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  • Uniform capital allowance system: calculating the decline in value of a depreciating asset

    From 1 July 2001, uniform capital allowance (UCA) rules apply to most depreciating assets. Taxpayers calculate deductions for the decline in value of their depreciating assets using these new rules.

    The UCA system combines a range of former capital allowance provisions, including those relating to plant and equipment. It does this by providing a set of general rules to calculate a deduction for the decline in value of most depreciating assets. It maintains some concessional tax treatments such as those applying to primary production depreciating assets and expenditure. It also introduces new deductions for certain types of capital expenditure that did not previously attract a deduction.

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    Instant asset write-off

    You can claim an immediate deduction for most depreciating assets, depending on:

    • the cost of the asset
    • when the asset is first used or installed ready for use
    • your business's aggregated turnover.

    This is referred to as the instant asset write-off.

    If businesses can't immediately claim a deduction for individual assets, they can continue to deduct these over time using the small business pool or general depreciation rules (depending on their turnover).

    You can use the simplified depreciation rules if you are a small business entity (2007–08 and later years).

    You must use the simplified depreciation rules for income years where you were in the simplified tax system (2006–07 and earlier years).

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    Backing business investment – accelerated depreciation

    From 12 March 2020 until 30 June 2021, the backing business investment measure provides a time-limited (15-month) investment incentive to support business investment and economic growth by accelerating depreciation deductions. The key features of the incentive are as follows:

    • The benefits are either
      • Deduction of 50% of the cost or opening adjustable value of an eligible asset on installation. Existing depreciation rules apply to the balance of the asset’s cost.
      • If you are using the simplified depreciation rules for small business you can claim 57.5% of the cost of the asset in the first year you add the asset to the small business pool.
       
    • Eligible businesses — businesses with aggregated turnover below $500 million.
    • Eligible assets — new depreciating assets (for example, plant, equipment and specified intangible assets, such as patents). The assets must be first held, and first used or first installed ready for use for a taxable purpose on or after 12 March 2020 until 30 June 2021. Some exclusions apply.

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    When a depreciating asset starts to decline in value

    Under UCA, a depreciating asset starts to decline in value when you first use it (or install it ready for use) for any purpose, including a private purpose. However, a deduction for the decline in value is only for the part of the asset used for a taxable purpose.

    This means if you initially use an asset for a private purpose, and in later years use it for a taxable purpose (such as in a business), you need to work out the asset's decline in value over the period of its private use before you can work out the decline in value for the period you used it for taxable purposes.

    Example – working out start date of decline in value

    Robyn purchases a car on 1 July 2013 for $25,000. She uses the car entirely for private purposes until 1 March 2014 when she starts a new business. The car is then used wholly for business purposes.

    The car starts to decline in value from 1 July 2013 because it is being used from that date, but no part of the decline is an allowable deduction before 1 March 2014. This is because the car is not used for a taxable purpose before that date.

    End of example

    How to work out the decline in value

    You decide whether to calculate the decline in value of a depreciating asset using either the:

    In some cases, you must use the same method used by the former holder of the asset. For example, if you acquire the asset from an associate such as your spouse or business partner. For some intangible depreciating assets, including an item of intellectual property, you must always use the prime cost method.

    Prime cost method

    Under the prime cost method, the decline in value is generally calculated as a constant percentage of the asset's cost and reflects a uniform decline in value over time. The formula is:

    The 'decline in value' is equal to the 'asset's cost' multiplied by the result of 'days held' divided by 365, then multiplied by the result of 100% divided by the 'asset's effective life'.

    The cost of an asset includes both the amount you pay for it as well as any additional amounts you spend on transporting it and installing it in position. Cost also includes amounts you spend on improving the asset.

    In some circumstances, such as when you change the effective life or cost of an asset, an adjusted prime cost formula must be used.

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    Diminishing value method

    Under the diminishing value method, the decline in value is calculated using the asset's base value. The base value of an asset is broadly its cost plus any costs incurred on the asset since you first held it (say on improvements) less the decline in value of the asset up to the end of the prior year.

