Guide to depreciating assets 2004

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Guide to depreciating assets 2003-04

Deductions for the cost of depreciating assets

Under income tax law, you are allowed to claim certain deductions for expenditure incurred in gaining or producing assessable income - for example, in carrying on a business.

Some expenditure, such as the cost of acquiring capital assets, is generally not deductible.

Generally, the value of a capital asset which provides a benefit over a number of years declines over its effective life. Because of this, the cost of capital assets used in gaining assessable income can be written off over a period of time as tax deductions.

Before 1 July 2001, the cost of plant (for example, cars and machinery) and software was written off as depreciation deductions.

From 1 July 2001, the uniform capital allowance system (UCA) applies to most depreciating assets, including plant. Under the UCA, deductions for the cost of a depreciating asset are based on the decline in value of the asset.

This publication covers:

how to work out the decline in value of your depreciating assets
what happens when you dispose of or stop using a depreciating asset, and
deductions available under the UCA for capital expenditure other than on depreciating assets.

Simplifying tax obligations for business

The Commissioner has released Practice Statement PS LA 2003/8 - Taxation treatment of expenditure on low cost items for taxpayers carrying on a business. The practice statement provides guidance on two straightforward methods which can be used if you are carrying on a business to help determine whether expenditure incurred to acquire certain low-cost tangible assets is to be treated as revenue or capital.

Subject to certain qualifications, the two methods cover expenditure below a threshold and the use of statistical sampling to estimate total revenue expenditure on low-cost tangible assets. The threshold rule allows an immediate deduction for qualifying low-cost tangible assets costing $100 or less (including any GST). If you have a low-value pool, the sampling rule allows you to use statistical sampling to determine the proportion of the total purchases on qualifying low-cost tangible assets that is revenue expenditure.

A deduction for expenditure incurred on qualifying low-cost tangible assets calculated in accordance with this Practice Statement will be accepted by tax officers.

The uniform capital allowance system (UCA)

The UCA provides a set of general rules that applies across a variety of depreciating assets and certain other capital expenditure. It does this by consolidating a range of former capital allowance regimes. These regimes were complex and inconsistent, and involved significant replication of parallel but not identical provisions and concepts. Most of these deficiencies are overcome by consolidating capital allowance provisions, including those relating to:

plant
intellectual property
software
forestry roads and buildings
mining and quarrying
spectrum licences.

The UCA maintains the treatment of some depreciating assets and capital expenditure such as certain primary production depreciating assets and capital expenditure.

It also introduces new deductions for types of capital expenditure that did not previously attract a deduction, such as certain business and project related costs - refer to Capital expenditure deductible under the UCA.

Deductions for the cost of your depreciating assets, including those acquired before 1 July 2001, are worked out using the UCA rules. You can generally deduct an amount for the decline in value of a depreciating asset you hold to the extent that you use it for a taxable purpose.

However, eligible taxpayers who elect to enter the Simplified Tax System (STS) will generally work out deductions for their depreciating assets under the STS rules - see STS taxpayers.

Steps in working out your deduction

Under the UCA, there are a number of steps in working out your deduction for the decline in value of a depreciating asset:

Is your asset a depreciating asset covered by the UCA? - see What is a depreciating asset?
Do you hold the depreciating asset? See Who can claim deductions for the decline in value of a depreciating asset?
Has the depreciating asset started to decline in value? See When does a depreciating asset start to decline in value?
What method will you use to work out decline in value? - see Methods of working out decline in value
What is the effective life of the depreciating asset? - see Effective life
What is the cost of your depreciating asset?- see The cost of a depreciating asset
Must you reduce your deduction for any use for other than a taxable purpose? - see Decline in value of a depreciating asset used for other than a taxable purpose.

Some of these steps do not apply:

if you choose to allocate an asset to a pool
if you can claim an immediate deduction for the asset
to certain primary production assets
to some assets used in rural businesses.

See Working out decline in value.

Glossary of terms relating to the UCA

The most commonly used UCA terms are explained in this glossary.

A comparison of some of the UCA terms with those used in the former depreciation rules is provided in the table below:

Former depreciation rules	UCA
Plant	Depreciating asset
Own	Hold
Cost	First and second elements of cost
Luxury car limit	Car limit
Income-producing use	Taxable purpose
Depreciation	Decline in value
Undeducted cost	Adjustable value

Adjustable value - A depreciating asset's adjustable value at a particular time is its cost (first and second elements) less any decline in value up to that time.

The opening adjustable value of an asset for an income year is generally the same as its adjustable value at the end of the previous income year.

Balancing adjustment amount - If an asset's termination value is greater than its adjustable value at the time of a balancing adjustment event, the excess is generally an assessable balancing adjustment amount.

If the termination value is less than the adjustable value, the difference is generally a deductible balancing adjustment amount.

Balancing adjustment event - Generally, a balancing adjustment event occurs for a depreciating asset if you stop holding it (for example, if you sell it) or you stop using it and you expect never to use it again.

Car limit - If the first element of cost of a car exceeds the car limit for the financial year in which you start to hold it, that first element of cost is generally reduced to the car limit. The car limit for 2003-04 is $57,009.

Decline in value - Deductions for the cost of a depreciating asset are based on the decline in value.

For most depreciating assets, you have the choice of two methods to work out the decline in value of a depreciating asset: the prime cost method or the diminishing value method see Methods of working out decline in value.

Depreciating asset - A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used.

Some assets are specifically excluded from the definition of depreciating asset - see What is a depreciating asset?

Effective life - Generally the effective life of a depreciating asset is how long it can be used by any entity for a taxable purpose or for the purpose of producing exempt income or non-assessable non-exempt income:

having regard to the wear and tear from your expected circumstances of use
assuming it will be maintained in reasonably good order and condition, and
having regard to the period within which it is likely to be scrapped, sold for no more than scrap value or abandoned.

First element of cost - The first element of cost is, broadly, the amount paid (money and/or the market value of property given) or the amount taken to have been paid to hold the asset.

Holder - Only a holder of a depreciating asset may deduct an amount for its decline in value. In most cases, the legal owner of a depreciating asset will be its holder - see Who can claim deductions for the decline in value of a depreciating asset?

Second element of cost - The second element of cost is, broadly, the amount paid (money and/or the market value of property given) or the amount taken to have been paid to bring the asset to its present condition and location at any time, such as a cost of improving the asset.

Start time - A depreciating asset's start time is generally when you first use it, or install it ready for use, for any purpose, including a private purpose.

Taxable purpose - A taxable purpose is the purpose of producing assessable income, the purpose of exploration or prospecting, the purpose of mining site rehabilitation, or environmental protection activities.

Termination value - Generally, the termination value is what you receive or are taken to receive for an asset as a result of a balancing adjustment event, such as the proceeds from selling an asset.

What is a depreciating asset?

A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used. Depreciating assets include such items as computers, electric tools, furniture and motor vehicles.

Land and items of trading stock are specifically excluded from the definition of depreciating asset.

Most intangible assets are also excluded from the definition of depreciating asset. Only the following intangible assets are specifically included as depreciating assets:

in-house software - see In-house software
certain items of intellectual property (patents, registered designs, copyrights and licences of these) mining, quarrying or prospecting rights and information
certain indefeasible rights to use an international telecommunications submarine cable system
spectrum licences
datacasting transmitter licences.

Improvements to land or fixtures on land - for example, windmills and fences - may be depreciating assets and are treated as separate from the land regardless of whether they can be removed or not.

In most cases, it will be clear whether or not something is a depreciating asset. If you are not sure, contact your recognised tax adviser or the Tax Office.

Depreciating assets excluded from the UCA

Deductions for the decline in value of some depreciating assets are not worked out under the UCA. These are:

depreciating assets for which deductions are available under the specific film provisions
depreciating assets that are capital works - for example, buildings and structural improvements for which deductions are available under the separate provisions for capital works or would have been available if the assets had met certain conditions for the deductions
cars where you use the 'cents per kilometre' method or the '12% of original value' method for calculating car expenses - these methods take the decline in value into account in their calculation
indefeasible rights to use an international telecommunications submarine cable system if the expenditure was incurred or the system was used for telecommunications purposes at or before 11:45 am by legal time in the Australian Capital Territory (ACT)] on 21 September 1999.

Who can claim deductions for the decline in value of a depreciating asset?

Only a holder of a depreciating asset may deduct an amount for its decline in value.

In most cases, the legal owner of a depreciating asset will be its holder.

There may be more than one holder of a depreciating asset - for example, joint legal owners of a depreciating asset are all holders of that asset. Each person's interest in the asset is treated as a depreciating asset. Each person works out their deduction for decline in value based on their interest in the asset - for example, at the cost of the interest to them, not the cost of the asset itself - and according to their use of the asset.

In certain circumstances, the holder is not the legal owner.

Some of these cases are discussed below.

If you are not sure whether you are the holder of a depreciating asset, contact your professional tax adviser or the Tax Office.

Leased luxury cars

A leased car, either new or second-hand, is generally a luxury car if its cost exceeds the car limit that applies for the financial year in which the lease is granted. The car limit for 2003-04 is $57,009 - see car limit.

For income tax purposes, a luxury car lease (other than a genuine short-term hire arrangement) is treated as a notional sale and loan transaction.

Any cost or value specified in the lease (or else the amount that would have been the arm's length cost had the lessor sold the car to the lessee when the lease was granted) is taken to be the cost of the car to the lessee and the amount loaned by the lessor to the lessee to buy the car.

The actual lease payments made by the lessee are divided into notional principal and finance charge components. That part of the finance charge component applicable to the particular period may be deductible to the lessee.

The lessee is generally treated as the holder of the luxury car and is 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 year in which the lease is granted.

Any deduction would be reduced to reflect any use of the car other than for a taxable purpose, such as private use.

If the lessee does not actually acquire the car from the lessor when the lease terminates or ends, the lessee is treated as if they sold the car to the lessor. The lessee will need to work out any assessable or deductible balancing adjustment amount - see What happens if you no longer hold or use a depreciating asset?

Depreciating assets subject to hire purchase agreements

For income tax purposes, certain hire purchase agreements entered into after 27 February 1998 are treated as a notional sale of goods by the financier (or hire purchase company) to the hirer, financed by a notional loan from the financier to the hirer.

Generally, the cost or value of the goods stated in the hire purchase agreement or the arm's length value is taken to be the cost of the goods to the hirer and the amount loaned by the financier to the hirer to buy the goods.

The hire purchase payments made by the hirer are separated into principal and interest, and the interest may be deductible to the hirer. Under the UCA rules, if the goods are depreciating assets, the hirer is the holder if they:

possess the assets or have a right to do so immediately, and
have a right to become the legal owner and it is reasonable to expect that they will become the legal owner or that the assets will be disposed of for their benefit.

If these conditions are met the hirer is able to claim a deduction for decline in value to the extent that the assets are used for a taxable purpose, such as for producing assessable income.

If the hirer actually acquires the goods under the agreement, the hirer continues to be treated as the holder. Actual transfer of legal title to the goods from the financier to the hirer is not treated as a disposal or acquisition.

On the other hand, if the hirer does not legally acquire the goods under the arrangement, the goods are treated as being sold back to the financier at their market value at that time.

The hirer will need to work out any assessable or deductible balancing adjustment amount - see What happens if you no longer hold or use a depreciating asset?

The notional loan amount under a hire purchase agreement is treated as limited recourse debt - see Limited recourse debt arrangements.

Leased depreciating assets fixed to land

If you are the lessee of a depreciating asset and it is affixed to your land, under property law you become the legal owner of the asset. As the legal owner you are taken to hold the asset. However, an asset may have more than one holder.

Despite the fact that the leased asset is affixed to your land, if the lessor of the asset (often a bank or finance company) has a right to recover it, then they too are taken to hold the asset as long as they have that right to recover it. You and the lessor - each being a holder of the depreciating asset - would calculate the decline in value of the asset based on the cost each of you incurs.

Example

Holder of leased asset fixed to land
Jo owns a parcel of land. A finance company leases some machinery to Jo who pays the cost of fixing it to her land. Under the ease agreement, the finance company has a right to recover the machinery f Jo defaults on her ease payments.
The finance company holds the machinery as it has a right to remove the machinery from the land. The finance company is entitled to deductions for the decline in value of the machinery based on the cost of the machinery to it.
However, Jo also holds the machinery as it is attached to her and. She is entitled to a deduction for the decline in value based on the cost to her to hold the machinery. This would not include her lease payments but would include the cost of installing the machinery - see The cost of a depreciating asset for more information about what amounts form part of the cost of a depreciating asset.

Depreciating assets which improve or are fixed to leased land

If a depreciating asset is fixed to leased land and the lessee has a right to remove it, the lessee is the holder while the right to remove the asset exists.

Example

Holder of depreciating asset fixed to leased land
Jo leases land from Bill who owns the land. Jo purchases some machinery and fixes it to the land. Under property law the machinery is treated as part of the land so Bill is its legal owner.
However, under the terms of her lease, Jo can remove the machinery from the land at any time. Because she has acquired and fixed the machinery to the land and has a right to remove it, Jo holds the machinery as long as the right to remove it exists.

If a lessee or owner of certain other rights over land (for example, an easement) improves the land with a depreciating asset, that person is the holder of the asset for their own use even though they have no right to remove it from the land. They remain the holder as long as the lease or right exists.

Example

Holder of depreciating asset which improves leased land

Jo leases and from Bill to use for farming. Jo installs an irrigation system on the land which is an improvement to the land. While Bill is the legal owner under property law as the irrigation system is part of his land, Jo holds the irrigation system. Even though she has no right to remove the irrigation system under her contract with Bill, Jo may deduct amounts for its decline in value for the term of the lease because:

she improved the land, and
the improvement is for her use.

Partnership assets

The partnership and not the partners or any particular partner is taken to be the holder of a partnership asset regardless of its ownership. A partnership asset is one held and applied by the partners exclusively for the purposes of the partnership and in accordance with the partnership agreement.

Working out decline in value

From 1 July 2001, deductions for the decline in value of most depreciating assets, including those acquired before that date, are worked out under the UCA rules.

The UCA contains general rules for working out the decline in value of a depreciating asset and those rules are covered in this part of the guide. Transitional rules apply to depreciating assets held before 1 July 2001 so their decline in value can be worked out using these rules - see Depreciating assets held before 1 July 2001.

