ATO Interpretative Decision

ATO ID 2003/516

Income Tax

Capital Allowances: deposit paid for improvement before depreciating asset held - second element of cost
FOI status: may be released

This ATO ID has been amended to clarify that there may be some other second element costs in addition to the costs referred to in the ATO ID.

CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Does capital expenditure incurred by a taxpayer, before they become the holder of a depreciating asset, on a deposit paid to secure the supply of goods and services that will improve the asset once it is held, form part of the second element of cost of the asset under subsection 40-190(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. As the economic benefit (that is, the goods and services) was supplied after the taxpayer began to hold the depreciating asset and has contributed to its present condition, the expenditure incurred forms part of the second element of cost under subsection 40-190(2) of the ITAA 1997.

Facts

The taxpayer paid a deposit to secure the supply of goods and services required to modify an imported motor vehicle so it can be used in Australia. The deposit was paid before the taxpayer began to hold the asset which was to be modified. The actual modification work took place after the taxpayer had begun to hold the vehicle. The balance of the payment was paid once the modification to the motor vehicle was completed. The company that was contracted to conduct the modifications is unrelated to the taxpayer and the supplier of the vehicle.

Reasons for Decision

The cost of a depreciating asset consists of both the first and second elements (section 40-175 of the ITAA 1997).

The first element of cost is worked out at the time you begin to hold the asset. Generally the first element of cost is the amount paid, or taken to have been paid, to hold the asset (sections 40-180 and 40-185 of the ITAA 1997).

The fact that the expenditure on the deposit was not directed at holding the asset and was not reflected in the condition of asset at the time it was acquired, precludes it from being a first element of cost.

The second element of cost is worked out after you have begun to hold the asset and includes the amount you are taken to have paid for economic benefits that have contributed to bringing the asset to its present condition and location (section 40-190 of the ITAA 1997).

The supply of goods and services is an economic benefit. The deposit was paid to secure the performance of an economic benefit that would bring the depreciating asset to a certain condition after it was held. Although the deposit was paid before the asset was held, the economic benefit was not provided until after the asset was held.

The expenditure incurred on the deposit is included in the motor vehicle's second element of cost under subsection 40-190(2) of the ITAA 1997 as it was paid for an economic benefit that has contributed to bringing the motor vehicle to its present condition since the taxpayer began to hold it.

Date of decision: 19 May 2003

Year of income: Year ended 30 June 2002

Legislative References:
Income Tax Assessment Act 1997
   section 40-175
   section 40-180
   section 40-185
   section 40-190

Related ATO Interpretative Decisions
ATO ID 2003/514
ATO ID 2003/515

Other References:
NAT 1996-6.2002

Keywords
Cost of a depreciating asset
First element of cost
Second element of cost
Uniform capital allowances system

Siebel/TDMS Reference Number: 3472653; 1-5FDW9V4; 1-AYM02VS

Business Line: Private Groups and High Wealth Individuals

Date of publication: 4 July 2003
Date reviewed: 27 February 2017

ISSN: 1445-2782

Copyright notice

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).