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The tax break is to be claimed by the taxpayer that is entitled to deductions for the asset's decline in value.
Only the holder of a depreciating asset can claim a deduction for its decline in value. In most cases, the legal owner of a depreciating asset will be its holder.
If a depreciating asset is owned jointly, each person's interest in the asset is treated as a depreciating asset. Each person works out their deductions for the decline in value of the asset based on their interest in the asset. Special rules apply for jointly held assets when working out if you meet your threshold. See What can be counted towards the threshold? for more information.
In certain circumstances, the holder is not the legal owner. Some of these cases are discussed below. If you are unsure about whether you are the holder of a depreciating asset refer to: Guide to depreciating assets.
Assets subject to hire purchase agreements
If a depreciating asset is subject to a hire purchase agreement, the hirer is regarded as the holder provided it is reasonable to expect that they will actually acquire the asset. See When is an investment considered to occur? for information about by when you need to have entered into a hire purchase arrangement in order to claim the tax break.
Assets held under chattel mortgage agreements
A chattel mortgage over a depreciating asset may operate by way of the mortgagee having legal title to the asset but with the mortgagor having possession. In this case, the mortgagor is regarded as the holder of the asset. If a chattel mortgage operates only by way of a charge over the asset without the transfer of legal title to the mortgagee, then the mortgagor is still the legal owner and will be the holder of the asset. See When is an investment considered to occur? for information about by when you need to have entered into a chattel mortgage if it does result in the transfer of legal ownership.
Assets held under leases
Eligible assets held under a lease may still qualify for the tax break. However, the tax break is to be claimed by the entity in the leasing arrangement who would claim deductions for the decline in value of the asset.
Generally, the lessor is the legal owner of the depreciating asset in a leasing arrangement. Therefore, it is the lessor that would claim the deductions for the decline in value of the asset and any tax break available.
As with capital allowance deductions, how the tax break is factored into lease prices will be a matter for commercial negotiations.
Where the lessor in a leasing agreement holds an eligible asset, it is the new investment threshold that applies to the lessor that is relevant.
Further, the lessor must be able to demonstrate that when the asset starts to be used or is installed ready for use it is reasonable to conclude that they (that is, the lessor) will use the asset principally in Australia for the principal purpose of carrying on their business.
This means that the lessor does not need to look through to the actual use of the asset by any individual lessee in satisfying this test. However, the lessor cannot claim the tax break on an asset which it is reasonable to conclude will never be located in Australia.
Example
Big Machine Leasing is the legal owner of the dragline being leased to the Collie Mining Company. Therefore, Big Machine Leasing will be the taxpayer entitled to claim deductions for the decline in value of the asset and the tax break (provided all of the criteria are satisfied).
However, Big Machine Leasing may pass on the benefit it receives from the tax break as part of its leasing agreement with Collie Mining Company (for example, in the form of lower lease charges).
A lessee may hold an eligible asset if they have the option of becoming the legal owner of the asset at some point in time and it is reasonable to expect that the option will be exercised.
In this situation, the lessee, as the holder of the asset, could claim the tax break in relation to the asset (provided all of the criteria are satisfied), along with the deductions for the decline in value of the asset.
Example
Big Machine Leasing is the legal owner of the dragline being leased to the Collie Mining Company. Collie Mining Company held a call option over the asset which was exercisable at the end of the lease. It was reasonable to expect that Collie Mining Company would exercise its right to become the legal owner of the asset at the end of the lease. There was objective evidence to support this conclusion:
- an independent assessment suggested that the asset was likely to have a market value at the option time in excess of the call option price
- there was a pattern of conduct which showed that Collie Mining Company had a history of entering into similar lease arrangements for similar assets and almost always exercised the call option to purchase the leased assets
- Collie Mining Company's operational requirements were consistent over a long period of time and there was no reason to expect this would change.
In the case of a leased luxury car, the lessee is generally treated as the holder of the car and is entitled to claim deductions for the decline in value of the car. Therefore, it is the lessee that will be entitled to claim the tax break for the car. The lessor's use of the asset in its leasing business will not exclude the lessee from being able to claim the tax break. For more information about luxury cars see Working out the cost of a car. See When is an investment considered to occur? for information about by when you need to have entered into a luxury car lease in order to claim the tax break.
Partnership assets
Where an asset is a partnership asset, the partnership rather than any individual partner is entitled to the deductions for the decline in value for the asset.
An asset may be considered to be a partnership asset if it is used by a partnership for the purposes of the partnership business. However, whether an asset is a partnership asset can only be determined from the terms of the partnership agreement and the conduct of the partners towards the asset.
If the asset is not a partnership asset and an individual partner is the holder of the asset, that partner may still be able to claim deductions for both the decline in value and the tax break in relation to the asset (provided all of the criteria are satisfied - for example, the partner must use the asset for the principal purpose of carrying on a business). For information about how the purpose test applies to assets held by partners see Was the purpose test satisfied?
However, where a partner in a partnership is claiming the tax break, the partner is not a small business entity for the purposes of Division 328 of the ITAA 1997 and cannot use the $1000 threshold or the 50% deduction rate applicable to small business entities. Tax Laws Amendment (2009 Measures No. 2) Act 2009, which applies to assessments for the 2007-08 income year and later income years, inserted subsection 328-110(6) of the ITAA 1997 to remove doubt that a partner in a partnership cannot be a small business entity in their capacity as a partner for the purposes of the small business entity rules.
If you are an individual partner who holds an asset and you are in receipt of personal services income, see Personal Services Income - personal services entities in business but not conducting a personal services business.
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Last Modified: Tuesday, 1 September 2009