Deductions for the decline in value of depreciating assets and certain other capital expenditure

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Definitions

Depreciating asset - an asset with a limited effective life which declines in value over that life.

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

There are a set of general rules for working out deductions for the decline in value of depreciating assets.

Generally, 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 use the Commissioner's determination which can be found in Taxation Ruling TR 2000/18 - Income tax: effective life of depreciating assets.

Your deduction for decline in value is reduced by 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 can allocate low-cost assets and low-value assets you hold to a low-value pool and work out the decline in value of all the assets in the pool in a single calculation.

A low-cost asset is a depreciating asset whose cost 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.

The adjustable value of a depreciating asset is its cost (excluding any input tax credit entitlements) less its decline in value since you first used it or installed it ready for use for any purpose, including a private purpose.

These rules for working out decline in value apply to most depreciating assets used in primary production. However, there are special rules for working out deductions for the decline in value of some primary production depreciating assets and certain other capital expenditure.

For more information about the general rules for working out decline in value, see Guide to depreciating assets.

Landcare operations

You can claim a deduction for capital expenditure you incur on a landcare operation for land in Australia in the year it is incurred. No deduction is available for capital expenditure on plant, except for plant comprising certain fences, dams or other structural improvements. If the decline in value of plant is not deductible under the landcare provisions, you calculate the plant's decline in value using the general rules for working out decline in value.

The deduction is available where you use the land wholly for either:

• a primary production business, or
• a business for the purpose of producing assessable income from the use of rural land - except a business of mining or quarrying.

The deduction is reduced to the extent you do not use the land wholly for either of these purposes. You may claim the deduction even if you are only a lessee of the land.

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 the use of fences
• erecting fences to keep out animals from areas affected by land degradation in order to prevent or limit further damage and assist in reclaiming 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.

In each case, apart from the construction of a levee, the operation must be carried out primarily and principally for the purpose stated. This is to ensure that the deduction for expenditure on landcare operations and the three-year write-off for water facilities cannot both be claimed for the same item of expenditure. Where a levee is constructed primarily and principally for water conservation, it is a water facility.

Any recoupment of the expenditure is assessable income.

These deductions are not available to a partnership. Expenses for landcare operations incurred by a partnership are allocated to each partner who can then claim the relevant deduction in respect of their share of the expenditure.

Water facilities

A water facility is plant or a structural improvement that is primarily or principally for the purpose of conserving or conveying water. The expenditure must be incurred primarily and principally for conserving or conveying water for use in your primary production business on land in Australia.

If you are carrying on a primary production business on the land, you may claim the deduction even if you are only a lessee of the land.

You can claim a deduction for the decline in value of a water facility in equal instalments over three income years. Examples of a water facility are dams, earth tanks, underground tanks, concrete or metal tanks, tank stands, bores, wells, irrigation channels or similar improvements, pipes, pumps, water towers, windmills and extensions or improvements to any of these items.

Your deduction is reduced where the water facility is not wholly used for either:

• carrying on a primary production business on land in Australia, or
• a taxable purpose - for example, producing assessable income.

Any recoupment of the expenditure is included in your assessable income. As the expenditure on water facilities is deductible over three income years, special rules apply to determine the amount of any recoupment to be included in assessable income in the year of recoupment and in later income years.

These deductions are not available to a partnership. Costs incurred by a partnership for facilities to conserve or convey water are allocated to each partner who can then claim the relevant deduction in respect of their share of the expenditure.

For capital expenditure you incurred on water facilities in the 2000-01 income year, you could choose a tax offset rather than a deduction.

Landcare and water facility tax offset

The landcare and water facility tax offset is not available for expenditure incurred after the end of the 2000-01 income year.

Note

The landcare and water facility tax offset is a carry-forward, non-refundable tax offset. This means you can carry forward indefinitely any excess tax offset, after tax liabilities are met, to use against future income tax liabilities. Before the tax offset can be applied in a later income year, it must be successively reduced by any unused net exempt income derived in the year the tax offset arose and any subsequent income year - providing you had a taxable income in that year. The tax offset is reduced by 30 cents for each dollar of net exempt income.