The general rules do not apply to some depreciating assets. For these assets, the UCA provides specific rules for working out deductions, for example:

there is an immediate deduction for certain depreciating assets which cost $300 or less that are used mainly to produce non-business assessable income - see Immediate deduction for certain non-business depreciating assets costing $300 or less
the decline in value of certain depreciating assets that cost or are written down to less than $1,000 can be worked out through a low-value pool - see Low-value pools
in-house software for which expenditure has been allocated to a software development pool - see Software development pools
for depreciating assets used in exploration or prospecting, in certain circumstances, the decline in value is the asset's cost - see Mining and quarrying and minerals transport
water facilities, horticultural plants and grapevines used in a primary production business - see Primary production depreciating assets
certain depreciating assets of primary producers and other landholders used in landcare operations, electricity connections or telephone lines - see Capital expenditure of primary producers and other landholders.

There are specific rules for working out deductions for depreciating assets used in carrying on research and development activities - see the Research and development tax concession schedule and instructions for more information.

When does a depreciating asset start to decline in value?

The decline in value of a depreciating asset starts when you first use it, or install it ready for use, for any purpose including a private purpose. This is known as a depreciating asset's start time.

Although an asset is treated as declining in value from its start time, a deduction for its decline in value is only allowable to the extent it is used for a taxable purpose (see Glossary ).

If you initially use a depreciating asset for other than a taxable purpose, such as for a private purpose, and in later years use it for a taxable purpose, you need to work out the asset's decline in value from its start time through the years it was used for a private purpose. You can then work out your deductions for the decline in value of the asset for the years it is used for a taxable purpose - see Decline in value of a depreciating asset used for other than a taxable purpose.

Methods of working out decline in value

You generally have the choice of two methods to work out the decline in value of a depreciating asset: the prime cost method or the diminishing value method. You can generally choose to use either method for each depreciating asset you hold. Once you have chosen a method for a particular asset, you cannot change to the other method for that asset.

In some cases, you do not need to make the choice because you can claim an immediate deduction for the asset - for example, certain depreciating assets which cost $300 or less - see Immediate deduction for certain non-business depreciating assets costing $300 or less.

In other cases, you do not have a choice of which method you use to work out the decline in value:

for some intangible depreciating assets - in-house software, certain items of intellectual property, spectrum licences and datacasting transmitter licences - you must use the prime cost method
if you acquire a depreciating asset from an associate who has deducted or can deduct amounts for the decline in value of the asset - see Depreciating asset acquired from an associate
if you acquire a depreciating asset but the user of the asset does not change or is an associate of the former user (for example, under sale and leaseback arrangements) - see Sale and leaseback arrangements
if there has been rollover relief - see Rollover relief.

Both the diminishing value and prime cost methods are based on a depreciating asset's effective life - the rules for working out an asset's effective life are explained in Effective life.

By working out the decline in value you determine the adjustable value of a depreciating asset. A depreciating asset's adjustable value at a particular time is its cost (first and second elements) less any decline in value up to that time - see The cost of a depreciating asset for information on first and second elements of cost. Adjustable value is similar to the concept of undeducted cost used in the former depreciation rules. The opening adjustable value of an asset for an income year is generally the same as its adjustable value at the end of the previous income year.

The decline in value and adjustable value of a depreciating asset are calculated from the asset's start time independently of your use of the depreciating asset for a taxable purpose.

However, your deduction for the decline in value is reduced to the extent your use of the asset is for other than a taxable purpose - see Decline in value of a depreciating asset used for other than a taxable purpose . Your deduction may also be reduced if the depreciating asset is a leisure facility or boat even though the asset is used, or installed ready for use, for a taxable purpose - see Decline in value of leisure facilities and boats.

The diminishing value method assumes that the decline in value each year is a constant proportion of the remaining value and produces a progressively smaller decline over time. The formula is:

Base value

Days held*

365

150%

asset's effective life

*Can be 366 in a leap year

For the income year in which an asset's start time occurs, the base value is the asset's cost. For a later income year, the base value is the asset's opening adjustable value plus any amounts included in the asset's second element of cost for that year.

Example

Base value

(The impact of the Goods and Services Tax, GST, is ignored in this example).

Leo purchased a computer for $6,000. The computer's base value in its start year would be its cost of $6,000.

If the computer's decline in value for that year is $1,500 and no amounts are included in the second element of the computer's cost, its base value for the next income year would be its opening adjustable value of $4,500.

This amount is the cost of the computer of $6,000 less its decline in value of $1,500.

Days held is the number of days you held an asset in an income year on which you used it or had it installed ready for use for any purpose. If the income year is the one in which the asset's start time occurs, you work out days held from its start time. If a balancing adjustment event occurs for the asset during the income year (for example, if you sell it), you work out days held up until the day the balancing adjustment event occurred - see What happens if you no longer hold or use a depreciating asset? for information about balancing adjustment events.

Example

Diminishing value method

(The impact of the GST is ignored in this example).

Laura purchased a photocopier on 1 July 2003 for $1,500.

The asset started to be used on the day of its purchase and has an effective life of five years. Laura chose to use the diminishing value method to work out the decline n value of the photocopier. The decline in value of $451 for the 2003-04 income year is worked out as follows:

1,500

366*

365

150%

5

*Can be 366 in a leap year

If Laura used the photocopier wholly for taxable purposes in that income year, she would be entitled to a deduction equal to the decline in value. The adjustable value of the asset at 30 June 2004 would be $1,049. This is the cost of the asset ($1,500) less its decline in value up to that time ($451).

The prime cost method assumes that the value of a depreciating asset decreases uniformly over its effective life.

The formula for the prime cost method is:

Base value

Days held*

365

100%

asset's effective life

*Can be 366 in a leap year

Example

Prime cost method

(The impact of the GST is ignored in this example).

Using the facts of the previous example, if Laura chose to work out the decline in value of the photocopier using the prime cost method, the decline in value for the 2003-04 income year would be $300. This worked out as follows:

1,500

366*

365

100%

5

*Can be 366 in a leap year

If Laura used the photocopier wholly for taxable purposes in that income year, she would be entitled to a deduction equal to the decline in value. The adjustable value of the asset at 30 June 2004 would be $1,200. This the cost of the asset ($1,500) less its decline in value up to that time ($300)

If there has been rollover relief and the transferor used the prime cost method to work out the asset's decline in value, the transferee should replace the asset's effective life in the prime cost formula with the asset's remaining effective life - that is, any period of the asset's effective life that is yet to elapse when the transferor stopped holding the asset - see Rollover relief.

An adjusted prime cost formula must be used if:

you recalculate the effective life of an asset - see Effective life an amount is included in the second element of cost of an asset's cost after the income year in which the asset's start time occurs - see The cost of a depreciating asset
an asset's opening adjustable value is reduced by a debt forgiveness amount - see Commercial debt forgiveness
you reduced the opening adjustable value of a depreciating asset which is the replacement asset for an asset subject to an involuntary disposal - see Involuntary disposal of a depreciating asset
an asset's opening adjustable value is modified due to GST increasing or decreasing adjustments, input tax credits in relation to the acquisition or importation of the asset or input tax credits for amounts included in the second element of cost of an asset - see GST input tax credits,
and an asset's opening adjustable value is modified due to forex realised gains or forex realised losses - see Foreign currency gains and losses.

The adjusted prime cost formula must be used from an income year in which any of these changes are made (a 'change year'). The formula is:

Opening adjustable value for the change days held year plus any second element of cost for that year

Days held*

365

100%

asset's effective life

*Can be 366 in a leap year

where the asset's remaining effective life is any period of its effective life that is yet to elapse at the start of the change year.

The prime cost formula must also be adjusted for certain intangible depreciating assets you acquire from a former holder - see Effective life of intangible depreciating assets.

Depreciating assets held before 1 July 2001

To work out the decline in value of depreciating assets you held before 1 July 2001, you generally use the same cost, effective life and method that you were using under the former law.

The undeducted cost of the asset at 30 June 2001 becomes its opening adjustable value at 1 July 2001.

The undeducted cost of the asset is worked out under the former depreciation rules. It is the asset's cost less the depreciation for the asset up to 30 June 2001, assuming that it was used wholly for producing assessable income.

For a depreciating asset that is an item of intellectual property or a spectrum licence and for certain depreciating assets used in mining, quarrying or minerals transport, the opening adjustable value at 1 July 2001 is the amount of unrecouped expenditure for the asset at 30 June 2001. These assets do not have an undeducted cost under the former rules.

Special transitional rules apply to plant for which you used accelerated rates of depreciation before 1 July 2001 or could have used accelerated rates had you used the plant, or had it installed ready for use, for producing assessable income before that day. These rules ensure that accelerated rates continue to apply under the UCA - see Accelerated depreciation.

Accelerated depreciation

For plant acquired between 27 February 1992 and 11.45am (by legal time in the ACT) on 21 September 1999, accelerated rates of depreciation and broadbanding were available. The rates were based on effective life adjusted by a loading of 20% and broadbanded into one of seven rate groups. The loading together with the broadbanding produced accelerated rates of deductions for depreciation.

Except for certain small business taxpayers, accelerated rates of depreciation are not available for plant you:

acquired under a contract entered into after 11.45am (by legal time in the ACT) on 21 September 1999
constructed, with construction starting after that time, or
acquired in some other way after that time.

Small business taxpayers could continue to use accelerated rates for plant acquired after that time if they met certain conditions when the plant was first used or installed ready for use. However, accelerated rates of depreciation have been removed for small business taxpayers for depreciating assets they: started to hold under a contract entered into after 30 June 2001 constructed and construction began after that time, or started to hold in some other way after that time.

If you used accelerated rates of depreciation for an item of plant before 1 July 2001, or could have used accelerated rates had you used the plant, or had it installed ready for use, for producing assessable income before that day, you continue to use accelerated rates to work out the decline in value under the UCA. You replace the effective life component in the formula for working out the decline in value with the accelerated rate you were using. Accelerated rates of depreciation are available in this document.

Example

Working out decline in value using accelerated rates of depreciation

(The impact of the GST is ignored in this example).

Peter purchased a machine for use in his business for $100,000 on 1 July 1999.

As the machine was acquired before 21 September 1999, Peter can use accelerated rates of deprecation to calculate his deductions. Using the prime cost method, a depreciation rate of 20% applies as the machine has an effective life of eight years.

To work out his deduction for the 2003-04 income year, Peter continues to use the same cost method and rate that he was using before the start of the UCA.

The decline in value of the machine for the 2003-04 income year of $20,000 is worked out as follows:

Asset's cost

Days held*

365

Prime cost rate

100,000

366

365

20%

*Can be 366 in a leap year

Decline in value of a depreciating asset used for other than a taxable purpose

The decline in value and adjustable value of a depreciating asset are calculated from the start time independently of your use of the depreciating asset for a taxable purpose. However, your deduction for the decline in value is reduced to the extent your use of the asset is for other than a taxable purpose.

If you initially use an asset for other than a taxable purpose, such as for a private purpose, and in later years use it for a taxable purpose, you need to work out the asset's decline in value from its start time through the years it was used for a private purpose. You can then work out your deductions for the decline in value of the asset for the years it is used for a taxable purpose.

Example

Depreciating asset used partly for a taxable purpose

(The impact of the GST is ignored in this example).

Leo purchased a computer for $6,000 and used it only 50% of the time for a taxable purpose during the income year.

If the computer's decline in value for the income year is $1,500, Leo's deduction would be reduced to $750, being 50% of the computer's decline in value for the income year.

The adjustable value at the end of the income year would be $4,500, irrespective of the extent of Leo's use of the asset for taxable purposes.

Example

Depreciating asset initially used for other than a taxable purpose

Paul purchased a refrigerator on 1 July 2001 and immediately used it wholly for private purposes. He started a new business on 1 March 2004 and then used the refrigerator wholly in his business. Paul's refrigerator started to decline in value from 1 July 2001 as that was the day he first used it. He needs to work out the refrigerator's decline in value from that date. However, Paul can only claim a deduction for the decline in value for the period commencing 1 March 2004 when the refrigerator was used for a taxable purpose.

Decline in value of leisure facilities and boats

Your deduction for the decline in value of a leisure facility or boat may be reduced even though it is used, or installed ready for use, for a taxable purpose. Your deduction is limited to the extent:

the asset's use is a fringe benefit
a leisure facility is used, or held for use, in the course of your business or for your employees, or
a boat is used, or held for use, mainly for hiring out, mainly for transporting the public or goods for payment, or for a purpose that is essential to the efficient conduct of your business.

Depreciating asset acquired from an associate

If you acquired plant on or after 9 May 2001 or another depreciating asset on or after 1 July 2001 from an associate, such as a relative or partner, and the associate claimed or can claim deductions for the decline in value of the asset, you must use the same method of working out the decline in value as the associate used.

You must also use the same effective life as the associate used if they used the diminishing value method. If they used the prime cost method you use any remaining period of the effective life used by them.

You must recalculate the effective life of the depreciating asset if the asset's cost increases by 10% or more in any income year, including the year in which you start to hold it - see How to recalculate effective life.

You can require the associate to tell you what method and effective life they used by serving a notice on them within 60 days after you acquire the asset. Penalties can be imposed if the associate intentionally refuses or fails to comply with the notice.

Sale and leaseback arrangements

If you acquired plant on or after 9 May 2001 or another depreciating asset after 1 July 2001 but the user of the asset does not change or is an associate of the former user - such as under a sale and leaseback arrangement - you must use the same method of working out the decline in value that the former holder used.

You must also use the effective life the former holder used if they used the diminishing value method. If they used the prime cost method you use any remaining period of the effective life used by them. If you cannot readily ascertain the method the former holder used or if they did not use a method, you must use the diminishing value method. An effective life determined by the Commissioner of Taxation must be used if you cannot find out the effective life the former holder used or if they did not use an effective life.

Immediate deduction (for certain non-business depreciating assets costing $300 or less)

The decline in value of certain depreciating assets costing $300 or less is their cost. This means you get an immediate deduction for the cost of the asset to the extent that you use it for a taxable purpose during the income year in which the deduction is available.

The immediate deduction is available if all of the following tests are met in relation to the asset:

it costs $300 or less
it is used mainly 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 you start to hold in the income year that costs more than $300
it is not one of a number of identical or substantially identical assets you start to hold in the income year that together cost more than $300.

