The following concepts relevant to the UCA system are referred to in this appendix:
- balancing adjustment amounts
- deduction for decline in value of depreciating assets
- deduction for environmental protection expenses
- deduction for project pool
- electricity connections and telephone lines
- hire-purchase agreements
- landcare operations and decline in value of water facility, fencing asset and fodder storage asset
- loss on the sale of a depreciating asset
- luxury car leases
- profit on the sale of a depreciating asset
- section 40-880 deduction
- the TOFA rules and UCA.
See also:
Small business entities
Eligible small business entities that choose to use the simplified depreciation rules calculate deductions for most of their depreciating assets under the specific small business entity depreciation rules.
Balancing adjustment amounts
If the company ceases to hold or to use a depreciating asset, a balancing adjustment event occurs. Calculate a balancing adjustment amount to include in the company’s assessable income or to claim as a deduction.
Include the assessable balancing adjustment amount for all assets at B Other assessable income item 7. (Assessable balancing adjustment amounts for assets used in R&D activities are required to be uplifted prior to being included at B Other assessable income item 7.
Include the deductible balancing adjustment amount for non-R&D assets at X Other deductible expenses item 7.
Balancing adjustment loss amounts for assets used only for R&D activities subject to the R&D tax incentive are taken into account in part A of the Research and development tax incentive schedule 2018 and also as part of calculating an R&D tax offset amount at item 21.
Balancing adjustment losses for assets used on R&D and non-R&D activities are uplifted under sections 40-292 or 40-293 of the ITAA 1997 and included at X Other deductible expenses item 7, if the company is otherwise eligible for an R&D tax offset under section 355-100 of the ITAA 1997. If the company is not otherwise eligible for an R&D tax offset under section 355-100 of the ITAA 1997, the balancing adjustment losses for assets used on R&D and non-R&D activities, as calculated under section 40-285 of the ITAA 1997, is included at X Other deductible expenses item 7 and claimed at 100%.
If the asset was used for both taxable and non-taxable purposes, reduce the balancing adjustment amount by the amount attributable to the non-taxable use. A capital gain or capital loss may arise for the amount attributable to that non-taxable use. This capital gain or capital loss is included in calculating the net capital gain or net capital loss for the income year.
Include any profit or loss on the sale of a depreciating asset that has been included in the accounts of the company at either R Other gross income item 6 or S All other expenses item 6. See Profit on the sale of a depreciating asset or Loss on the sale of a depreciating asset.
If you have elected to use the hedging tax-timing method provided for in the TOFA rules and you have a gain or loss from a hedging financial arrangement used to hedge risks for a depreciating asset, work out separately:
- the balancing adjustment assessable or deductible amount (include this at either B Other assessable income item 7 or X Other deductible expenses item 7 as appropriate), and
- the gain or loss on the hedging financial arrangement under the TOFA rules that has not yet been assessed or deducted (include this at E TOFA income from financial arrangements not included in item 6 item 7 or W TOFA deductions from financial arrangements not included in item 6 item 7 as appropriate).
If a balancing adjustment event occurred to a depreciating asset of the company during the income year, you may also need to include an amount at H Termination value of intangible depreciating assets item 9 or at I Termination value of other depreciating assets item 9.
Deduction for decline in value of depreciating assets
The decline in value of a depreciating asset is generally worked out using either the prime cost or diminishing value method. Both methods are based on the effective life of an asset. For most depreciating assets, the company can choose whether to self-assess the effective life or adopt the Commissioner’s determination that can be found in ATO Interpretative Decision ATO ID 2002/180 Income tax: effective life of depreciating asset: choice of Commissioner's determination.
The company can deduct an amount equal to the decline in value for an income year of a depreciating asset for the period that it holds the asset during that year. However, the deduction is reduced to the extent the company uses the asset or has it installed ready for use other than for a taxable purpose.
The decline in value of a depreciating asset costing $300 or less is its cost (but only to the extent the asset is used for a taxable purpose) if the asset satisfies all of the following requirements:
- It is used predominantly for the purpose of producing assessable income that is not income from carrying on a business.