Electricity connections and telephone lines

You can claim a deduction in equal instalments 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 such land, or
• a telephone line to land being used to carry on a primary production business.

Any recoupment of the deductible expenditure is included in your assessable income. As the expenditure is deductible over more than one income year, special rules apply to determine the amount of any recoupment to be included in assessable income in the year of recoupment and in later income years.

These deductions are not available to a partnership. Costs incurred by a partnership for mains electricity supply or telephone lines are allocated to each partner who can then claim the relevant deduction in respect of their share of the expenditure.

Grapevines

The decline in value of grapevines is calculated at a rate of 25%, provided you own the land to which the grapevines are affixed, or the grapevines are established on Crown land you hold under lease. If you are not entitled to calculate your deduction for decline in value under the provisions relating to grapevines because these conditions are not met, a deduction may be available for decline in value under the provisions relating to horticultural plants (see below). Your deduction for the decline in value of grapevines is based on the capital expenditure incurred on establishing the grapevines. Capital expenditure incurred on establishing grapevines does not include expenditure in draining swamps or low-lying land or in clearing land but it would include, for example, the cost of:

• preparing the land - ploughing and topsoil enhancement
• planting the vine itself, and
• the vine.

You deduct the decline in value of grapevines pro rata over a period of four years from the time the grapevines are used in a primary production business to produce assessable income. If ownership of the grapevines changes, the remaining deduction is available to the new owner while the grapevines are used in a primary production business. If a grapevine is destroyed before the end of the write-off period, you are allowed a deduction in that year for the remaining unclaimed expenses less any proceeds - for example, insurance.

Any recoupment of the expenditure is assessable income. As the expenditure is deductible over more than one income year, special rules apply to determine the amount of any recoupment to be included in assessable income in the year of recoupment and in later income years.

These deductions are not available to a partnership. Costs incurred by a partnership in establishing grapevines are allocated to each partner who can then claim the relevant deduction in respect of their share of the expenditure.

Horticultural plants

You are allowed a deduction for the decline in value of horticultural plants, provided:

• you own the plants - lessees and licensees of land are treated as if they own the horticultural plants on that land
• you use them in a business of horticulture to produce assessable income, and
• you incurred the expense after 9 May 1995, or the expense was incurred by a former owner.

Your deduction for the decline in value of horticultural plants is based on the capital expenditure incurred establishing the plants. This does not include expenditure on the initial clearing of the land. It may include, for example:

• the costs of acquiring and planting the seeds, and
• part of the cost of ploughing, contouring, fertilising, stone removal and topsoil enhancement relating to the planting.

You cannot claim this deduction for forestry plants. If you claim this deduction for a grapevine, you cannot claim a deduction for the grapevine's decline in value under the provisions specific to grapevines.

The period over which you can deduct the decline in value depends on the effective life of the horticultural plant. You can choose to work out the effective life yourself or you can use the effective life determined by the Commissioner which is listed in Taxation Ruling TR 2000/18 - Income tax: effective life of depreciating assets.

If the effective life of the plant is less than three years, you can claim the establishment costs in full in the year in which the products or parts of the plant are first able to be harvested and sold commercially. If the effective life of the plant is three or more years, you can write off the establishment costs over the maximum write-off period from the date the plant first generated assessable income. If the plant is destroyed before the end of its effective life, you are allowed a deduction in that year for the remaining unclaimed expenses less any proceeds (for example, insurance).

Plants with effective life of three or more years

Where ownership of the horticultural plants changes, the new owner is entitled to continue claiming the balance of the capital expenditure incurred establishing the plants on the same basis.

Any recoupment of the expenditure is assessable income. Where the expenditure is deductible over more than one income year, special rules apply to determine the amount of any recoupment to be included in assessable income in the year of recoupment and later income years.

These deductions are not available to a partnership. Costs incurred by a partnership in establishing horticultural plants are allocated to each partner who can then claim the relevant deduction in respect of their share of the expenditure.