If you are not eligible to claim the immediate deduction, you work out the decline in value of the asset using the general rules for working out decline in value. Alternatively, you may be able to allocate the asset to a low-value pool.

The immediate deduction is not available for the following depreciating assets:

water facilities, horticultural plants and grapevines used in a primary production business - see Primary production depreciating assets
certain depreciating assets of primary producers and other landholders used in landcare operations,
electricity connections or telephone lines - see Capital expenditure of primary producers and other landholders
in-house software if you have allocated expenditure on it to a software development pool - see Software development pools.

Cost is $300 or less

If you are entitled to a GST input tax credit in relation to the asset, the cost is reduced by the input tax credit before determining whether the cost is $300 or less.

If you hold an asset jointly with others and the cost of your interest in the asset is $300 or less, then you can claim the immediate deduction even though the depreciating asset in which you have an interest costs more than $300 - see Jointly held depreciating assets.

Example

Cost is $300 or less

(The impact of the GST is ignored in this example).

John, Margaret and Neil jointly own a rental property in the proportions of 50%, 25% and 25%. Based on their respective interests, they contribute $400, $200 and $200 to acquire a new refrigerator for the rental property.

Margaret and Neil can claim an immediate deduction because the cost of the interest in the refrigerator does not exceed $300. John cannot claim an immediate deduction because the cost of his interest is more than $300.

Used mainly to produce non-business assessable income

Some examples of depreciating assets used to produce non-business income are:

a briefcase or tools of trade used by an employee
furniture in a rental property, or
a calculator used in managing an investment portfolio.

To claim the immediate deduction, you must use the depreciating asset more than 50% of the time for producing non-business assessable income.

If you meet this test, you can use the asset for other purposes (such as to carry on a business) and still claim the deduction.

However, if you do not use the asset mainly for producing non-business assessable income, you will not be able to claim the deduction.

Example

Depreciating asset used mainly to produce non-business assessable income

(The impact of the GST is ignored in this example).

Rob buys a calculator for $150. The calculator is used 40% of the time by him in his business and 60% of the time for managing his share portfolio. As the calculator is used more than 50% of the time for producing non-business assessable income, Rob can claim an immediate deduction for it of $150.

If Rob used his calculator 40% of the time for private purposes and 60% of the time for managing his share portfolio, he is still using the calculator more than 50% of the time for producing non-business assessable income.

However, his deduction would be reduced by 40% to reflect his private use of the asset.

Not part of a set

Whether items form a set needs to be determined on a case by case basis. Items may be regarded as a set if they are:

interdependent on each other
marketed as a set, or
designed and intended to be used together.

It is the cost of a set of assets you acquire in the income year that must not exceed $300. The test cannot be avoided by buying parts of a set separately.

Example

Set of items

(The impact of the GST is ignored in this example).

In the 2003-04 income year Paula, a primary school teacher, buys a series of six progressive reading books costing $65 each. The books are designed so that pupils move on to the next book only when they have successfully completed the previous book. The books are marketed as a set and are designed to be used together. The six books would be regarded as a set. Paula cannot claim an immediate deduction for any of these books because they form part of a set which she acquired in the income year and the total cost of the set is more than $300.

Example

Not a set

(The impact of the GST is ignored in this example).

Marie, an employee, buys a range of tools for her tool kit for work - a shifting spanner, a boxed set of screwdrivers and a hammer. Each item costs $300 or less.

While the tools add to Marie's tool kit, they are not a set. It would make no difference if Marie purchased the items at the same time and from the same supplier or manufacturer. An immediate deduction is available for all the items, including the screwdrivers. The screwdrivers are a set, as they are marketed and used as a set. However as the cost is $300 or less, the deduction is available.

A group of assets acquired in an income year can be a set even though they also form part of a larger set acquired over more than one income year. If the assets acquired in an income year are a set then the total cost of that set must not exceed $300. If the assets acquired in an income year are not a set then the test does not need to be satisfied.

Assets acquired in another income year are not taken into account when working out whether items form a set or the total cost of a set.

Example

Set of items part of a larger set

(The impact of the GST is ignored in this example).

In the 2003-04 income year Paula, a primary schoolteacher, hears about a series of 12 progressive reading books. The books are designed so that pupils move on to the next book only when they have successfully completed the previous book. The first six books are at a basic level where the second six are at an advanced level.

Paula buys one book a month beginning in January and by 30 June 2004 she holds the first six books (the basic readers) at a total cost of $240. Because of the interdependency of the books, the six books are a set even though they can be purchased individually and they form apart of a larger set. An immediate deduction is available for each book because the cost of the set Paula acquired during the income year was not more than $300.

If Paula acquires the other six books the advanced readers in the following income year, they would be regarded as a set acquired in that year.

The concept of a set requires more than one depreciating asset. In some cases, however, more than one item may be a single depreciating asset. An example would be a three volume dictionary. This is a single depreciating asset, not a set of three separate depreciating assets as the three volumes have a single integrated function.

Not one of a number of identical or substantially identical items

Items are identical if they are the same in all respects.

Items are substantially identical if they are the same in most respects even though there may be some minor or incidental differences. Factors you would consider include colour, shape, function, texture, composition, brand and design.

You do not take assets into account that you acquired in another income year.

Example

Substantially identical items

(The impact of the GST is ignored in this example).

Jan buys three kitchen stools for her rental property in the 2003-04 income year. The stools are all wooden and of the same design, however, they are different colours. The colour of the stools is only a minor difference which is not enough to conclude that the stools are not substantially identical. The stools cost $150 each. Jan cannot claim an immediate deduction for the cost of each individual stool because they are substantially identical and their total cost exceeds $300.

Example

Not substantially identical items

Jan also buys some chairs for her rental property: a canvas chair for the patio, a high back wooden chair for the bedroom dressing table and a leather executive chair for the study. While these are all chairs, they are not identical or substantially identical. The cost of each of the chairs can be claimed as an immediate deduction if it is $300 or less.

Effective life

Generally, the effective life of a depreciating asset is how long it can be used by any entity for a taxable purpose or for the purpose of producing exempt income or non-assessable non-exempt income:

having regard to the wear and tear you reasonably expect from your expected circumstances of use
assuming that it will be maintained in reasonably good order and condition, and
having regard to the period within which it is likely to be scrapped, sold for no more than scrap value or abandoned.

Effective life is expressed in years, including fractions of years.

It is not rounded to the nearest whole year.

Choice of determining effective life

For most depreciating assets, you have a choice to either work out the effective life yourself or use an effective life determined by the Commissioner.

The choice must be made for the income year in which the asset's start time occurs. Generally, the choice must be made by the time you lodge your income tax return for that year.

However, the choice is not available:

for most intangible depreciating assets - see Effective life of intangible depreciating assets
if a depreciating asset is acquired from an associate who claimed or could have claimed deductions for the asset's decline in value - see Depreciating asset acquired from an associate
for a depreciating asset which you start to hold but the user of the asset does not change or is an associate of the former user - for example, under a sale and leaseback arrangement - see Sale and leaseback arrangements
if there has been rollover relief - see Rollover relief.

Working out the effective life yourself

The sort of information which you could use to make an estimate of effective life of an asset includes:

the physical life of the asset
engineering information
the manufacturer's specifications
your own past experience with similar assets
the past experience of other users of similar assets
the level of repairs and maintenance commonly adopted by users of the asset
retention periods
scrapping or abandonment practices.

You work out the effective life of a depreciating asset from the asset's start time.

Commissioner's determination

In making his determination, the Commissioner assumes the depreciating asset is new and has regard to general industry circumstances of use.

Taxation Ruling TR 2000/18 - Effective life of depreciating assets lists the Commissioner's determination of effective life for various depreciating assets. TR 2000/18 came into force on 1 January 2001 and replaced Taxation Ruling IT 2685 - Depreciation.

The table attached to IT 2685 lists the effective life of various items of plant as determined by the Commissioner.

As a general rule, the schedule of effective lives accompanying IT 2685 should only be used for depreciating assets:

acquired under a contract entered into
otherwise acquired, or
started to be constructed before 1 January 2001.

Note

IT 2685 contains depreciation rates - accelerated rates and broadbanded rates - which should only be used for plant that was acquired before 11.45am (by legal time in the ACT) on 21 September 1999 or by certain small business taxpayers before 1 July 2001 - see Accelerated depreciation.

Because the Commissioner often reviews his determinations of effective life, the determined effective life for a particular asset may change from the beginning of, or during, an income year. You need to work out which version of the schedule accompanying TR 2000/18 to refer to for a particular asset's determined effective life.

As a general rule, use the version of the schedule that is in force at the time you:

enter into a contract to acquire an asset
otherwise acquire it, or
start to construct it.

However, if the asset's start time does not occur within five years of this time, you must use the effective life that is in force at the asset's start time. For an item of plant acquired under a contract entered into, otherwise acquired or started to be constructed before 11.45am (by legal time in the ACT) on 21 September 1999, there is no restriction on the period within which the plant must be used. The general rule applies to such plant.

For an extract from TR 2000/18 (as at 1 July 2003) showing the effective lives of some commonly used depreciating assets, see Examples of effective lives - Taxation Ruling TR 2000/18.

Statutory caps on the Commissioner's determination of effective life

From 1 July 2002 there are statutory caps on the Commissioner's determined effective life for certain depreciating assets. This means if you choose to use the Commissioner's determination of effective life for an asset with a capped life, you must use the capped life if it is shorter than the Commissioner's determination.

Assets with capped lives include aeroplanes, helicopters and certain assets used in the oil and gas industries. For more information refer to TR 2000/18 (as at 1 July 2003).

Effective life of intangible depreciating assets

The effective life of most intangible depreciating assets is prescribed under the UCA.

Asset	Effective life in years
Standard patent	20
Innovation patent	8
Petty patent	6
Registered design	15
Copyright	The shorter of 25 years from when you acquire it or the period until the copyright ends
A licence (except one relating to a copyright or in-house software)	The term of the licence
A licence relating to a copyright	The shorter of 25 years from when you become the licensee or the period until the licence ends
In-house software	2½
Spectrum licence	The term of the licence
Datacasting transmitter licence	15
A mining, quarrying or prospecting right relating to mining operations (except obtaining petroleum or quarry materials)	The life of the mine or proposed mine or, if there is more than one, the life of the mine that has the longest estimated life
A mining, quarrying or prospecting right relating to mining operations to obtain petroleum	The life of the petroleum field or proposed petroleum field
A mining, quarrying or prospecting right relating to mining operations to obtain quarry materials	The life of the quarry or proposed quarry or, if there is more than one, the life of the quarry that has the longest estimated life

You do not have a choice to either work out the effective life yourself or use an effective life determined by the Commissioner for the intangible depreciating assets. In addition, the effective life of these depreciating assets cannot be recalculated.

The effective life of an indefeasible right to use an international telecommunications submarine cable system is the effective life of the international telecommunications submarine cable over which the right is granted.

The effective life of any other intangible depreciating asset cannot be longer than the term of the asset as extended by any reasonably assured extension or renewal of that term.

If you acquire any of the intangible assets listed in the table (except items 5, 7 or 8) from a former holder and you choose to calculate the asset's decline in value using the prime cost method, you must replace the effective life shown in the table in the formula with the number of years remaining in that effective life as at the start of the income year you acquired the asset.

Choice of recalculating effective life

You may choose to recalculate the effective life of a depreciating asset if the effective life you have been using is no longer accurate because the circumstances relating to the nature of the asset's use have changed.

You can recalculate an asset's effective life each time those circumstances change. It can be done in any income year after the one in which the asset's start time occurs and whether you worked out the previous effective life yourself or you used the effective life determined by the Commissioner.

Some examples of changed circumstances relating to the nature of the use of an asset are:

your use of the asset turns out to be more or less rigorous than expected
there is a downturn in the demand for the goods or services that the asset is used to produce that will result in the asset being scrapped
legislation prevents the asset's continued use, or
changes in technology make the asset redundant.

You cannot choose to recalculate the effective life of any depreciating asset for which you:

used accelerated rates of depreciation before 1 July 2001 - see Accelerated depreciation for information on accelerated rates of depreciation, or
could have used accelerated rates of depreciation before 1 July 2001 if you had used the asset to produce assessable income or had it installed ready for that use.

In addition, the effective life of certain intangible depreciating assets cannot be recalculated - see Effective life of intangible depreciating assets.

Requirement to recalculate effective life

In some circumstances, you must recalculate the effective life of a depreciating asset.

You must recalculate the effective life of a depreciating asset if its cost is increased by 10% or more in an income year after the one in which its start time occurs and you either:

worked out the effective life of the asset yourself, or
used the Commissioner's determination of effective life (or a capped life) and the prime cost method to work out the asset's decline in value.

Even though you may be required to recalculate the effective life of an asset, you may conclude that the effective life remains the same.

You may also be required to recalculate the effective life of a depreciating asset you:

acquired from an associate who claimed or could have claimed deductions for the asset's decline in value - see Depreciating asset acquired from an associate, or
become the holder of, where the user of the asset does not change or is an associate of the former user - for example, under a sale and leaseback arrangement - see Sale and leaseback arrangements.

How to recalculate effective life

The recalculated effective life is worked out from the depreciating asset's start time. You use the same principles to recalculate the effective life of a depreciating asset as you would to work out the original effective life yourself - see Working out the effective life yourself.

Effect of recalculating effective life

If you recalculate the effective life of a depreciating asset, the new effective life starts to apply for the income year for which you make the recalculation.

If you are using the diminishing value method to work out the decline in value of a depreciating asset, the new estimate of effective life is used in the formula as the asset's effective life.

Under the prime cost method, the adjusted prime cost formula must be used from the year for which you recalculate the asset's effective life - see Methods of working out decline in value for information about the adjusted prime cost formula.

The cost of a depreciating asset

To work out the decline in value of a depreciating asset, you need to know its cost.

Under the UCA, the cost of a depreciating asset has two elements.

The first element of cost is, generally, amounts you are taken to have paid to hold the asset, such as the purchase price. It is worked out as at the time you begin to hold the asset.

The second element of cost is, generally, amounts you are taken to have paid after that time to bring the asset to its present condition and location, such as a cost of improving the asset.

Example

First and second elements of cost

(The impact of the GST is ignored in this example).