- It is not part of a set of assets acquired in the same income year that costs more than $300.
- It is not one of any number of substantially identical items acquired in the same income year that together cost more than $300.
Certain assets that cost less than $1,000 or that have an opening adjustable value of less than $1,000 can be allocated to a low-value pool to calculate the decline in value. Assets eligible for the immediate deduction cannot be allocated to a low-value pool.
To work out the deduction for decline in value of most depreciating assets use worksheets 1 and 2 in the Guide to depreciating assets 2018.
Deduction for environmental protection expenses
The company can deduct expenditure to the extent that it incurs it for the sole or dominant purpose of carrying on environmental protection activities (EPA). EPA are activities undertaken to prevent, fight or remedy pollution or to treat, clean up, remove or store waste from the company’s earning activity. The company’s earning activity is one it carried on, carries on or proposes to carry on for the purpose of:
- producing assessable income (other than a net capital gain)
- exploration or prospecting, or
- mining site rehabilitation.
The company may also claim a deduction for cleaning up a site on which a predecessor carried on substantially the same business activity.
The deduction is not available for:
- EPA bonds and security deposits
- expenditure for acquiring land
- expenditure for constructing or altering buildings, structures or structural improvements
- expenditure to the extent that the company can deduct an amount for it under another provision.
Expenditure that forms part of the cost of a depreciating asset is not expenditure on EPA.
Expenditure incurred on or after 19 August 1992 on certain earthworks constructed as a result of carrying out EPA can be written off at the rate of 2.5% a year under the provisions for capital works expenditure.
Expenditure on an environmental impact assessment of a project of the company is not deductible as expenditure on EPA. If it is capital expenditure directly connected with a project, it could be a project amount for which a deduction would be available over the life of the project; see Deduction for project pools.
If the deduction arises from a non-arm’s length transaction and the expenditure is more than the market value of what it was for, the amount of the expenditure is taken instead to be that market value.
Any recoupment of the expenditure is assessable income.
Deduction for project pools
Certain capital expenditure incurred after 30 June 2001 that is directly connected with a project carried on or proposed to be carried on for a taxable purpose can be allocated to a project pool and written off over the project life. Each project has a separate project pool.
The project must be of sufficient substance and be sufficiently identified that it can be shown that the capital expenditure said to be a ‘project amount’ is directly connected with the project.
A project is carried on if it involves a continuity of activity and active participation. Merely holding a passive investment such as a rental property would not be regarded as carrying on a project.
For more information, see Taxation Ruling TR 2005/4 Income tax: capital allowances – project pools – core issues.
The capital expenditure, known as a project amount, must be expenditure incurred:
- to create or upgrade community infrastructure for a community associated with the project, this expenditure must be paid (not just incurred) to be regarded as a project amount
- for site preparation for depreciating assets (other than in draining swamp or low-lying land or in clearing land for horticultural plants including grapevines)
- for feasibility studies for the project
- for environmental assessments for the project
- to obtain information associated with the project
- in seeking to obtain a right to intellectual property
- for ornamental trees or shrubs.
Project amounts also include mining capital expenditure and transport capital expenditure.
The expenditure must not otherwise be deductible or form part of the cost of a depreciating asset.
If the expenditure incurred arises from a non-arm’s length dealing and is more than the market value of what it was for, the amount of the expenditure is taken to be that market value.
The deduction for project amounts allocated to a project pool commences when the project starts to operate.
If your project pool contains only project amounts incurred on or after 10 May 2006 and the project starts to operate on or after that date, your deduction is calculated as follows:
- (Pool value × 200%) divided by DV project pool life
In some circumstances, a post 9 May 2006 project may be taken to have started to operate before 10 May 2006. This would occur, for example, if the company abandoned a project and then restarted it on or after 10 May 2006 in an attempt to enable it to claim deductions in accordance with the above formula.
For other project pools, the deduction is calculated using the following formula:
- (Pool value × 150%) divided by DV project pool life
The ‘DV project pool life’ is the project life or, if that life has been recalculated, the most recently recalculated project life. The project life is determined by estimating how long (in years and fractions of years) it will be from when the project starts to operate until it stops operating. Generally, a project starts to operate when the activities that will produce assessable income start. The project life is estimated from the company’s perspective, having regard to factors which are outside the company’s control.
