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To work out the decline in value of a depreciating asset, you need to know its cost.
Under the UCA, the cost of a depreciating asset has two elements.
The first element of cost is, generally, amounts you are taken to have paid to hold the asset, such as the purchase price. It also includes amounts incurred after 30 June 2005 that you are taken to have paid in relation to starting to hold the asset. The amounts must be directly connected with holding the asset.
The first element of cost is worked out as at the time you begin to hold the asset.
The second element of cost is, generally, amounts you are taken to have paid after that time to bring the asset to its present condition and location, such as a cost of improving the asset. It also includes expenses incurred after 30 June 2005 of a balancing adjustment event occurring for the asset (that is, costs incurred to stop holding or using the asset) - see What happens if you no longer hold or use a depreciating asset? for information on balancing adjustment events. Such expenses may include advertising or commission expenses or the cost of demolishing the asset.
The first element of a depreciating asset's cost cannot include an amount which forms part of the second element of cost of another depreciating asset. For example, if a depreciating asset is demolished so another depreciating asset can be installed on the same site, the demolition costs will form part of the second element of cost of the asset demolished. The amount is not also included in the first element of cost of the new asset.
Example: First and second elements of cost - ignoring any GST impact
Terry wants to buy a vehicle for his business and the vehicle is not available in Australia. He locates a company in the United States from which he would be able to purchase the vehicle. He travels to the United States for the sole purpose of buying the vehicle and incurs travel costs of $5,000. Terry purchases the vehicle for $45,000.
The first element of cost is $50,000. This amount includes the purchase cost of the vehicle and the travel costs. The travel costs would be included in the first element of cost of the vehicle because they are directly connected with Terry starting to hold the vehicle.
If Terry installs an alarm in the vehicle two months later at a cost of $1,500, that amount will be included in the second element of cost of the vehicle as the cost was incurred after he began to hold the vehicle.
For both first and second elements of cost of a depreciating asset, amounts you are taken to have paid include:
- an amount you pay
- the market value of a non-cash benefit you provide
- if you incur or increase a liability to pay an amount - the amount of the liability or increase
- if you incur or increase a liability to provide a non-cash benefit - the market value of the non-cash benefit or the increase
- if all or part of another's liability to pay you an amount is terminated - the amount of the liability or part terminated
- if all or part of another's liability to provide a non-cash benefit (except the depreciating asset) to you is terminated - the market value of the non-cash benefit or part terminated.
The cost of a depreciating asset does not include:
- amounts of input tax credits for which you are or become entitled - see GST input tax credits
- expenditure not of a capital nature, or
- any amount that you can deduct or which is taken into account in working out a deductible amount under provisions outside the UCA.
Example: Expenditure not of a capital nature and deductible outside the UCA
Carolyn uses a motor vehicle for her business. As a result of Carolyn's use of the vehicle, she needs to replace the tyres. The cost of replacing the tyres is not included in the second element of the vehicle's cost because it would ordinarily be deductible under the repair provisions.
There are special rules to work out the cost of depreciating assets in certain circumstances. Some of the common cases are covered below. If you are not sure of the cost of a depreciating asset, contact the Tax Office or your recognised tax adviser.
Last modified: 18 Jul 2006QC 27742