Terry purchases a car for $45,000. The first element of cost is $45,000. If Terry installs a car alarm in the vehicle two months after at a cost of $1,500, that amount will be included in the second element of cost of the car as the amount was incurred after he began to hold the car.

The cost of a depreciating asset includes not only amounts you pay but also the market value of any non-cash benefits you provide in relation to the asset.

It would also include a liability you incur to pay an amount or to provide a non-cash benefit.

The cost of a depreciating asset does not include:

amounts of input tax credits for which you are or become entitled - see GST input tax credits
expenditure not of a capital nature, or
any amount that you can deduct or which is taken into account in working out a deductible amount under provisions outside the UCA.

Example

Expenditure not of a capital nature and deductible outside the UCA

Carolyn uses a motor vehicle for her business. As a result of Carolyn's use of the vehicle, she needs to replace the tyres.

The cost of replacing the tyres is not included in the second element of the vehicle's cost because it would ordinarily be deducted under the repair provisions.

There are special rules to work out the cost of depreciating assets in certain circumstances. Some of the common cases are covered below. If you are not sure of the cost of a depreciating asset, contact your professional tax adviser or the Tax Office.

GST input tax credits

If the acquisition or importation of a depreciating asset constitutes a creditable acquisition or a creditable importation, the cost of the asset is reduced by any input tax credit you are, or become, entitled to for the acquisition or importation.

If you become entitled to the input tax credit in an income year after the one in which the asset's start time occurred, its opening adjustable value is also reduced by the amount of the input tax credit.

If the cost of a depreciating asset is taken to be its market value (such as for assets acquired under a private or domestic arrangement), the market value is reduced by any input tax credit to which you would be entitled had the acquisition been solely for a creditable purpose.

Similarly, any input tax credit you are entitled to claim in relation to the second element of a depreciating asset's cost reduces the cost of the asset. Its opening adjustable value is also reduced if you become entitled to the input tax credit in an income year after the one in which the asset's start time occurred.

Certain adjustments under the GST legislation reduce or increase the cost and, in some cases, the opening adjustable value of the asset. Other adjustments are treated as an outright deduction or income.

Jointly held depreciating assets

If a depreciating asset is held by more than one person, each holder works out their deduction for the decline in value of the asset based on the cost of their interest in the asset and not the cost of the asset itself.

Car limit

Cars designed mainly for carrying passengers are subject to a car limit. If the first element of cost exceeds the car limit for the financial year in which you start to hold it, that first element of cost is reduced to the car limit.

The car limit for 2003-04 is $57,009.

Before applying the car limit you may need to:

increase the cost of the car if you acquired the car at a discount - see Car acquired at a discount
reduce the cost of the car by input tax credits - see GST input tax credits

If a car with a cost exceeding the car limit is held by more than one person, the car limit is applied to the cost of the car and not to each holder's interest in the car. Once the car limit has been applied, the cost of the car (as reduced to the car limit) is apportioned as between each holder's interest. Each holder then works out their deduction for the decline in value of the car - see Jointly held depreciating assets.

The car limit also applies under the luxury car lease rules - Leased luxury cars.

The car limit does not apply in certain circumstances to some cars fitted out for transporting disabled people.

When a balancing adjustment event occurs in relation to the car, the termination value must be adjusted under a special formula - see Balancing adjustment rules for cars.

Car acquired at a discount

If a car is acquired at a discount, the first element of its cost may be increased by the discount portion. The discount portion is any part of the discount that is due to the sale of another asset for less than market value - for example, a trade-in.

A car's cost is not affected by a discount obtained for other reasons.

The adjustment is only made if the cost of the car (after GST credits or adjustments) plus the discount portion exceeds the car limit and if you or another entity has deducted or can deduct an amount for the other asset for any income year.

This rule does not apply to some cars fitted out for transporting disabled people.

When a balancing adjustment event occurs in relation to the car, the termination value must be increased by the same discount portion - see Balancing adjustment rules for cars.

Example

Car acquired at a discount

(The impact of the GST is ignored bin this example).

Kristine arranges to buy a $60,000 sedan for business use from Greg, a car dealer. She offers the station wagon she is using for this purpose, worth $20,000, as a trade-in. Greg agrees to reduce the price of the sedan to below the car limit if Kristine accepts less than market value for the trade- in. Kristine agrees to accept $15,000 for the trade-in and the price of the sedan is reduced to $55,000 (that is, a discount of $5,000).

The cost of the car plus the discount is more than the car limit so the first element of the car's cost increased by the amount of the discount to $60,000. As the first element of cost then exceeds the car limit, it must be reduced to the car limit for the income year. The termination value of the wagon would be taken to be the market value of $20,000 as Kristine and Greg were not dealing at arm's length - see Termination value.

Non-arm's length and private or domestic arrangements

The first element of a depreciating asset's cost is the market value of the asset at the time you start to hold it if:

the first element of the asset's cost would otherwise exceed its market value and you do not deal at arm's length with another party to the transaction, or
you started to hold the asset under a private or domestic arrangement (for example, as a gift from a family member).

Similar rules apply to the second element of a depreciating asset's cost. For example, if something is done to improve your depreciating asset under a private or domestic arrangement, the second element of the asset's cost is the market value of the improvement when it is made.

The market value may need to be reduced for any input tax credits to which you would have been entitled - see GST input tax credits.

Note that there are special rules for working out the effective life and decline in value of a depreciating asset acquired from an associate, such as a spouse or partner - see Depreciating asset acquired from an associate.

Depreciating asset acquired with other property

If you pay an amount for a depreciating asset and something else, only that part of the payment that is reasonably attributable to the depreciating asset is treated as being paid in relation to it. This applies to first and second elements of cost.

Apportionment on the basis of the market values of the various items for which the payment is made will generally be reasonable.

Example

Apportionment of cost

Sam undertakes to pay an upholsterer $800 for a new desk and $300 to re-upholster a chair. He negotiates a trade discount of $100. The $1,000 paid should be apportioned between:

the first element of cost of the desk
the second element of cost of the chair

based on the relative market values of the desk and the labour and materials used to upholster the chair.

Hire purchase agreements

For income tax purposes, certain hire purchase agreements entered into after 27 February 1998 are treated as notional sale and loan transactions.

If the goods subject to the hire purchase agreement are depreciating assets and the hirer is the holder of the depreciating assets - see Depreciating assets subject to hire purchase agreements- the hirer may be entitled to deductions for the decline in value. Generally, the cost or value stated in the hire purchase agreement or the arm's length value is taken to be the cost of the depreciating assets.

Death of the holder

If a depreciating asset starts being held by you as a legal personal representative (say, as the executor of an estate) as a result of the death of the former holder, the cost of the asset to you is generally its adjustable value on the day the former holder died.

If the former holder allocated the asset to a low-value pool, the cost of the asset to you is so much of the closing balance of the pool for the income year in which the former holder died that is reasonably attributable to the asset.

If you start to hold a depreciating asset because it passes to you as a beneficiary of an estate or as a surviving joint tenant, the cost of the asset to you is its market value when you started to hold it reduced by any capital gain that was ignored when the owner died or when it passed from the legal personal representative. See the Guide to capital gains tax (NAT 4151 - 6.2004) for information about when these gains can be disregarded.

Commercial debt forgiveness

Generally, an amount which you owe is a commercial debt if you can claim a deduction for the interest paid on the debt or you would have been able to claim a deduction for interest if it had been charged. The amount of the commercial debt includes any accrued but unpaid interest.

If a commercial debt is forgiven, you may be required to reduce expenditure deductible under the UCA by all or part of the net forgiven amount. If the reduction of deductible expenditure is made for a depreciating asset, the asset's cost is reduced. If the reduction is made in a year later than the one in which the asset's start time occurs, the opening adjustable value of the asset is also reduced.

If an asset's opening adjustable value is reduced and you use the prime cost method to work out the asset's decline in value, you need to use the adjusted prime cost formula for the income year the change is made and in later years - see Methods of working out decline in value.

Recoupment of cost

Recoupment of an amount included in the cost of a depreciating asset may be included in assessable income. An amount is not an assessable recoupment if it is received for the sale of a depreciating asset for its market value.

Foreign currency gains and losses

If you purchase a depreciating asset in foreign currency, the first element of the asset's cost is converted to Australian currency at the exchange rate applicable when you begin to hold the asset, or when the obligation is satisfied, whichever occurs first. From 1 July 2003, if the foreign currency 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).

Similar consequences apply for second element of cost amounts involving foreign currency. However, 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.

Otherwise, that gain or loss is included in assessable income or allowed as a deduction, respectively.

What happens if you no longer hold or use a depreciating asset?

If you cease to hold or to use a depreciating asset, a balancing adjustment event may occur. If there is a balancing adjustment event, you need to calculate a balancing adjustment amount to include in your assessable income or to claim as a deduction.

A balancing adjustment event occurs for a depreciating asset when:

you stop holding it - for example, if the asset is sold, lost or destroyed
you stop using it and expect never to use it again
you stop having it installed ready for use and you expect never to install it ready for use again
you have not used it and decide never to use it, or
a change occurs in the holding or interests in an asset which was or is to become a partnership asset.

A balancing adjustment event does not occur just because a depreciating asset is split or merged - see Split or merged depreciating assets.

However, a balancing adjustment event does occur if you stop holding part of a depreciating asset.

The balancing adjustment amount is worked out by comparing the asset's termination value (such as the proceeds from the sale of an asset) and its adjustable value at the time of the balancing adjustment event. See Termination value for information about how to work out an asset's termination value.

If the termination value is greater than the adjustable value, the excess is included in your assessable income.

If the termination value is less than the adjustable value, you can deduct the difference.

Example

Working out an assessable balancing adjustment amount

(The impact of the GST is ignored in this example).

Bridget purchased a cabinet on 1 July 2001. She used the cabinet from that date wholly for a taxable purpose. The cabinet was sold on 30 June 2003 for $1,300. Its adjustable value at that time was $1,200.

As the termination value of $1,300 is greater than the adjustable value of the cabinet at the time of its sale, the difference of $100 included in Bridget's assessable income as an assessable balancing adjustment amount.

Example

Working out a deductible balancing adjustment amount

(The impact of the GST is ignored in this example).

If Bridget sold the cabinet for $1,000, the termination value is less than the adjustable value of the cabinet at the time of its sale ($1,200). The difference of $200 is a deductible balancing adjustment amount.

There are situations where these general balancing adjustment rules do not apply:

If a depreciating asset has been partly used for other than a taxable purpose, the balancing adjustment amount is reduced to reflect only the taxable use. Additionally, a capital gain or capital loss can arise to the extent of the use
for other than a taxable purpose - see Depreciating asset used for other than a taxable purpose .
Similarly, if the depreciating asset is a leisure facility or a boat and your deductions for the decline in value of the asset have been reduced, the balancing adjustment amount is reduced and a capital gain or capital loss can arise - see Leisure facilities and boats.
There are special balancing adjustment rules for cars - see Balancing adjustment rules for cars.
A balancing adjustment event for a depreciating asset in a low-value or common-rate pool or for which expenditure has been allocated to a software development pool is dealt with under specific rules for those pools - see Balancing adjustment event for a depreciating asset in a low-value pool, Common-rate pools and Software development pools.
If the disposal of a depreciating asset is involuntary, you may be able to offset an assessable balancing adjustment amount - see Involuntary disposal of a depreciating asset.
Rollover relief may apply to the disposal of a depreciating asset in certain circumstances, such as where an asset is transferred between spouses pursuant to a court order following a marriage breakdown - see Rollover relief.
There are no specific balancing adjustment rules for some primary production depreciating assets - see Primary production depreciating assets- or certain depreciating assets used for landcare operations, electricity connections or telephone lines - see Capital expenditure of primary producers and other landholders. However, such assets may be considered part of land for capital gains tax purposes.
There are special balancing adjustment rules for depreciating assets used in carrying on research and development activities - see the Research and development tax concession schedule and instructions for more information.

A GST liability will generally occur when a depreciating asset is disposed of by a GST registered entity - see the fact sheet GST and the disposal of capital assets for more information.

Termination value

The termination value is, generally, what you receive or are taken to receive for the asset when a balancing adjustment event occurs. It is made up of amounts received and the market value of non-cash benefits (such as goods or services) you receive for the asset.

The most common example of termination value is the proceeds from selling an asset. The termination value may also be an insurance payout for the loss or destruction of a depreciating asset.

The termination value is reduced by the GST payable if the balancing adjustment event is a taxable supply. It can be modified by increasing or decreasing adjustments.

If the termination value is taken to be the market value of the asset (for example, in the case of assets disposed of under a private or domestic arrangement), the market value is reduced by any input tax credit to which you would be entitled had you acquired the asset solely for a creditable purpose.

In most cases, the termination value can be reduced by any expenses of the balancing adjustment event - for example, advertising or commission expenses. The expenses must not be otherwise deductible.

An amount is not an assessable recoupment if it is included in the termination value of a depreciating asset - see Recoupment of cost.

There are special rules to work out the termination value of depreciating assets in certain circumstances. Some of the more common cases are covered below. If you are not sure of the termination value of a depreciating asset, contact your professional adviser or the Tax Office.

Non-arm's length and private or domestic arrangements

The termination value of a depreciating asset is its market value just before you stopped holding it if:

the termination value would otherwise be less than market value and you do not deal at arm's length with another party to the transaction, or
you stop holding the asset under a private or domestic arrangement (for instance, you give the asset to a family member).

Selling a depreciating asset with other property

If you receive an amount for the sale of several items that include a depreciating asset, you need to apportion the amount received between the termination value of the depreciating asset and the other items. The termination value is only that part of what you received that is reasonably attributable to the asset.

The Tax Office generally accepts independent valuations as a basis for this apportionment. However, if there is no independent valuation, you may need to demonstrate that your apportionment of the amount is reasonable. Apportionment on the basis of the market values of the various items for which the amount is received will generally be reasonable.

Example

Depreciating asset sold with other property

(The impact of the GST is ignored in this example).

Ben receives $100,000 for the sale of both a chainsaw (a deprecating asset) and a block of land (not a deprecating asset). It would be reasonable to apportion the $100,000 between:

the termination value of the chainsaw, and
the proceeds of sale for the land

based on the relative market values of the chainsaw and the land.

Depreciating asset you stop using or never use

The termination value of a unit of in-house software you still hold but stop using and expect never to use again, or decide never to use, is zero - see In-house software.