See also:
The ‘pool value’ for an income year at a particular time is broadly the sum of the project amounts allocated to the pool up to the end of that year less the sum of the deductions the company has claimed for the project pool in previous years or could have claimed had the project operated wholly for a taxable purpose.
The pool value can be subject to adjustments.
If the company is or becomes entitled to a GST input tax credit for expenditure allocated to a project pool, the pool value is reduced by the amount of the credit. Certain increasing or decreasing adjustments for expenditure allocated to a project pool will also require an adjustment to the pool value.
If during any income year commencing after 30 June 2003 the company ceased to have an obligation to pay foreign currency and the obligation was incurred as a project amount allocated to a project pool, a foreign currency gain or loss (referred to as a forex realisation gain or loss) may have arisen under the forex provisions. If the amount was incurred after 30 June 2003 (or earlier, if so elected) and became due for payment within 12 months after it was incurred, then (unless elected otherwise, see below) the pool value for the income year in which the amount was incurred is increased by any forex realisation loss and decreased by any forex realisation gain. However, if a forex realisation gain exceeds the pool value, the pool value is reduced to zero and the excess gain is assessable income. If the company elected that this treatment should not apply, any forex realisation gain will be assessable and any forex realisation loss will be deductible.
The deduction for a project pool cannot be more than the amount of the pool value for that income year.
There is no need to apportion the deduction if the project starts to operate during the income year or for project amounts incurred during the year. However, the deduction is reduced to the extent to which the project is operated for other than a taxable purpose during the income year.
If the project is abandoned, sold or otherwise disposed of, the company can deduct the sum of the closing pool value of the prior income year (if any) plus any project amounts allocated to the pool during the income year, after allowing for any necessary pool value adjustments. A project is abandoned if it stops operating and will not operate again.
Any amount received for the abandonment, sale or other disposal of a project is assessable.
If an amount of expenditure allocated to a project pool is recouped or if the company derives a capital amount for a project amount or something on which a project amount was expended, the amount must be included in assessable income.
If any receipt arises from a non-arm’s length dealing and the amount is less than the market value of what it was for, the amount received is taken to be that market value.
Electricity connections and telephone lines
A deduction can be claimed by the company over 10 years for capital expenditure incurred in connecting:
- mains electricity to land on which a business is carried on or in upgrading an existing connection to that land, or
- a telephone line to land being used to carry on a primary production business.
Include the deduction at X Other deductible expenses item 7. If you have included the expenditure as an expense at item 6 Calculation of total profit or loss, also include the expenditure at W Non-deductible expenses item 7.
Include any recoupment of the expenditure in assessable income at B Other assessable income item 7 if you have not included it at R Other gross income item 6.
Hire-purchase agreements
Hire-purchase and instalment sale agreements of goods are treated as a sale of the property by the financier (or hire-purchase company) to the hirer (or instalment purchaser).
The sale is treated as being financed by a loan from the financier to the hirer at a sale price of either their agreed cost or value or the property’s arm’s length value. The periodic hire-purchase (or instalment) payments are treated as payments of principal and interest under the notional loan. The hirer can deduct the interest component subject to any reduction required under the thin capitalisation rules.
In relation to the notional sale, the hirer of a depreciating asset is treated as the holder of the asset and is entitled to claim a deduction for the decline in value. The cost of the asset for this purpose is generally taken to be the agreed cost or value, or the arm’s length value if the dealing is not at arm’s length.
If the company has included hire-purchase charges at any label at item 6 Calculation of total profit or loss, include the amount at W Non-deductible expenses item 7.
Include the deduction for the decline in value of the goods at F Deduction for decline in value of depreciating assets item 7. Include the interest component at X Other deductible expenses item 7.
Landcare operations and decline in value of water facility, fencing asset and fodder storage asset
Landcare operations
The company can claim a deduction in the year it incurs capital expenditure on a landcare operation for land in Australia.
