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  • Purchase and valuation of second-hand items

    Attention

    Warning:

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

    End of attention

    If you purchase a second-hand item of plant you can generally claim a depreciation deduction based on the cost of the item to you.

    Where you purchase a rental property, the most effective means of establishing your cost of plant is to have the separate value of depreciable items, calculated on an arm's length basis, specified in the sale agreement. If separate values for depreciable items of plant are not included in the sale agreement for your rental property when you purchase it, then you may be required to demonstrate the basis of your valuation of the depreciable items.

    Generally, independent valuations that establish reasonable values for depreciable items of plant satisfy ATO requirements. In the absence of an independent valuation, you may need to demonstrate that your estimate provided a reasonable value. Considerations would include the market value of the plant itself compared to the total purchase price of the property.

    Worksheets for calculating depreciation and low-value pools are contained in the publication Guide to depreciation.

    Example

    In this example, the Johnsons bought the property part way through the year-on 20 July 2000. The opening undeducted costs are taken to be equal to the contract puchase prices that the Johnsons paid for the items at the time the property was acquired. They are entitled to a depreciation deduction for 346 days out of the 365 in the 2000-01 income year. The depreciation deduction for each item is calculated using the diminishing value method as shown below:

    Description

    Original
    cost

    Opening
    un-
    deducted
    cost

    Part-year
    claim

    150% divided
    by effective
    life (yrs)
    from Guide to
    dep'n

    Dep'n
    deduction

    Closing
    un-
    deducted
    cost

    Furniture

    $2,000

    $2,000

    346 ÷ 365

    150% ÷ 15

    $190

    $1,810

    Carpets

    $1,200

    $1,200

    346 ÷ 365

    150% ÷ 10

    $171

    $1,029

    Curtains

    $1,000

    $1,000

    346 ÷ 365

    150% ÷ 7

    $203

    $797 (see note)

    Totals

    $4,200

    $4,200

     

     

    $564

    $3,636

    Note: As the closing undeducted cost of the curtains is $1,000 or less, the Johnsons may choose to transfer this plant to the low-value pool for the year ended 30 June 2002.

    End of example

    Example

    In this example, the Johnsons allocated various items of plant into a low-value pool. The low-value pool comprised plant that had an undeducted cost of less than $1,000 (because of previous depreciation claims using the diminishing value method) and some new plant that they had purchased during the year.

    Plant held before 1 July 2000

    Undeducted cost at 30 June 2000

    Hot water system

    $486

    Refrigerator

    $389

    Stove

    $518

    Washing machine

    $286

    Low value asset decline in value calculation

    Asset

    Taxable use percentage of cost or opening adjustable value

    Low-value pool rate

    Deduction for decline in value

    Total of assets

    $1,679

    37.5%

    $630

    Plant held before 1 July 2000

    Undeducted cost at 30 June 2000

    Pooled depreciation rate

    Depreciation deduction

    Hot water system

    $486

     

     

    Refrigerator

    $389

     

     

    Stove

    $518

     

     

    Washing machine

    $286

     

     

    Totals

    $1679

    37.5%

    $630

    Plant purchased
    1 July 2000-30 June 2001

    Purchase
    price

     

     

    Television set
    (11/11/2000)

    $747

     

     

    Gas heater (28/2/2001)

    $303

     

     

    Totals

    $1050

    18.75%

    $197

    Plant purchased
    1 July 2000-30 June 2001

    Purchase
    price

    Low-value pool rate

    Deduction for decline in value

    Television set
    (11/11/2000)

    $747

    18.75%

    $140

    Gas heater (28/2/2001)

    $303

    18.75%

    $57

    Total

    $1,050

    18.75%

    $197

    Total deduction for decline in value for 2000-01

    Total deduction for decline in value for 2000–01 is $827 ($630 plus $197).

    Closing pool balance for 2000-01

    Low-value assets: $1,679 minus $630 equals $1,049

    Low-cost assets: $1,050 minus $197 equals $853

    Closing pool balance for 2000-01 is $1,902 ($1,049 plus $853)

    End of example
    Last modified: 28 Jul 2003QC 16187