For any other asset, if you stop using it and expect never to use it again but still hold it, the termination value is the market value when you stop using it. For a depreciating asset you decide never to use but still hold, the termination value is the market value when you make the decision.

Death of the holder

If you die and a depreciating asset starts to be held by your legal personal representative (such as the executor of your estate), a balancing adjustment event occurs. The termination value of the asset is its adjustable value on the day you die. If you have allocated the asset to a low-value pool, the termination value is so much of the closing balance of the pool for the income year in which you die that is reasonably attributable to the asset.

If the asset passes directly to a beneficiary of your estate or to a surviving joint tenant, the termination value is the asset's market value on the day you die.

Depreciating asset used for other than a taxable purpose

If a depreciating asset is used both for a taxable purpose and for other than a taxable purpose, the balancing adjustment amount must be reduced by the amount that is attributable to the use for other than a taxable purpose. In addition, a capital gain or capital loss may arise under the capital gain and capital loss provisions. The amount of the capital gain or capital loss is the difference between the asset's cost and its termination value that is attributable to the use for other than a taxable purpose.

For depreciating assets that are used wholly for other than a taxable purpose, the balancing adjustment amount is reduced to zero. The difference between the asset's termination value and its cost can be a capital gain or capital loss.

For some depreciating assets, any capital gain or capital loss arising will be disregarded even though the asset is used for other than a taxable purpose. These assets include:

cars that are designed to carry a load of less than one tonne and fewer than nine passengers
motor cycles
valour or brave conduct decorations awarded
a collectable (such as a painting or an antique) if the first element of its cost is $500 or less
assets for which you can deduct an amount for the decline in value under the STS rules for the income year in which the balancing adjustment event occurred
assets acquired before 20 September 1985, or assets used solely to produce exempt income.

In addition, a capital gain arising from the disposal of a personal use asset (such as an asset used or kept mainly for personal use or enjoyment) of which the first element of cost is $10,000 or less and a capital loss arising from the disposal of any personal use asset are disregarded for capital gains tax purposes.

Example

Sale of a depreciating asset used partly for a taxable purpose

(The impact of the GST is ignored in this example).

Andrew sells a computer for $600. The computer's cost is $1,000. It has been used 40% of the time for private purposes. At the time of its sale, the computer's adjustable value is $700.

Andrew can claim a deduction for the balancing adjustment amount of $60. This is 60% (the proportion of use for a taxable purpose) of the balancing adjustment amount (the difference between the computer's termination value and its adjustable value at the time of its sale).

In addition, a capital loss of $160 arises. This is 40% (the proportion of use for other than a taxable purpose) of the difference between the computer's termination value and its cost.

Leisure facilities and boats

If a balancing adjustment event occurs in relation to a depreciating asset that is a leisure facility or a boat and your deductions for the decline in value of the asset have been reduced - see Decline in value of leisure facilities and boats - the balancing adjustment amount is reduced to the extent your deductions for decline in value were reduced. In addition, a capital gain or capital loss may arise in respect of the difference between the asset's cost and its termination value that is attributable to the reduction.

These rules are similar to those for working out the balancing adjustment amount for a depreciating asset used for other than a taxable purpose.

Plant acquired before 21 September 1999 and other depreciating assets acquired before 1 July 2001

Any assessable balancing adjustment amount or capital gain (if the asset was used for other than a taxable purpose) may be reduced if a balancing adjustment event occurs to:

an item of plant that was acquired before 11.45am (by legal time in the ACT) on 21 September 1999, or
a depreciating asset acquired before 1 July 2001 that is not plant.

The amount of the reduction is the cost base of the asset for capital gains tax purposes less its cost. The purpose of this reduction is to preserve capital gains tax cost base advantages for assets acquired before these dates.

One reason that the cost base might exceed the cost is indexation of the cost base. There is indexation of the cost base to 30 September 1999.

Indexation is not available for assets for which capital gains and capital losses are disregarded - see Depreciating asset used for other than a taxable purpose for a list of such assets. However, the balancing adjustment amount is reduced if the asset is:

a car that is designed to carry a load of less than one tonne and fewer than nine passengers
a motor cycle
a valour decoration
a collectable (such as a painting or an antique) if the first
element of its cost is $500 or less
an asset acquired before 20 September 1985, or
an asset used solely to produce exempt income

In these cases, the balancing adjustment amount is reduced by the difference between the asset's termination value and its cost which is attributable to the use of the asset for a taxable purpose.

See the Guide to capital gains tax (NAT 4151 - 6.2004) for more information about indexation of a cost base and the impact of indexation on discount capital gains.

Balancing adjustment rules for cars

If a balancing adjustment event occurs for your car, you need to work out any balancing adjustment amount. Special rules apply to the calculation of balancing adjustment amounts for cars.

If a balancing adjustment event occurs for a car used for other than a taxable purpose, any capital gain or capital loss is disregarded.

If you use the 'one-third of actual expenses' or the 'log book' If a car was acquired at a discount and the cost of the car was method of claiming car expenses, your balancing adjustment increased by a discount portion, the termination value of the amount needs to be reduced by the amount that is attributable to the use of the car for other than a taxable purpose.

Example

If you use the 'one-third of actual expenses' method

(The impact of GST is ignored in this example.)

Louise acquired a car on 1 July 2002. During both the 2002-03 and 2003-04 income years, Louise used the 'one-third of actual expenses' method to work out her deductions for car expenses. She sold her car for $24,500 on 30 June 2004. At that time, the adjustable value of the car was $18,200.

Louise's balancing adjustment amount is reduced by the amount attributable to her use of the car for other than a taxable purpose. As she used the 'one-third of actual expenses' method to work out her deductions for car expenses, her balancing adjustment amount is reduced by two-thirds. Louise's balancing adjustment would be $2,100; that is, one-third of the difference between the termination value and the adjustable value of the car. Louise must include the amount of $2,100 in her assessable income.

Example

If you use the 'log book' method

If Louise used the 'log book' method to work out her deductions for car expenses and her log book showed that the level of her business use was 40%, her balancing adjustment amount would be $2,520. This is 40% of the difference between the termination value and the adjustable value of the car. Louise must include the amount of $2,520 in her assessable income.

If you have only used the 'cents per kilometre' method or the '12% of original value' method of claiming car expenses, no balancing adjustment amount arises because the decline in value of the car is not worked out separately under those methods. The decline in value is taken into account as part of the calculation of the car expenses. However, if you switch between these methods and the 'one-third of actual expenses' or 'log book' methods of claiming car expenses, you may have to work out a balancing adjustment amount. This is only expected to occur in a limited number of cases. If you are affected and you are unsure of how to work out your balancing adjustment amount, contact your professional adviser or the Tax Office.

For a car subject to the car limit -see Car limit- you need to reduce the termination value. You multiply the termination value by the following fraction:

Car limit + amounts included in the car's second element of cost

total cost of the car

where the total cost of the car is the sum of the first and second elements of cost ignoring the car limit and after any adjustments for input tax credits - see GST input tax credits. You use this reduced termination value to work out your balancing adjustment amount for the car.

If a lessee under a luxury car lease or a hirer under a hire purchase agreement does not actually acquire the car when the lease or agreement terminates or ends, they are treated as if they sold the asset to the lessor or financier, respectively.

The lessee or hirer will need to work out any assessable or deductible balancing adjustment amount.

Involuntary disposal of a depreciating asset

An involuntary disposal occurs if a depreciating asset is:

lost or destroyed
compulsorily acquired by an Australian government agency, or
disposed of to an Australian government agency after negotiations

after 11.45am (by legal time in the ACT) on 21 September 1999.

You may offset an assessable balancing adjustment amount arising from an involuntary disposal against the cost of one or more replacement assets. If you offset an amount against the cost of a replacement asset for an income year after the one in which the replacement asset's start time occurs, you must also reduce the sum of its opening adjustable value plus any second elements of its cost for that later year.

You must incur the expenditure on the replacement asset, or start to hold it, no earlier than one year before the involuntary disposal and no later than one year after the end of the income year in which the disposal occurred.

The Commissioner can agree to extend the time limit.

To offset the assessable balancing adjustment amount, the replacement asset must be wholly used for a taxable purpose and you must be able to deduct an amount for it.

Rollover relief

If rollover relief is available under the UCA rules, no balancing adjustment amount arises when a balancing adjustment event occurs for a depreciating asset. In some cases, rollover relief is automatic - for example, transfers pursuant to a court order following a marriage breakdown.

In some cases, rollover relief must be chosen - if the event arises from a variation in the constitution of a partnership or in a partnership interest, the transferor and the transferee must jointly choose the rollover relief.

When rollover relief applies, the transferee of the depreciating asset can claim deductions for the asset's decline in value as if there had been no change in holding.

The transferee must use the same method as the transferor used to work out the decline in value of the asset.

If the transferor used the diminishing value method, the transferee must also use the same effective life that the transferor was using.

If the transferor used the prime cost method, the transferee must replace the asset's effective life in the prime cost formula with the asset's remaining effective life - that is, any period of the asset's effective life that is yet to elapse when the transferor stopped holding the asset.

The first element of cost for the transferee is the adjustable value of the asset when it was held by the transferor - just before the balancing adjustment event occurred.

There are specific record keeping requirements for rollover relief - see Rollover relief.

Limited recourse debt arrangements

If a depreciating asset is acquired under a limited recourse debt arrangement (including a hire purchase agreement or instalment sale) which terminates after 27 February 1998 and part of the debt principal remains unpaid because of the limited recourse, an adjustment to assessable income may be required. To the extent that the capital allowance deductions exceed the actual amount outlaid under the arrangement, an amount is included in assessable income.

If you are not sure how to work out your adjustment to assessable income, contact your tax adviser or the Tax Office.

Split or merged depreciating assets

If a depreciating asset you hold is split into two or more assets, or if a depreciating asset or assets you hold is or are merged into another depreciating asset, you are taken to have stopped holding the original depreciating asset(s) and to have started holding the split or merged asset(s). However, a balancing adjustment event does not occur just because depreciating assets are split or merged.

An example of splitting a depreciating asset is removing a CB radio from a truck. If you install the radio in a house you may be merging the two assets (radio and truck).

After depreciating assets are split or merged, each new asset must satisfy the definition of a depreciating asset if the UCA rules are to apply to it. For each depreciating asset you have started to hold, you need to establish the effective life and cost.

The first element of cost for each of the split or merged depreciating assets is a reasonable proportion of the adjustable values of the original asset(s) just before the split or merger and the same proportion of any costs of the split or merger.

If a balancing adjustment event occurs to a merged or split depreciating asset - for example, if it is sold - the balancing adjustment amount is reduced:

to the extent the asset has been used for other than a taxable purpose
by any amount that is reasonably attributable to use for other than a taxable purpose of the original depreciating asset(s) before the split or merger.

This reduction is not required if the depreciating asset is mining, quarrying or prospecting information.

Foreign currency gains and losses

Under new provisions (the forex provisions), if you sell a depreciating asset in foreign currency, the termination value of the asset is translated to Australian currency at the exchange rate applicable when you receive the foreign currency. Any realised foreign currency gain or loss on the transaction is included in assessable income or allowed as a deduction, respectively.

Low-value pools

From 1 July 2000, an optional low-value pooling arrangement for plant was introduced. It applied to certain plant costing less than $1,000 or having an undeducted cost of less than $1,000. This plant could be allocated to a low-value pool and depreciated at statutory rates.

The UCA adopts most of the former rules for low-value pools.

From 1 July 2001, the decline in value of certain depreciating assets can be worked out through a low-value pool.

Transitional rules apply so that a low-value pool created before 1 July 2001 continues and is treated as if it were created under the UCA. The closing balance of the pool worked out under the former rules is used to start working out the decline in value of the depreciating assets in the pool under the UCA rules.

Under the UCA, you can allocate low-cost assets and low-value assets to a low-value pool. A low-cost asset is a depreciating asset whose cost is less than $1,000 (after GST credits or adjustments) as at the end of the income year in which you start to use it, or have it installed ready for use, for a taxable purpose.

A low-value asset is a depreciating asset:

that is not a low-cost asset
that has an opening adjustable value for the current year of less than $1,000, and
for which you used the diminishing value method to work out any deductions for decline in value for a previous income year.

The decline in value of an asset you hold jointly with others is worked out on the cost of your interest in the asset. This means if you hold an asset jointly and the cost of your interest in the asset or the opening adjustable value of your interest is less than $1,000, you can allocate your interest in the asset to your low-value pool - see Jointly held depreciating assets.

The following depreciating assets cannot be allocated to a low-value pool:

low-value assets for which you used the prime cost method to work out any deductions for decline in value for a previous income year
horticultural plants (including grapevines)
assets for which you can deduct amounts under the STS - see STS taxpayers
assets that cost $300 or less for which you can claim an immediate deduction - see Immediate deduction for certain non-business depreciating assets costing $300 or less, or
certain depreciating assets used in carrying on research and development activities - see the Research and development tax concession schedule and instructions for more information.

Allocating depreciating assets to a low-value pool

A low-value pool is created when you first choose to allocate a low-cost or low-value asset to the pool.

When you allocate an asset to the pool, you must make a reasonable estimate of the percentage of your taxable use of the asset over its effective life (for a low-cost asset) or the effective life remaining at the start of the income year for which it was allocated to the pool (for a low-value asset). This percentage is known as the asset's taxable use percentage.

It is this taxable use percentage of the cost or opening adjustable value that is written off through the low-value pool.

Example

Working out the taxable use percentage

Kate allocates a low-cost asset to a low-value pool. The asset has an effective life of three years. Kate intends to use the asset 90% for taxable purposes in the first year, 80% in the second year and 70% in the third year. The taxable use percentage would be the average of these estimates; that is, 80%.

Once you have allocated an asset to the pool, you cannot vary your estimate of the taxable use percentage even if the actual use of the asset turns out to be different from your estimate.

Once you choose to create a low-value pool and a low-cost asset is allocated to the pool, you must pool all other low-cost assets you start to hold in that income year and in later income years. However, this rule does not apply to low-value assets.

You can decide whether to allocate low-value assets to the pool on an asset-by-asset basis.

Once you have allocated an asset to the pool, it remains in the pool.

Working out the decline in value of depreciating assets in a low-value pool

Once an asset is allocated to a low-value pool, it is not necessary to work out its adjustable value or decline in value separately. Only one annual calculation for the decline in value for all of the depreciating assets in the pool is required.