Unless the company is a rural land irrigation water provider, the deduction is available to the extent the company uses the land for either:
- a primary production business, or
- in the case of rural land, carrying on a business for a taxable purpose from the use of that land, except a business of mining or quarrying.
The company may claim the deduction even if it is only a lessee of the land.
The deduction is also available to rural land irrigation water providers, that is, to entities whose business is primarily and principally the supply of water (other than by using a motor vehicle) to entities for use in primary production businesses on land in Australia or to businesses (other than mining or quarrying businesses) using rural land in Australia.
If the company is a rural land irrigation water provider, it can claim a deduction for capital expenditure it incurs on a landcare operation for:
- land in Australia that other entities (being entities supplied with water by the company) use at the time for carrying on primary production businesses, or
- rural land in Australia that other entities (being entities supplied with water by the company) use at the time for carrying on businesses for a taxable purpose from the use of that land (except a business of mining or quarrying).
A rural land irrigation water provider’s deduction is reduced by a reasonable amount to reflect an entity’s use of the land for other than a taxable purpose after the water provider incurred the expenditure.
A landcare operation is one of the following operations:
- eradicating or exterminating animal pests from the land
- eradicating, exterminating or destroying plant growth detrimental to the land
- preventing or combating land degradation other than by erecting fences
- erecting fences to keep out animals from areas affected by land degradation to prevent or limit further damage and to help reclaim the areas
- erecting fences to separate different land classes in accordance with an approved land management plan
- constructing a levee or similar improvement
- constructing drainage works (other than the draining of swamps or low-lying areas) to control salinity or assist in drainage control
- an alteration, addition, extension, or repair of a capital nature to an asset described in the fourth to seventh dot points, or an extension of an operation described in the first three dot points
- a structural improvement, or an alteration, addition, extension or repair of a capital nature to a structural improvement, that is reasonably incidental to levees or drainage works deductible under a landcare operation.
You cannot claim a deduction if the capital expenditure is on plant unless it is on certain fences, dams or other structural improvements.
Any recoupment of the expenditure would be assessable income.
Water facilities
The company may be entitled to claim a deduction for capital expenditure it incurs on a water facility if it is a primary producer or an irrigation water provider (for expenditure incurred on or after 1 July 2004). If the company incurred the expenditure from 7.30pm (AEST), 12 May 2015 it can deduct the full amount in the year it incurred the expenditure. If the company incurred the expenditure before this time, it can deduct one-third of the amount in the income year in which it incurred the expenditure, and one-third in each of the following two years.
A water facility is plant or a structural improvement that is primarily or principally for the purpose of conserving or conveying water, or a structural improvement that is reasonably incidental to conserving or conveying water. It also includes a repair of a capital nature, or an alteration, addition or extension, to that plant or structural improvement. Examples of water facilities include dams, tanks, tank stands, bores, wells, irrigation channels or similar improvements, pipes, pumps, water towers, and windmills.
Unless the company is an irrigation water provider, the expenditure must be incurred by the company primarily and principally for conserving or conveying water for use in its primary production business on land in Australia. The company may claim the deduction even if it is only a lessee of the land.
The deduction is reduced if the facility is not wholly used for either:
- carrying on a primary production business on land in Australia, or
- a taxable purpose.
The deduction for water facilities is also available to irrigation water providers, that is, to entities whose business is primarily and principally the supply (other than by using a motor vehicle) of water to other entities for use in a primary production business on land in Australia.
If the company is an irrigation water provider, it must incur the expenditure on the water facility primarily and principally for conserving or conveying water for use in primary production businesses conducted by other entities on land in Australia, being entities supplied with water by the company. The company’s deduction is reduced if the water facility is not wholly used for a taxable purpose.
Fencing assets
The company may be entitled to claim a deduction for capital expenditure it incurs on fencing assets. If the company incurred the expenditure from 7.30pm (AEST), 12 May 2015 it can deduct the full amount in the year it incurred the expenditure. If the company incurred the expenditure before this time - or if the expenditure relates to a stockyard, pen or portable fence – the company can deduct an amount for the asset’s decline in value based on its effective life.
