• Purchase and valuation of second-hand assets

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 asset you can generally claim a deduction based on the cost of the asset to you.

Where you purchase a rental property, the most effective means of establishing your cost is to have the separate value of depreciating assets, calculated on an arm's length basis, specified in the sale agreement. If separate values for depreciating assets 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.

Generally, independent valuations that establish reasonable values for depreciating assets 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 asset compared to the total purchase price of the property.

You should use Worksheet 1-depreciating assets and Worksheet 2-low-value pool to help you work out your deductions for decline in value of depreciating assets. These worksheets are contained in the publication Guide to depreciating assets.

Example

In this example, the Hitchmans bought the property part way through the year-on 20 July 2001. Depreciating assets sold with the property were assigned separate values in the purchase contract that reflected their respective arm's length values at the time. Therefore the amounts shown in the contract can be used by the Hitchmans as the opening adjustable values of the assets. They can claim a deduction for decline in value for 346 days out of the 365 in the 2001-02 income year. The deduction for each asset is calculated using the diminishing value method as shown below:

 Description Cost Opening adjustable value Part-year claim 150% divided by effective life (yrs) from Guide to depreciating assets Deduction for decline in value Closing adjustable value Furniture \$2000 \$2000 346365 150%15 \$190 \$1810 Carpets \$1200 \$1200 346365 150%10 \$171 \$1029 Curtains \$1000 \$1000 346365 150%7 \$203 \$797* Totals \$4200 \$4200 \$564 \$3636

Note

*As the closing adjustable value of the curtains is \$1000 or less, the Hitchmans may choose to transfer this asset to the low-value pool for the year ended 30 June 2003.

Example

In this example, the Hitchmans allocated various depreciating assets into a low-value pool. The low-value pool comprised assets that had an adjustable value of less than \$1000 (because of previous depreciation claims using the diminishing value method) and some new assets they had purchased during the year.

 Assets held before 1 July 2001 Total adjustable value of pool at 30 June 2001 Low-value pool rate Deduction for decline in value Various \$1679 37.5% \$630
 Assets purchased1 July 2001-30 June 2002 Purchase price Television set (11/11/2001) \$747 Gas heater (28/2/2002) \$303 Totals \$1050 18.75% \$197 Total deduction for year ended 30 June 2002 \$827

Value of low-value pool at 30 June 2002:

1679 - 630 = \$1049
1050 - 197 = \$853

= \$1902