The deduction for the decline in value of depreciating assets in a low-value pool is worked out using a diminishing value rate of 37.5%.

For the income year you allocate a low-cost asset to the pool its decline in value is worked out at a rate of 18.75% or half the pool rate. Halving the rate recognises that assets may be allocated to the pool throughout the income year. This eliminates the need to make separate calculations for each asset based on the date it was allocated to the pool.

To work out the decline in value of the depreciating assets in a low-value pool, add:

18.75% of:

the taxable use percentage of the cost of low-cost assets you have allocated to the pool for the income year, and
the taxable use percentage of any amounts included in the second element of cost for the income year of:
- all assets in the pool at the end of the previous income year
- and - low-value assets allocated to the pool for the income year

and 37.5% of:

the closing pool balance for the previous income year, and
the taxable use percentage of the opening adjustable value of any low-value assets allocated to the pool for the income year.

Example

Working out the decline in value of depreciating assets in a low-value pool

[Ignoring any goods and services tax (GST) impact]

During the 2003-04 income year, John bought a printer for $990. John allocated low-cost assets to a low-value pool in the 2002-03 income year so now he must allocate the printer to the pool because it too is a low-cost asset.

He estimates that only 60% of its use will be for taxable purposes. He therefore allocates only 60% of the cost of the printer to the pool, that is, $594.

Assume that at the end of the 2002-03 income year, John had a low-value pool with a closing pool balance of $5,000.

John's deduction for the decline in value of the assets in the Pool for the 2003-04 income year would be $1,986. This worked out as follows:

18.75% of the taxable use percentage of the cost of the printer allocated to the pool during the year (18.75% of $594)	$111
plus 37.5% of the closing pool balance for the previous year (37.5% x $5,000)	$1,875

The closing balance of a low-value pool for an income year is:

the closing pool balance for the previous income year plus
the taxable use percentage of the cost of any low-cost assets allocated to the pool for the income year plus
the taxable use percentage of the opening adjustable value of any low-value assets allocated to the pool for the income year plus
the taxable use percentage of any amounts included in the second element of cost for the income year of:
- assets in the pool at the end of the previous income year, and
- low-value assets allocated for the income year

less

the decline in value of the assets in the pool for the income year.

Example

Working out the closing balance of a low-value pool

Following on from the previous example, assuming that John made no additional allocations to or reductions from his low-value pool, the closing balance of the pool for the 2003-04 income year would be $3,608:

Closing pool balance for the 2002-03 income year	$5,000
plus the taxable use percentage of the cost of the printer	$594
less the decline in value of the assets the pool for the income year	($1,986)

Balancing adjustment event for a depreciating asset in a low-value pool

If a balancing adjustment event occurs for a depreciating asset in a low-value pool, the amount of the closing pool balance for that income year is reduced by the taxable use percentage of the asset's termination value. If that amount exceeds the closing pool balance, reduce the closing pool balance to zero and include the excess in your assessable income.

A capital gain or capital loss may arise if the asset is not used wholly for a taxable purpose. The difference between the asset's cost and its termination value that is attributable to the estimated use for other than a taxable purpose is treated as a capital gain or capital loss.

Example

Disposal of a depreciating asset in a low-value pool

(The impact of GST is ignored in this example.)

Following on from the previous examples, during the 2004-05 income year John sells the printer for $500.

Because he originally estimated that the printer would only be used 60% for taxable purposes, the closing balance of the pool is reduced by 60% of the termination value of $500; that is $300.

A capital loss of $196 also arises. As the printer's taxable use percentage is 60%, 40% of the difference between the asset's cost ($990) and its termination value ($500) treated as a capital loss.

Assuming that John made no additional allocations to or reductions from his low-value pool, the closing balance of the pool for the 2004-05 income year is $1,955:

Closing pool balance for the 2003-04 income year	$3,608
less the decline in value of the assets in the pool for the year (37.5% x $3,608)	($1,353)
less the taxable use percentage of the termination value of pooled assets that were disposed of during the year	($300)

To help you work out your deductions for depreciating assets in a low-value pool, a worksheet is provided

In-house software

In-house software is computer software or a right (for example, a licence) to use computer software:

that you acquire or develop (or have another entity develop) for your use in performing the functions for which it was developed, and
for which no amount is deductible outside the UCA or the STS.

If expenditure on software is deductible under the ordinary deduction provisions of the income tax law, the software is not in-house software. A deduction for such expenditure is allowable in the income year in which it is incurred.

Expenditure to develop software for exploitation of the copyright is not in-house software. The copyright is intellectual property which is a depreciating asset and the decline in value would be calculated using an effective life of 25 years and the prime cost method.

Under the UCA, expenditure on in-house software may be deducted in the following ways:

the decline in value of in-house software acquired - such as off the shelf software - is worked out using an effective life of two and a half years and the prime cost method
expenditure you incur in developing (or having developed) in-house software may (or may need to be) allocated to a software development pool - see Software development pools.
if expenditure incurred in developing (or having developed) in-house software is not allocated to a software development pool, it can be capitalised into the cost of a resulting unit of in-house software - its decline in value can then be worked out using an effective life of two and a half years and the prime cost method from the time the software is first used
if in-house software costs $300 or less and it is used mainly for producing non-business assessable income, an immediate deduction may be allowable - see Immediate deduction for certain non-business depreciating assets costing $300 or less.

The termination value of in-house software you still hold but stop using and expect never to use again or decide never to use is zero. As a result, you can claim an immediate deduction for the cost of the software at that time.

You can also claim an immediate deduction for expenditure incurred on an in-house software development project (not allocated to a software development pool) if you have not used the software or had it installed ready for use and decide that you will never use it or have it installed ready for use.

The amount you can deduct is your total expenditure on the software less any amount you derive in relation to the software or a part of it. Your deduction is limited to the extent that, when you incurred the expenditure, you intended to use the software, or have it installed ready for use, for a taxable purpose.

Software development pools

The choice of allocating expenditure on developing in-house software to a software development pool was available before 1 July 2001 and continues under the UCA.

Under the UCA rules, you can choose to allocate to a software development pool expenditure you incur on developing (or having developed) in-house software you intend to use solely for a taxable purpose. Once you do allocate expenditure on such in-house software to a pool, all such expenditure incurred in that year or a later year must be allocated to a software development pool. A different pool is created for each income year in which you incur expenditure on developing (or having developed) in-house software.

Expenditure on developing in-house software you do not intend to use solely for a taxable purpose and expenditure on acquiring in-house software cannot be allocated to a software development pool.

If you are entitled to claim a GST input tax credit in relation to expenditure allocated to a software development pool, the expenditure in the pool for the income year in which you are entitled to the credit is reduced by the amount of the credit.

Certain adjustments under the GST legislation in relation to expenditure allocated to a software development pool are treated as an outright deduction or income. Other adjustments reduce or increase the amount of the expenditure that has been allocated to the pool for the adjustment year.

You do not get any deduction for expenditure in a software development pool in the income year in which you incur it. You are allowed deductions at the rate of 40% in each of the next two years and 20% in the year after that.

If you have allocated software development expenditure on a project to a software development pool and the project is abandoned, the expenditure remains to be deducted as part of the pool.

If you have pooled in-house software development expenditure and you receive consideration for the software (for example, insurance proceeds on the destruction of the software), you must include that amount in your assessable income unless you can choose for rollover relief to apply and do so. Choice of rollover relief is only available in this context where a change occurs in the holding of, or of interests in, the software - see Rollover relief.

Any recoupment of the expenditure must also be included in your assessable income.

If the 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 of the receipt is taken to be that market value.

Common-rate pools

Before 1 July 2001, certain items of plant that had the same depreciation rate and were used solely for producing assessable income could be allocated to a common-rate pool so a single calculation of deductions could be made.

You cannot allocate depreciating assets to a common-rate pool under the UCA rules. However, if you have allocated plant to a common-rate pool before 1 July 2001, you can continue to claim deductions under the UCA. The pool is treated as a single depreciating asset and the decline in value is worked out using the following rules:

the diminishing value method must be used
the opening adjustable value and the cost of the asset on 1 July 2001 is the closing balance of the pool on 30 June 2001
the effective life component of the diminishing value formula must be replaced with the pool percentage you used before the start of the UCA
in applying the diminishing value formula for the income year in which the UCA starts, the base value is the opening adjustable value of the asset, and
any second elements of the cost of assets in the pool are treated as second elements of the cost of the pool.

If a balancing adjustment event occurs for a depreciating asset in the pool or you stop using an asset wholly for taxable purposes, the asset is removed from the pool. The pool is treated as having been split into the removed asset and the remaining pooled items. The removed asset is then subject to the general rules for working out decline in value or balancing adjustment amounts. The cost of the removed asset and the remaining pool is worked out using the rules for working out the cost of a split asset - see Split or merged depreciating assets.

Primary production depreciating assets

The general principles of the UCA apply to most depreciating assets used in primary production.

However, the decline in value of the following primary producer depreciating assets is worked out using special rules:

facilities used to conserve or convey water
horticultural plants, and
grapevines.

For depreciating assets deductible under these rules, you cannot use the general rules for working out decline in value or claim the immediate deduction for depreciating assets costing $300 or less.

Deductions for these assets are not available to a partnership.

Costs incurred by a partnership are allocated to each partner who can then claim the relevant deduction for their share of the expenditure.

There are no specific balancing adjustment rules for these depreciating assets. However, the assets may be considered part of land for capital gains tax purposes.

When the land is disposed of, any deductions you have claimed, or can claim, for the assets may reduce the cost base of the land. Refer to Guide to capital gains tax (NAT 4151 - 6.2004) for more information.

Primary producers may also be able to claim deductions for capital expenditure on landcare operations, electricity connections and telephone lines - see Capital expenditure of primary producers and other landholders.

Water facilities

A water facility is plant or a structural improvement that is primarily and principally for the purpose of conserving or conveying water. The expenditure must be incurred by you primarily and principally for conserving or conveying water for use in a primary production business you conduct on land in Australia. You may claim the deduction even if you are only a lessee of the land.

You can claim a deduction for the decline in value of a water facility in equal instalments over three income years.

Examples of a water facility are dams, earth tanks, underground tanks, concrete or metal tanks, tank stands, bores, wells, irrigation channels, pipes, pumps, water towers, windmills and extensions or improvements to any of these items.

Your deduction is reduced where the water facility is not wholly used for either:

carrying on a primary production business on land in Australia, or
a taxable purpose.

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.

No deduction is available for capital expenditure incurred on acquiring a second-hand commercial water facility unless you can show that no one else has deducted or could deduct an amount for earlier capital expenditure on the construction or previous acquisition of the water facility.

If you are a primary producer and an STS taxpayer, you can choose to work out your deductions for water facilities under either the STS capital allowance rules or the UCA rules. For more information about STS taxpayers, see STS taxpayers.

A recoupment of expenditure on water facilities may be included in your assessable income. As the expenditure is deductible over more than one income year, special rules apply to determine the amount of any recoupment to be included in assessable income in the year of recoupment and in later income years. An amount received for the sale of a water facility for its market value is not regarded as an assessable recoupment.

Horticultural plants

You are allowed a deduction for the decline in value of horticultural plants, provided:

you own the plants - lessees and licensees of land are treated as if they own the horticultural plants on that land
you use them in a business of horticulture to produce assessable income, and
you incurred the expense after 9 May 1995.

Your deduction for the decline in value of horticultural plants is based on the capital expenditure incurred on establishing the plants. This does not include expenditure on the initial clearing of land. It may include, for example:

the costs of acquiring and planting seeds, or
part of the cost of ploughing, contouring, fertilising, stone removal and topsoil enhancement relating to the planting.

You cannot claim this deduction for forestry plants. If you claim this deduction for a grapevine, you cannot claim a deduction for the grapevine's decline in value under the provisions specific to grapevines - see Grapevines.

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 period over which you can deduct the expenditure depends on the effective life of the horticultural plant. You can choose to work out the effective life yourself or you can use the effective life determined by the Commissioner which is listed in Taxation Ruling TR 2000/18 - Effective life of depreciating assets.

If the effective life of the plant is less than three years, the establishment costs can be claimed in full in the year in which the first commercial season starts.

If the effective life of the plant is three or more years, the establishment costs can be written off over the maximum write-off period, which generally commences at the start of what is expected to be the plant's first commercial season.

If the plant is destroyed before the end of its effective life, you are allowed a deduction in that year for the remaining unclaimed establishment costs less any proceeds - for example, insurance.

Plants with an effective life of three or more years

Effective life	Annual write-off rate	Maximum write-off period
3 to less than 5 years	40%	2 years and 183 days
5 to less than 6 2/3 years	27%	3 years and 257 days
6 2/3 to less than 10 years	20%	5 years
10 to less than 13 years	17%	5 years and 323 days
13 to less than 30 years	13%	7 years and 253 days
30 years or more	7%	14 years and 105 days

Where ownership of the horticultural plants changes, the new owner is entitled to continue claiming the balance of capital expenditure incurred on establishing the plants on the same basis.

If you are a primary producer and an STS taxpayer, you must use the UCA rules to work out your deductions for horticultural plants. For more information about STS taxpayers, see STS taxpayers.

A recoupment of expenditure on horticultural plants may be assessable income. As the expenditure may be deductible over more than one income year, special rules apply to determine the amount of any recoupment to be included in assessable income in the year of recoupment and in later income years. An amount received for the sale of a horticultural plant for its market value is not regarded as an assessable recoupment.

Grapevines

The decline in value of a grapevine is calculated at a rate of 25%, provided:

you own the grapevine, or
the grapevine is established on Crown land you hold under a lease and is used in a primary production business.

If you are not entitled to calculate your deduction for decline in value under the provisions relating to grapevines because these conditions are not met, a deduction may be available for decline in value under the provisions relating to horticultural plants - see Horticultural plants.

Your deduction for the decline in value of grapevines is based on the capital expenditure incurred on establishing the grapevines. Capital expenditure incurred on establishing grapevines does not include the cost of purchasing or leasing land or expenditure in draining swamps or low-lying land or in clearing land but it does include - for example, the cost of:

preparing the land - ploughing and topsoil enhancement
planting the vine itself, or
the vine.

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.