A fencing asset includes a structural improvement, a repair of a capital nature, or an alteration, addition or extension, to a fence. The expenditure must be incurred by you on the construction, manufacture, installation or acquisition of a fencing asset that is used primarily and principally in a primary production business you conduct on land in Australia. The company may claim the deduction even if it is only a lessee of the land.
The deduction is reduced where the fencing asset is not wholly used for either:
- carrying on a primary production business on land in Australia, or
- a taxable purpose.
Fodder storage assets
The company can claim a deduction for the capital expenditure it incurs on fodder storage assets. If the company incurred the expenditure from 7.30pm (AEST), 12 May 2015 it can deduct one-third of the amount in the income year in which the company incurred it, and one-third in each of the following two years. If the company incurred the expenditure before this time, the company can deduct an amount for the asset’s decline in value based on its effective life.
A fodder storage asset is an asset that is primarily and principally for the purpose of storing fodder. It includes a structural improvement, a repair of a capital nature, or an alteration, addition or extension, to an asset or structural improvement, that is primarily and principally for the purpose of storing fodder.
The term 'fodder' refers to food for livestock, usually but not exclusively dried, such as grain, hay or silage. Fodder can include liquid feed and supplements. Examples of typical fodder storage assets include:
- silos
- liquid feed supplement storage tanks
- bins for storing dried grain
- hay sheds
- grain storage sheds, and
- above-ground bunkers.
The expenditure must be incurred by the company on the construction, manufacture, installation or acquisition of a fodder storage asset that is used primarily and principally in a primary production business it conducts on land in Australia. The company may claim the deduction even if it is only a lessee of the land.
The deduction is reduced where the fodder storage asset is not wholly used for either:
- carrying on a primary production business on land in Australia, or
- a taxable purpose.
Loss on the sale of a depreciating asset
Any such loss included in the accounts will differ from the balancing adjustment amount taken into account for taxation purposes.
If the accounts show a loss on the sale of a depreciating asset under S All other expenses item 6, include that amount at W Non-deductible expenses item 7 except to the extent it relates to assets used in R&D activities, which are shown at D Accounting expenditure in item 6 subject to R&D tax incentive item 7. Also see Balancing adjustment amounts.
Luxury car leases
Luxury car leasing arrangements (other than genuine short-term hiring agreements or a hire-purchase agreement) are treated as notional sale and loan transactions.
A leased car, either new or second hand, is a luxury car if its cost exceeds the car limit that applies for the income year in which the lease commences. The car limit for 2017–18 is $57,581.
The cost or value of the car specified in the lease (or the market value if the parties were not dealing at arm’s length in connection with the lease) is taken to be both the cost of the car for the lessee and the amount loaned by the lessor to the lessee to buy the car.
In relation to the notional loan, the actual lease payments are divided into notional principal and finance charge components. That part of the finance charge component for the notional loan applicable for the particular period (the accrual amount) is deductible to the lessee subject to any reduction required under the thin capitalisation rules.
In relation to the notional sale, the lessee is treated as the holder of the luxury car and is entitled to claim a deduction for the decline in value of the car.
For the purpose of calculating the deduction, the cost of the car is limited to the car limit for the income year in which the lease is granted. For more information on deductions for the decline in value of leased luxury cars, see Guide to depreciating assets 2018.
In summary, the lessee is entitled to deductions equal to:
- the accrual amount, and
- the decline in value of the luxury car, based on the applicable car limit.
Both deductions are reduced to reflect any use of the car for other than a taxable purpose.
If the company has included the lease expenses at F Lease expenses within Australia item 6 or I Lease expenses overseas item 6, include the amount at W Non-deductible expenses item 7.
Include the deduction for decline in value of the luxury car at F Deduction for decline in value of depreciating assets item 7. Include the accrual amount at X Other deductible expenses item 7.
If the lease terminates or is not extended or renewed and the lessee does not actually acquire the car from the lessor, the lessee is treated under the rules as disposing of the car by way of sale to the lessor. This constitutes a balancing adjustment event and any assessable or deductible balancing adjustment amount for the lessee must be determined.