    The formula for the diminishing value method is:

    The 'decline in value' is equal to the 'base value' multiplied by the result of 'days held' divided by 365, then multiplied by the result of 150% divided by the 'asset's effective life'.

    if you started to hold the asset prior to 10 May 2006, or

    The 'decline in value' is equal to the 'base value' multiplied by the result of 'days held' divided by 365, then multiplied by the result of 150% divided by the 'asset's effective life'.

    if you started to hold the asset on or after 10 May 2006.

    This method assumes the decline in value each year is a constant proportion of the amount not yet written-off and produces a progressively smaller decline in value over time.

    Example 1

    Depreciating Asset Pty Ltd acquires an asset for $10,000 on 1 July 2013 and starts to use it wholly for taxable purposes from that day. The effective life of the asset is 10 years.

    If Depreciating Asset Pty Ltd chose to use the diminishing value method to calculate the asset's decline in value, the company's deductions over the next two years would be:

    • 2013–14 income year: 10,000 × (365 ÷ 365) × (200% ÷ 10) = $2,000
    • 2014–15 income year: (10,000 − 2,000) × (365 ÷ 365) × (200% ÷ 10) = $1,600.

    If the company chose to use the prime cost method to calculate the asset's decline in value, the deductions over the two years would be:

    • 2013–14 income year: 10,000 × (365 ÷ 365) × (100% ÷ 10) = $1,000
    • 2014–15 income year: 10,000 × (365 ÷ 365) × (100% ÷ 10) = $1,000.
    End of example

     

    Example 2

    A deduction for the decline in value of a depreciating asset is reduced by the extent it is not used for a taxable purpose. For example, if an asset is used 40% of the time for a private purpose, the deduction for its decline in value is reduced by 40%.

    The decline in value of certain assets costing $300 or less will be the cost, that is, you will be entitled to an immediate deduction.

    End of example

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    Effective life of the asset

    The decline in value of a depreciating asset is generally based on the effective life of the asset. The effective life of a depreciating asset is broadly the period it can be used by anyone for income-producing purposes. This is assuming it will be subject to the wear and tear you reasonably expect from your expected circumstances of use and assuming it will be maintained in reasonably good order and condition.

    You decide whether to make your own estimate of a depreciating asset's effective life or to adopt the Commissioner's determination. If you choose the latter, use the schedules attached to the effective life ruling TR 2019/5 for depreciating assets acquired from 1 January 2001. For acquisitions before that date, use the schedule attached to Taxation Ruling IT 2685 (withdrawn).

    In some situations, you don't have a choice of self-assessing or adopting the Commissioner's determination. For example, if you acquire the asset from an associate (such as your spouse or business partner), you must use the same effective life your associate used (if they used the diminishing value method) or the effective life that is yet to elapse (if they used the prime cost method). For some intangible depreciating assets, including items of intellectual property, the effective life is set out in the uniform capital allowance rules so you cannot self-assess.

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    Estimating a depreciating asset's effective life

    You work out the effective life of a depreciating asset as at the time it is first used or installed ready for use for any purpose. The estimate should take into account:

    • how you expect to use the asset
    • what rate of wear and tear you would reasonably expect from that use assuming the asset is maintained in reasonably good order and condition
    • how long the asset could, in these circumstances, be used to produce income (irrespective of who used it)
    • any proposal to scrap or abandon the asset that would otherwise cut short its use for income producing purposes.

    In making your estimate, you need to take into account relevant factors such as the manufacturer's specifications, independent engineering information and your particular experience with similar assets.

    If you choose to make your own estimate of effective life, you need to indicate this at the appropriate capital allowances labels in your tax return if those labels appear in your tax return, they may not.

    Altering the effective life you are using

    You can choose to recalculate the effective life you are using for an income year if your circumstances of use change and the effective life you have been using is no longer accurate.

    You can do this irrespective of whether you are using our estimate or your own and you can recalculate each time your circumstances change. In addition, if you make an improvement to an asset that results in its cost increasing by 10% or more in an income year, you may be obliged to recalculate the effective life.

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    Calculating the decline in value of assets in a low-value pool

    The decline in value of certain assets with a cost or opening adjustable value of less than $1,000 can be calculated through a low-value pool at a diminishing value rate of 37.5%.

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      Last modified: 07 Apr 2020QC 16297