You start to deduct the decline in value of grapevines from the time you first use the grapevines in a primary production business to produce assessable income. If ownership of the grapevines changes, the remaining deduction is available to the new owner while the grapevines are used in a primary production business.

If a grapevine is destroyed before the end of the write-off period, you are allowed a deduction in that year for the remaining unclaimed establishment expenditure less any proceeds - for example, insurance.

If you are a primary producer and an STS taxpayer, you must use the UCA rules to work out your deductions for grapevines.

For more information about STS taxpayers, see STS taxpayers.

A recoupment of expenditure on grapevines may be assessable income. As the expenditure is deductible over more than one income year, special rules apply to determine the amount of any recoupment to be included in assessable income in the year of recoupment and in later income years.

An amount received for the sale of a grapevine for its market value is not regarded as an assessable recoupment.

Capital expenditure deductible under the UCA

The UCA maintains the treatment of some capital expenditure and also introduces new deductions for some capital expenditure that did not previously attract a deduction. Most of these deductions are only available if the expenditure does not form part of the cost of a depreciating asset.

The following types of capital expenditure are deductible under the UCA:

landcare operations, electricity connections or telephone lines incurred by primary producers and other landholders - see Capital expenditure of primary producers and other landholders
environmental protection activities - see Environmental protection activities
exploration and prospecting - see Mining and quarrying and minerals transport
rehabilitation of mining and quarrying sites - see Mining and quarrying and minerals transport
petroleum resource rent tax - see Mining and quarrying and minerals transport
certain capital expenditure directly connected with a project see Project pools
certain business related costs - see Business related costs - section 40-880 deductions.

Generally, to work out your deductions you need to reduce the expenditure by the amount of any GST input tax credits you are entitled to claim in relation to the expenditure.

Increasing or decreasing adjustments that relate to the expenditure may be allowed as a deduction or included in assessable income, respectively. Special rules apply to input tax credits on expenditure allocated to a project pool - see Project pools. STS taxpayers (except primary producers) may deduct capital expenditure under these UCA rules only if the expenditure is not part of the cost of a depreciating asset.

Primary producers who are STS taxpayers can choose to deduct certain depreciating assets under the UCA rules - see STS taxpayers.

Capital expenditure of primary producers and other landholders

A deduction is available for capital expenditure incurred by primary producers and other landholders on:

landcare operations
connection of a mains electricity cable to a metering point or the upgrading of a connection, provided the electricity is used for a taxable purpose, and
a telephone line brought on or extending to land used in a primary production business.

These deductions are not available to a partnership. Costs incurred by a partnership are allocated to each partner who can claim a deduction for their share of the relevant capital expenditure.

Such capital expenditure may be incurred on a depreciating asset. However, if the expenditure is deductible under these rules, you cannot use the general rules for working out decline in value or claim the immediate deduction for depreciating assets costing $300 or less.

If the capital expenditure is incurred on a depreciating asset and you are a primary producer and an STS taxpayer, you can choose to work out your deductions for these depreciating assets using either the STS capital allowance rules or the UCA rules. For more information about STS taxpayers, see STS taxpayers.

Landcare operations

You can claim a deduction in the year you incur capital expenditure on a landcare operation for land in Australia.

The deduction is available to the extent the land is used for either:

a primary production business or carrying on a business for a taxable purpose from the use of rural land - except a business of mining or quarrying.

You may claim the deduction even if you are only a lessee of the land.

A landcare operation is one of the following operations:

eradicating or exterminating animal pests from the land
eradicating, exterminating or destroying plant growth detrimental to the land
preventing or combating land degradation other than by erecting fences
erecting fences to keep animals out of areas affected by land degradation to prevent or limit further degradation and to help reclaim the areas
erecting fences to separate different land classes in accordance with an approved land management plan
constructing a levee or similar improvement, or
constructing drainage works - other than the draining of swamps or low-lying areas - to control salinity or assist in drainage control.

No deduction is available for landcare operations if the capital expenditure is on plant unless it is on certain fences, dams or other structural improvements. The decline in value of plant not deductible under the landcare provisions is worked out using the general rules for working out decline in value.

In each of the above cases, apart from the construction of a levee or a similar improvement and erecting a fence in accordance with an approved land management plan, the operation must be carried out primarily and principally for the purpose stated. If a levee is constructed primarily and principally for water conservation, it would be a water facility and no deduction would be allowable under these rules. Its decline in value would need to be worked out under the rules for water facilities.

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.

A recoupment of the expenditure may be included in your assessable income.

Electricity connections and telephone lines

You may be able to 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, or
a telephone line brought on or extending to land being used to carry on a primary production business.

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.

A recoupment of the expenditure may be included in your assessable income.

Environmental protection activities

You can claim an immediate deduction for expenditure to the extent that you incur it 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 your earning activity. Your earning activity is one you carried on, carry on or propose to carry on for the purpose of:

producing assessable income (other than a net capital gain)
exploration or prospecting, or
mining site rehabilitation.

You may also claim a deduction for cleaning up a site on which a predecessor carried on substantially the same business.

The deduction is not available for:

EPA bonds and security deposits
expenditure on acquiring land
expenditure on constructing or altering buildings, structures or structural improvements, or expenditure to the extent that you can deduct an amount for it under another provision.

Expenditure on EPA that is also an environmental impact assessment of your project is not deductible 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 Project pools.

Also, expenditure which forms part of the cost of a depreciating asset is not deductible as expenditure on EPA if a deduction is available for the decline in value of the asset.

A recoupment of the expenditure may be included in your assessable income for the year in which you receive it.

Note that expenditure incurred on or after 19 August 1992 on certain earthworks constructed as a result of carrying out EPA can be written off at a rate of 2.5% under the provisions for capital works expenditure.

Mining and quarrying and minerals transport

From 1 July 2001, deductions for the decline in value of depreciating assets used in mining and quarrying and in minerals transport are worked out using the general rules - see Working out decline in value.

However, the decline in value of a depreciating asset you first use for exploration or prospecting for minerals (including petroleum) or quarry materials obtainable by activities carried on for the purpose of producing assessable income can be its cost. This means you can deduct the cost of the asset in the year in which you start to use it for such activities to the extent the asset is used for a taxable purpose.

An immediate deduction is available for payments of petroleum resource rent tax and for capital expenditure which does not form part of the cost of a depreciating asset and is incurred on:

exploration or prospecting for minerals (including petroleum) or quarry materials obtainable by activities carried on for the purpose of producing assessable income, or
rehabilitation of your mining or quarrying sites.

If the expenditure arises from a non-arm's length transaction and is more than the market value of what it was for, the amount of the expenditure is taken to be that market value. A recoupment of the expenditure may be included in assessable income.

Expenditure incurred after 30 June 2001 which does not form part of the cost of a depreciating asset and is not otherwise deductible may be a project amount which can be allocated to a project pool for which deductions are available. To be a project amount, mining capital expenditure or transport capital expenditure must be directly connected with carrying on the mining operations or business, respectively, in relation to which the expenditure is incurred.

Mining capital expenditure is capital expenditure incurred on:

carrying out eligible mining or quarrying operations
site preparation
necessary buildings or improvements
providing water, light, power, access or communications to the site of those operations
buildings used directly for operating or maintaining treatment plant
buildings and improvements for storing minerals or quarry materials before or after treatment, or
certain housing and welfare - except for quarrying operations.

Transport capital expenditure includes capital expenditure on:

a railway, road, pipeline, port or other facility used principally for transporting minerals, quarry materials or processed minerals
obtaining a right to construct or install such a facility
compensation for damage or loss caused by constructing or installing such a facility
earthworks, bridges, tunnels or cuttings necessary for such a facility, or
contributions you make in carrying on business to someone else's expenditure on the above items.

For information on how to work out deductions using a project pool, see Project pools.

Special transitional rules ensure that amounts of undeducted expenditure as at the end of 30 June 2001 incurred under the former special provisions for the mining and quarrying and mineral transport industries remain deductible over the former statutory write-off periods - for example, over the lesser of 10 years and the life of the mine.

Similarly, the former statutory write-off continues to apply to expenditure you incurred after 30 June 2001 if:

it would have qualified for deduction under the former special provisions, and
it is a cost of a depreciating asset that you started to hold under a contract entered into before 1 July 2001 or otherwise started to hold or commenced to construct before that day, or your expenditure was incurred under a contract entered into before 1 July 2001 and the expenditure does not relate to a depreciating asset.

Finally, exploration or prospecting expenditure incurred after 30 June 2001 that is a cost of a depreciating asset that you started to hold under a contract entered into before 1 July 2001 or otherwise started to hold or commenced to construct before that day is deductible at the time it is incurred.

Project pools

Under the UCA, certain capital expenditure incurred after 30 June 2001 which is directly connected with a project you carry on or propose to carry on for a taxable purpose can be allocated to a project pool and written off over the project life.

A project is carried on if it involves a continuity of activity and active participation. Merely holding a passive investment such as a rental property would not be regarded as carrying on a project.

The capital expenditure is known as a project amount and is 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 costs for depreciating assets (other than in draining swamp or low-lying land or in clearing land for horticultural plants including grapevines)
for feasibility studies or 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.

Mining capital expenditure and transport capital expenditure - see Mining and quarrying and minerals transport- can also be a project amount which can be allocated to a project pool and for which a deduction is available.

The expenditure must not be otherwise 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 and is calculated as follows:

Pool value x 150%

DV project pool life

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 you have claimed for the pool in previous years or could have claimed had the project operated wholly for a taxable purpose.

The pool value can be subject to adjustments.

If you are entitled to claim a GST input tax credit for expenditure allocated to a project pool, the pool value in the income year in which you are, or become, entitled to the credit is reduced by the amount of the credit. Certain increasing or decreasing adjustments in relation to expenditure allocated to a project pool may also affect the pool value.

If during any income year commencing on or after 1 July 2003 you paid or ceased to have to pay foreign currency incurred as a project amount allocated to a project pool, a foreign currency gain or loss (referred to as a forex realisation gain or loss) may have arisen under new forex provisions. If the amount was incurred after 30 June 2003 (or earlier, if you so elected) and became due for payment within 12 months after you incurred it then unless you elected otherwise the pool value for the income year you incurred the amount is adjusted by the amount of any forex realisation gain or loss. Otherwise the loss is deductible and any gain is included in assessable income.

The DV project pool life is the project life or, if that life has been recalculated, the most recently recalculated project life.

The project life is worked out 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 you start the activities that will produce assessable income. You estimate the project life from your perspective but the event used to determine when the project will stop operating must be something outside your control.

There is no need to apportion the deduction if the project starts to operate during the income year or for project amounts incurred during the income year.

The deduction is reduced to 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 in the income year, you can deduct the sum of the closing pool value of the prior income year 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.

Your assessable income will include any amount received for the abandonment, sale or other disposal of a project.

If you recoup an amount of expenditure allocated to a project pool or if you derive a capital amount in relation to a project amount or something on which a project amount was expended, the amount must be included 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.

Business related costs - section 40-880 deductions

Certain business related capital expenditure incurred after 30 June 2001 is deductible to the extent that the business is, was or will be carried on for a taxable purpose. The following types of capital expenditure may qualify for deduction:

expenditure to establish your business structure - such expenditure includes the costs of incorporating a company or creating a partnership or trust through which you will carry on your business but does not include the costs of acquiring a franchise or goodwill
expenditure to convert your business structure to a different structure - such as the costs of transferring your business assets to a partnership because you have decided to start carrying on your business through a partnership rather than as a sole trader
expenditure to raise equity for your business
expenditure to defend your business against a takeover
costs to your business of unsuccessfully attempting a takeover
costs of liquidating a company that carried on a business and of which you are a shareholder, and
costs to stop carrying on your business - such as the legal costs of terminating the services of employees when the business ceases.

The deduction cannot be claimed for capital expenditure to the extent to which it:

can be deducted under another provision
forms part of the cost of a depreciating asset you hold or of land
relates to a lease
would be taken into account in working out an assessable profit or deductible loss
would be taken into account in working out a capital gain or a capital loss, or
is specifically not deductible under the income tax laws - such as a fine.

If the expenditure 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.

You deduct 20% of the expenditure in the year you incur it and in each of the following four years.

A recoupment of the expenditure may be included in your assessable income.

STS taxpayers

The Simplified Tax System (STS) is an alternative method of determining taxable income for eligible taxpayers. It began on 1 July 2001.

You are eligible to be an STS taxpayer for an income year if:

you carry on a business in that year
you have an STS average turnover of less than $1 million in that year (the STS average turnover includes the turnover of any entities you are 'grouped with'), and
you, together with any entities you are 'grouped with', have depreciating assets with a total adjustable value of less than $3 million at the end of the year.

The STS contains its own simplified capital allowance rules.

If you are an eligible taxpayer and elect to enter the STS, you will generally calculate deductions for your depreciating assets using these rules.

In general, most:

depreciating assets costing less than $1,000 each can be written off immediately
other depreciating assets with an effective life of less than 25 years are pooled in a general STS pool and deducted at the rate of 30%
depreciating assets with an effective life of 25 years or more are pooled in a long life STS pool and deducted at the rate of 5%
newly acquired assets are deducted at either 15% or 2.5% in the first year, regardless of when they were acquired during the year.

More information on working out deductions for depreciating assets under the STS rules is provided in the publication The Simplified Tax System - A guide for tax agents and small businesses.

Assets for which deductions are claimed under the UCA

For certain depreciating assets, deductions must be claimed under the UCA rather than under the STS rules:

assets that are leased out, or are expected to be leased out, for more than 50% of the time on a depreciating asset lease - this does not apply to depreciating assets subject to hire purchase agreements, or short-term hire agreements on an intermittent hourly, daily, weekly or monthly basis where there is no substantial continuity of hiring: depreciating assets used in rental properties are generally excluded from the STS capital allowance rules on the basis that they are subject to a depreciating asset lease
assets allocated to a low-value or a common-rate pool before entering the STS: those assets must remain in the pool and deductions must be claimed under the UCA rules
horticultural plants (including grapevines)
in-house software where the development expenditure is allocated to a software development pool - see Software development pools.

Capital expenditure deductible under the UCA

As the STS capital allowance rules apply only to depreciating assets, certain capital expenditure incurred by an STS taxpayer that does not form part of the cost of a depreciating asset may be deducted under the UCA rules for deducting capital expenditure.