Profit on the sale of a depreciating asset
Any such profit included in the accounts will differ from the balancing adjustment amount taken into account for taxation purposes.
If the accounts show a profit on the sale of a depreciating asset under R Other gross income item 6, include that amount at Q Other income not included in assessable income item 7. Also see Balancing adjustment amounts.
The TOFA rules and UCA
The TOFA rules contain interaction provisions which may modify the cost and termination value of a depreciating asset acquired by a company to which the TOFA rules apply. This will be the case where the consideration (or a substantial proportion of it) is deferred for greater than 12 months after delivery.
For more information, see the Guide to the taxation of financial arrangements (TOFA) rules.
Section 40-880 deduction
Immediate deductibility for start-up costs
From 2015–16, section 40-880 allows a company that is not in business, or that is a small business entity, to immediately deduct certain start-up expenses relating to the proposed structure or proposed operation of a business that is proposed to be carried on.
Expenditure is fully deductible in the income year incurred if:
- it is incurred by a small business entity or a company that is not carrying on business and is not connected or affiliated with another company that is carrying on business that is not a small business entity, and
- it relates to a business that is proposed to be carried on and is either
- incurred for advice or services relating to the proposed structure or proposed operation of the business, or
- is paid to an Australian government agency in relation to setting up the business or establishing its operating structure.
Section 40-880 deduction
If the deduction relates to an earlier income year, or does not meet the criteria set out above, the previous rules apply, which is a five-year write-off for certain business-related capital expenditure incurred by the company for a past, present or proposed business.
As part of the tax treatment for black hole expenditure, rules apply to business-related capital expenditure incurred after 30 June 2005. Section 40-880 deductions are no longer limited to seven specific types of business-related capital expenditure. The company may now be able to claim a deduction for capital expenditure it incurs after 30 June 2005:
- for its business
- for a business that it used to carry on, such as capital expenses incurred in order to cease the business
- for a business it proposes to carry on, such as the costs of feasibility studies, market research or setting up the business entity
- as a shareholder or partner to liquidate or deregister a company or to wind up a trust or partnership, provided that the company, trust or partnership carried on a business.
If the company incurs the relevant capital expenditure for its existing business, a former business or a proposed business, the expenditure is only deductible to the extent the business is, was, or is proposed to be, carried on for a taxable purpose.
The company cannot deduct expenditure for an existing business that is carried on by another entity or a proposed business unless it is proposed to commence within a reasonable time. However, it can deduct expenditure it incurs for a business that used to, or is proposed to be, carried on by another entity. Such expenditure is only deductible to the extent that:
- the business was, or is proposed to be, carried on for a taxable purpose, and
- the expenditure is in connection with
- business that was, or is proposed to be, carried on, and
- derivation of assessable income from that business by the partnership.
A section 40-880 deduction cannot be claimed for capital expenditure to the extent that it:
- can be deducted under another provision of the income tax laws
- forms part of the cost of a depreciating asset the company holds, used to hold, or will hold
- forms part of the cost of land
- relates to a lease or other legal or equitable right
- would be taken into account in working out an assessable profit or deductible loss
- could be taken into account in working out a capital gain or a capital loss from a CGT event
- would be specifically not deductible under the income tax laws if the expenditure was not capital expenditure
- is specifically not deductible under the income tax laws for a reason other than that the expenditure is capital expenditure
- is of a private or domestic nature
- is incurred for gaining or producing exempt income or non-assessable non-exempt income
- is excluded from the cost or cost base of an asset because, under special rules in the UCA or capital gains tax regimes respectively, the cost or cost base of the asset was taken to be the market value
- is a return of or on capital (for example, distributions by trustees) or a return of a non-assessable amount (for example, repayments of loan principal).
The company deducts 20% of the qualifying capital expenditure in the year it is incurred and in each of the following four years.
If you have included any of the expenditure incurred for the income year as an expense at item 6, show this amount as an expense add back at W Non-deductible expenses item 7.
Include the deduction for the section 40-880 deduction at X Other deductible expenses item 7.