- A deduction for a decline in value is only when there is a depreciating asset.
- A depreciating asset -An asset that has a limited effective life and can be expected to be declined in value over time.
- The holder of the depreciating asset
- First element costs – costs that are incurred when the taxpayer starts to hold the asset.
- Second element costs – costs that incurred after the taxpayer starts to hold the asset, which have contributed to bringing the asset to its present condition and location. This would include material and labour costs.
- The following types of expenditure are likely to be included as second element costs:
– Freight and delivery costs
– Customs duties and other import levies
– The cost of modifications, alterations or improvements to a depreciating asset.
– The cost of minor rearrangements and removal of other plant and equipment at the relevant premises to enable the new plant to be installed.
- Exclusions :
– costs incurred in making structural alterations to a building in which plant and equipment is to be housed.
– Amounts that are otherwise deductible outside Division 40
– Expenses that are not of a capital nature
– Post installation costs – e.g. the cost to train staff to operate the machine
- Car – there is a limit that we can depreciate for car each year
Effective life of a depreciating asset
- Taxpayer can self-assess the effective life based on how long it will be used
- Taxpayer can rely on Commissioner’s determination
- The effective life is statutorily prescribed
- Re-estimation of the effective life
- The asset is first used or installed ready for use for any purpose
Calculation of decline in value
- Prime cost/straight-line method (Intangible assets must be depreciated on the basis of PC)
- Diminishing value (DV) method
- Immediate deductions – cost no more than $300
Balancing adjustment events & Termination value
- Termination value – Adjustable value = assessable balancing adjustment amount
- Adjustable value – Termination value = Deductible balancing adjustment amount
Low-value pool (Low-cost assets 18.75%/Low-value assets 37.5%)
Change in ownership or interests in depreciating assets
Capital Works deductions