Depreciating asset acquired with other property
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If you pay an amount for a depreciating asset and something else, only that part of the payment that is reasonably attributable to the depreciating asset is treated as being paid in relation to it. This applies to first and second elements of cost.
The Tax Office generally accepts independent valuations as a basis for this apportionment. However, if there is no independent valuation, you may need to demonstrate that your apportionment of the amount paid is reasonable. Apportionment on the basis of the market values of the various items for which the payment is made will generally be reasonable.
Example: Apportionment of cost
Sam undertakes to pay an upholsterer $800 for a new desk and $300 to re-upholster a chair in a more durable material. He negotiates a trade discount of $100. The $1,000 paid should be apportioned between:
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- the first element of cost of the desk
- the second element of cost of the chair
- based on the relative market values of the desk and the labour and materials used to upholster the chair.
Hire purchase agreements
For income tax purposes, certain hire purchase agreements entered into after 27 February 1998 are treated as notional sale and loan transactions.
If the goods subject to the hire purchase agreement are depreciating assets and the hirer is the holder of the depreciating assets - see Depreciating assets subject to hire purchase agreements - the hirer may be entitled to deductions for the decline in value. Generally, the cost or value stated in the hire purchase agreement or the arm's length value is taken to be the cost of the depreciating assets.
Death of the holder
If a depreciating asset starts being held by you as a legal personal representative (say, as the executor of an estate) as a result of the death of the former holder, the cost of the asset to you is generally its adjustable value on the day the former holder died.
If the former holder allocated the asset to a low-value pool, the cost of the asset to you is so much of the closing balance of the pool for the income year in which the former holder died that is reasonably attributable to the asset - see Low-value pools for information about low-value pools.
If you start to hold a depreciating asset because it passes to you as a beneficiary of an estate or as a surviving joint tenant, the cost of the asset to you is its market value when you started to hold it reduced by any capital gain that was ignored when the owner died or when it passed from the legal personal representative. See the Guide to capital gains tax 2007 (NAT 4151-6.2007) for information about when these gains can be disregarded.
Commercial debt forgiveness
Generally, an amount which you owe is a commercial debt if you can claim a deduction for the interest paid on the debt or you would have been able to claim a deduction for interest if it had been charged. The amount of the commercial debt includes any accrued but unpaid interest.
If a commercial debt is forgiven, you may be required to reduce the expenditure which is deductible under the UCA by all or part of the net forgiven amount. If a reduction of the amount of deductible expenditure is made for a depreciating asset, the asset's cost is reduced. If the reduction is made in a year later than the one in which the asset's start time occurs, the opening adjustable value of the asset is also reduced.
If an asset's opening adjustable value is reduced and you use the prime cost method to work out the asset's decline in value, you need to use the adjusted prime cost formula for the income year the change is made and in later years - see Methods of working out decline in value.
Last modified: 27 Aug 2007QC 27892