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  • Deductions for the decline in value of depreciating assets

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    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

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    Definitions

    A depreciating asset is an asset with a limited effective life which declines in value over that life.

    Decline in value (previously 'depreciation') is the value that an asset loses over its effective life.

    From 1 July 2001, the UCA applies to most depreciating assets, including those acquired before that date. The UCA consolidates a range of former capital allowance provisions, including those relating to plant and equipment. It does this by providing a set of general rules that applies across a variety of depreciating assets and certain other capital expenditure.

    You now calculate deductions for the decline in value of depreciating assets using these rules. You can deduct an amount equal to the decline in value for the period that you hold a depreciating asset during the year of income. However, your deduction is reduced to the extent you use the asset, or have it installed ready for use, for other than a taxable purpose. A taxable purpose includes the purpose of producing assessable income.

    You work out the decline in value of a depreciating asset using either the prime cost or diminishing value method. Both methods are based on the effective life of an asset. For most depreciating assets, you choose whether to self-assess the effective life or to use the Commissioner's determination which can be found in Taxation Ruling TR 2000/18-Income tax: depreciation effective life.

    Under the UCA, you can allocate low-cost assets and low-value assets you hold to a low-value pool. A low-cost asset is a depreciating asset whose cost as at the end of the year in which you start to use it is less than $1,000 (excluding input tax credit entitlements). A low-value asset is a depreciating asset that is not a low-cost asset but which has an opening adjustable value of less than $1,000, and for which you have calculated any available deductions for decline in value for a previous income year under the diminishing value method.

    Adjustable value of a depreciating asset is its cost less its decline in value since you first used it or installed it ready for use for any purpose, including a private purpose.

    For more information, see the publication Guide to depreciating assets or fact sheets dealing with business tax reform and capital allowances from the ATO website at www.ato.gov.au

    Last modified: 28 Oct 2003QC 27421