Draft Taxation Determination

TD 93/D109

Income tax: in calculating the residual value of a leased item, may a lower residual value than those outlined in IT 28 be adopted in light of the more generous depreciation rates?

• Please note that the PDF version is the authorised version of this draft ruling.
  This document has been finalised by TD 93/142.

FOI status:

draft only - for comment

Preamble

1. No. The residual value of a leased item should reflect its market value at the end of the lease.

2. The table at para. 20 of IT 28 is intended to be a rough guide to the minimum market value of items with different effective lives. It is based on a straight-line amortisation of the cost of an item over its effective life, requiring a minimum residual value of 75% of the cost written down in that way. It is not based on actual depreciation allowable, whether by the diminishing value method or at accelerated or broadbanded rates, although the table in IT 28 was set out, for convenience, according to prime cost depreciation rates.

3. A table based on effective lives, rather than depreciation rates, is set out below.

Minimum residual values - percentage of cost


A residual value lower than those outlined in the table may be used where a well considered and fair estimate of the likely market value of the item at the end of the lease would result in a lower value.

Example

An asset with an effective life of 20 years, acquired after 26 February 1992, is leased for 4 years.

The 20 year effective life column should be used to determine an acceptable minimum residual value, even though the prime cost rate of depreciation for such an asset would now be 13%. In the absence of evidence indicating that the asset would have a lower market value at the end of the lease, the minimum acceptable residual value for the item would be 55% of the cost of the asset.

Commissioner of Taxation
6 May 1993

References

ATO references:
NO 92/1936-6

Related Rulings/Determinations:

IT 28

Subject References:
Leasing
residual values