Eugene claims the following deduction:

Income Year	Opening pool balance	Capital allowances (30%)	Closing pool balance
2003-2004	$23,362	$7,009	$16,353
2004-2005	$16,353	$4,906	$11,447
2005-2006	$11,447	$3,434	$8,013 and so on

The pool balance continues to be written down in this fashion. Assuming that Eugene does not re-enter the STS, in 2012-2013 the pools opening pool balance is $943. As this is less than $1,000, Eugene can write off $943 in that income year which will bring the general STS pool balance to zero.

Application and transitional provisions

5.83 These amendments apply for the income year commencing 1 July 2001 and all later years.

Consequential amendments

5.84 A consequential amendment is made to Subdivision 20-B of the ITAA 1997 to avoid the profits on the sale of a previously leased vehicle, that is allocated to an STS pool, being taxed under both Subdivision 328-D and Subdivision 20-B. In these situations Subdivision 20-B is amended so as not to apply. [Schedule 2, item 5]

5.85 Consequential amendments are made to subsection 995-1(1) of the ITAA 1997 to reflect a number of new definitions used in the STS capital allowances provisions.

[Schedule 2, items 12 to 14, 16 to 18 and 23]