To work out the decline in value of a depreciating asset, you need to know its cost. Under the UCA, the cost of a depreciating asset has two elements.
The first element of cost is, generally, amounts you are taken to have paid to hold the asset, such as the purchase price. It is worked out as at the time you begin to hold the asset.
The second element of cost is, generally, amounts you are taken to have paid after that time to bring the asset to its present condition and location, such as a cost of improving the asset.
Example: First and second elements of cost (ignoring any GST impact)
Terry purchases a car for $45,000. The first element of cost is $45,000. If Terry installs a car alarm in the vehicle two months later at a cost of $1,500, that amount will be included in the second element of cost of the car as the amount was incurred after he began to hold the car.End of example
The cost of a depreciating asset includes not only amounts you pay but also the market value of any non-cash benefits you provide in relation to the asset. It would also include a liability you incur to pay an amount or to provide a non-cash benefit.
The cost of a depreciating asset does not include:
- amounts of input tax credits for which you are or become entitled see GST input tax credits
- expenditure not of a capital nature, or
- any amount that you can deduct or which is taken into account in working out a deductible amount under provisions outside the UCA.
Example: Expenditure not of a capital nature and deductible outside the UCA
Carolyn uses a motor vehicle for her business. As a result of Carolyn's use of the vehicle, she needs to replace the tyres. The cost of replacing the tyres is not included in the second element of the vehicle's cost because it would ordinarily be deductible under the repair provisions.End of example
There are special rules to work out the cost of depreciating assets in certain circumstances. Some of the common cases are covered below. If you are not sure of the cost of a depreciating asset, contact your professional tax adviser or the ATO.