This includes capital expenditure on certain business related costs and amounts directly connected with a project - see Capital expenditure deductible under the UCA for more information.

In-house software

Under the UCA rules, you can choose to allocate to a software development pool expenditure you incur in developing (or having developed) in-house software you intend to use solely for a taxable purpose. Once you have allocated expenditure on such software to a pool, all such expenditure incurred thereafter (in that year or in a later year) must also be allocated to a pool - see Software development pools.

If you have allocated such expenditure to a software development pool either before or since entering the STS, you must continue to allocate such expenditure to a software development pool and calculate your deductions under the UCA.

If you have not previously allocated such expenditure to a software development pool and you choose not to do so this year or if the expenditure was incurred in developing in-house software which you do not intend using solely for a taxable purpose, you can capitalise it into the cost of the unit of software developed and claim deductions for the unit of in-house software under the STS rules when it starts to be used or is installed ready for use for a taxable purpose.

Deductions for in-house software acquired off the shelf by an STS taxpayer for use in their business are available under the STS rules. For example, such an item costing less than $1,000 will qualify for an outright deduction.

Primary producers

An STS taxpayer can choose to claim deductions under either the STS rules or the UCA rules for certain depreciating assets used in the course of carrying on a business of primary production. The choice is available for water facilities and for depreciating assets relating to landcare operations, electricity connections and telephone lines

You can choose to claim your deductions under the STS rules or UCA rules for each depreciating asset. Once you have made the choice, it cannot be changed.

Record keeping

You must keep the following information for a depreciating asset:

the first and second elements of cost
the opening adjustable value for the income year
any adjustments made to cost or adjustable value
the date you started holding the asset and its start time
the rate or effective life used to work out the decline in value
the method used to work out the decline in value
the amount of your deduction for the decline in value and any reduction for use of the asset other than for a taxable purpose
the adjustable value at the end of the income year
any recoupment of cost you have included in assessable income, and
if a balancing adjustment event occurs in relation to the asset during the year: the date of the balancing adjustment event, termination value, and adjustable value at that time, the balancing adjustment amount, any reduction of the balancing adjustment amount and details of any rollover or balancing adjustment relief.

You must also keep:

details of how you worked out the effective life of a depreciating asset where you have not adopted the effective life determined by the Commissioner
if you have recalculated the effective life of an asset - the date of the recalculation, the recalculated effective life, the reason for the recalculation and details of how you worked out the recalculated effective life, and
original documents such as suppliers' invoices and receipts for expenditure on the depreciating asset.

Additional record keeping requirements apply if you acquire an asset from an associate or if you acquire a depreciating asset but the user is the same or is an associate of the former user - see Depreciating asset acquired from an associate and Sale and leaseback arrangements.

Failure to keep proper records will attract penalties.

Low-value pools

For depreciating assets in a low-value pool, you need to keep the following details - some details relate to the assets and some to the pool:

the start time of assets in the pool and the date you started holding them
the closing pool balance at the end of the previous income year
any second elements of cost incurred for the income year for assets in the pool at the end of the previous income year
the opening adjustable value of any low-value assets you have allocated to the pool for the income year
the first element of cost of any low-cost assets allocated to the pool for the income year
the second element of cost of low-cost assets and low value assets allocated to the pool for the income year
the taxable use percentage of each amount added to the pool for the income year
the termination value and taxable use percentage for any assets in the pool in respect of which a balancing adjustment event occurred during the income year and the date of the balancing adjustment event
the closing pool balance
the decline in value
any amount included in assessable income because the taxable use percentage of the termination value exceeds the closing pool balance, and
any recoupment of cost you have included in assessable income.

Because a capital gain or capital loss may arise when a balancing adjustment event occurs in relation to a depreciating asset you expect to use for other than a taxable purpose or in relation to a depreciating asset you have allocated to a low- value pool and expect to use for other than a taxable purpose, you must keep the following information:

the first and second elements of cost
termination value, and
the taxable use percentage.

Rollover relief

If automatic rollover relief applies- the transferor must give the transferee a notice containing enough information for the transferee to work out how the UCA rules apply to the depreciating asset. Generally, this needs to be done within six months of the end of the transferee's income year in which the balancing adjustment event occurred. The transferee must keep a copy of the notice for five years after:

the asset is disposed of, or
the asset is lost or destroyed

whichever happens earlier.

If a transferor and transferee jointly choose rollover relief, the decision must be in writing and must contain enough information for the transferee to work out how the UCA rules apply to the depreciating asset. Generally, the choice needs to be made within six months of the end of the transferee's income year in which the balancing adjustment event occurred. The transferor must keep a copy of the agreement for five years after the balancing adjustment event occurred. The transferee must keep a copy for five years after the next balancing adjustment event that occurs to the asset.

Completing the capital allowances schedule 2004

Unless you are an STS taxpayer or an individual taxpayer not carrying on a business, you need to complete a Capital allowances schedule 2004 if you had more than $15,000 at any of the following labels on your income tax return:

Label	Where label found
Depreciation expenses (see note below)	All tax returns except fund tax return
Deduction for decline in value of depreciating assets	Company and fund tax returns only
Low-value pool deduction	Tax return for individuals only

more than $75,000 shown at either of the following labels:

Label	Where label found
Intangible depreciating assets first deducted	All tax returns
Other depreciating assets first deducted	All tax returns

more than $1,000 shown at either of the following labels:

Label	Where label found
Deduction for project pool	All tax returns except fund tax return
Business deduction for project pool	Business and professional items section of tax return for individuals

Note

You do not include information in the Capital allowances schedule 2004 about depreciating assets that are subject to the STS capital allowances rules (see the publication The Simplified Tax System - A guide for tax agents and small businesses (NA 6459 - 5.2004) for information about the STS capital allowances rules. These publications are available from the Tax Office.

Accordingly, if you are exiting the STS or have previously exited the STS and are claiming a deduction in respect of an STS item at the Depreciation expenses label (for example, in relation to a continuing STS pool), you do not need to complete the schedule if the amount at the label relates entirely to STS items. However, if the amount relates to both STS items and UCA items you will need to complete the schedule but, in doing so, assets subject to the STS rules are to be disregarded.

You should use Worksheet 1- depreciating assets and Worksheet 2 - low-value pool to help you complete your income tax return and the schedule.

For more information about the Capital allowances schedule 2004, see the Capital allowances schedule 2004 instructions (NAT 4089 - 6.2004).

Guidelines for using the depreciating assets worksheet

Worksheet 1 - depreciating assets

Primary production and Non-primary production - Use a separate worksheet for each category.

Cost - The cost of a depreciating asset includes the first and second elements of cost. The cost of an asset can be adjusted in certain circumstances, such as if the first element of a car's cost exceeds the car limit. If the cost of the asset has been adjusted, include the adjusted cost in this column - see The cost of a depreciating asset.

Opening adjustable value and Adjustable value at end of year - The adjustable value of a depreciating asset at any time is its cost reduced by any decline in value up to that time. The opening adjustable value of an asset for an income year is generally the same as its adjustable value at the end of the previous income year.

Balancing adjustment events - A balancing adjustment event occurs for a depreciating asset if you stop holding it (for example, if you sell it) or you stop using it - see What happens if you no longer hold or use a depreciating asset?.

Termination value - Generally, the termination value is what you receive for the asset as a result of a balancing adjustment event, such as the proceeds from selling the asset - see Termination value.

Balancing adjustment amounts - If the asset's termination value is greater than its adjustable value, the excess is an assessable balancing adjustment amount. If the termination value is less than the adjustable value, the difference is a deductible balancing adjustment amount. If the asset is used for other than a taxable purpose, the balancing adjustment amount is reduced and a capital gain or capital loss may arise - see Depreciating asset used for other than a taxable purpose.

Balancing adjustment relief - This refers to the offsetting of otherwise assessable balancing adjustment amounts for involuntary disposals - see Involuntary disposal of a depreciating asset- or if rollover relief applies - see Rollover relief.

Decline in value - There are two methods of working out the decline in value of a depreciating asset - prime cost and diminishing value - see Methods of working out decline in value.

Effective life and Percentage rate - Both the prime cost and diminishing value methods are based on a depreciating asset's effective life - see Effective life. However, if you are able to use accelerated rates of depreciation - see Accelerated depreciation.- you use the relevant percentage rate to work out the decline in value rather than the effective life.

A list of accelerated rates is provided - see Accelerated rates of depreciation.

Percentage of taxable use - This is the percentage of your taxable use (for example, income producing use) of the asset during the income year.

Deduction for decline in value - Your deduction for the decline in value of the asset is the decline in value reduced to the extent you used the asset for other than a taxable purpose - see Decline in value of a depreciating asset used for other than a taxable purpose. Your deduction may also be reduced if the asset is a leisure facility or a boat.

The letters G, H, I, J and K on the worksheet correspond to labels on the Capital allowances schedule 2004. The worksheet will assist if you have to complete the schedule - see Completing the Capital allowances schedule 2004.

Examples of effective lives - from Taxation Ruling TR 2000/18

Depreciating asset	Effective life in years given in TR 2000/18 (as at 1 July 2003)
Carpets
in business places, picture theatres, hotels, etc	5
in houses let furnished	10
in professional chambers	10
in ten-pin bowling centres	4
Cash registers	6 2/3
Computers
generally	4
laptops	3
Curtains and drapes	6 2/3
Fire extinguishers	13 1/3
Furniture	13 1/3
Hot water installations	20
Lawn mower
motor	6 2/3
self propelled	5
Library (professional)	10
Motor vehicles, etc
cars
generally	8
hire and travellers' cars	5
taxis	4
motor cycles and scooters	6 2/3
Ovens - microwave	6 2/3
Photocopying machines	5
Power tools (hand operated)	5
Refrigerators	20
Televisions (not used for hire)	10
Tools (loose)	5
Vacuum cleaners (electric)	10
Washing machines	6 2/3
For houses and flats let
furnished only:
blinds, venetian	20
electric clock	13 1/3
electric heater	10
garbage units (compacting)	6 2/3
refrigerators	13 1/3
stoves	20

Accelerated rates of depreciation

You only use these tables if you are able to use accelerated depreciation. You use the rate that corresponds to the effective life of the item of plant. The following tables show the appropriate rates.

For most general items of plant the rates are as follows.

Effective life in years	Prime cost rate %	Diminishing value rate %
Less than 3	100	-
3 to less than 5	40	60
5 to less than 6 2/3	27	40
6 2/3 to less than 10	20	30
10 to less than 13	17	25
13 to less than 30	13	20
30 or more	7	10

For most cars and motor cycles the following rates apply.

Effective life in years	Prime cost rate %	Diminishing value rate %
Less than 3	100	-
3 to less than 5	33	50
5 to less than 6 2/3	20	30
6 2/3 to less than 10	15	30
10 to less than 13	17	25
13 to less than 20	13	20
20 to less than 40	5	7.5
40 or more	3 3	75

Guidelines for using the low value pool worksheet

Worksheet 2 - low-value pool

Description of low-value asset - In this column include a brief description of any low-value assets you allocated to the pool for the current year. A low-value asset is a depreciating asset (other than a horticultural plant) that is not a low-cost asset but that has an opening adjustable value of less than $1,000 worked out using the diminishing value method.

Opening adjustable value of low-value asset - The adjustable value of a depreciating asset at any time is its cost (first and second elements) reduced by any decline in value up to that time. The opening adjustable value of an asset for an income year is generally the adjustable value at the end of the previous income year.

Taxable use percentage - When you allocate an asset to a low-value pool, you must make a reasonable estimate of the percentage of your taxable use of the asset over its effective life (for a low-cost asset) or its effective life remaining at the start of the income year it was allocated to the pool (for a low-value asset).

Reduced opening adjustable value of low-value asset - This is the taxable use percentage of the opening adjustable value of a low-value asset you have allocated to the pool for the income year.

Description of low-cost asset or second element of cost of asset in pool - In this column include a brief description of any low-cost assets you allocated to the pool for the income year. A low-cost asset is a depreciating asset (other than a horticultural plant) whose cost as at the end of the year in which the start time occurred is less than $1,000. Also show in this column a description of any amounts included in the second element of cost of any assets in the pool at the end of the previous year and of any low-value assets allocated for this year. The second element of an asset's cost is capital expenditure on the asset which is incurred after you start to hold it, such as a cost of improving the asset - see The cost of a depreciating asset.

Cost of low-cost asset and second element of cost - Include the cost after you have made any adjustments, such as for GST input tax credits - see The cost of a depreciating asset.

Reduced cost of low-cost asset or second element of cost - This is the taxable use percentage of the cost of low cost assets you allocated to the pool for the income year or the taxable use percentage of any amounts included in the second element of cost of assets in the pool at the end of the previous year and of low-value assets allocated to the pool for this year.

Balancing adjustment events - A balancing adjustment event occurs in relation to a depreciating asset if you stop holding it (for example, if you sell it) or you stop using it - see What happens if you no longer hold or use a depreciating asset?.

Reduced termination value - This is the taxable use percentage of the asset's termination value. You use the taxable use percentage you estimated when the asset was allocated to the pool. This reduced termination value reduces the amount of the closing pool balance. If it exceeds the amount of the closing pool balance, reduce that balance to zero and include the excess in assessable income. If you use the asset for other than a taxable purpose, a capital gain or capital loss may arise when a balancing adjustment event occurs for the asset - see Balancing adjustment event for a depreciating asset in a low-value pool.

The letters L, M, N, O, P and Q on the worksheet correspond to labels on the Capital allowances schedule 2004. The worksheet will assist if you have to complete the schedule - see Completing the Capital allowances schedule 2004.

Abbreviations used in this publication

ACT	Australian Capital Territory
Commissioner	Commissioner of Taxation
EPA	environmental protection activities
GST	goods and services tax
LCA	low-cost asset
LVA	low-value asset
OAV	opening adjustable value
PS LA	Practice Statement Law Administration
STS	simplified tax system
TR	Taxation Ruling
TV	termination value
UCA	uniform capital allowance system

Last Modified: Wednesday, June 30, 2004

Copyright

Commonwealth of Australia

This work is copyright. You may download, display, print and reproduce this material in unaltered form only (retaining this notice) for your personal, non-commercial use or use within your organisation. Apart from any use as permitted under the Copyright Act 1968, all other rights are reserved.

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ATO references:
NO NAT 1996

Guide to depreciating assets 2004

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