• Depreciation provisions

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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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    Basis for depreciation

    Generally, the normal depreciation rules apply for working out the attributable income of a CFC. This means you can choose to depreciate assets by the diminishing value method or the prime cost method. In addition, the rates of depreciation that apply for working out taxable income will also apply in working out attributable income.

    Example 18

    Deduction for depreciation

    A CFC purchased a depreciable asset on 1 July 2003 and uses it solely for the production of notional assessable income. For the statutory accounting period ended 30 June 2004, depreciation would be worked out as follows using the diminishing value method.

    Cost at 1 July 2003

    $20,000

    Depreciation - 20% X 20,000

    $4,000

    Written down value at 30 June 2004

    $16,000

    Depreciation in 2003-04

    $4,000

    Apportionment for exempt usage

    A notional allowable deduction for depreciation must be reduced if an asset is only partially used for the production of notional assessable income. The normal rules apply in working out the reduction.

    Example 19

    Apportionment of deduction for depreciation

    A CFC purchased a depreciable asset on 1 July 2003 and used it for the production of income. For the statutory accounting period ended 30 June 2004, only 50% of the usage was for the production of notional assessable income. Depreciation, using the diminishing value method, would be worked out as follows.

    Cost at 1 July 2003

    $20,000

    20% depreciation to 30 June 2004

    $4,000

    Written down value at 30 June 2004

    $16,000

    Depreciation in 2003-04 (50% of $4,000)

    $2,000

    Asset used in a non-attributable period

    Special rules apply for an asset held by a CFC during a period for which it was either:

    • not necessary to work out the attributable income of the CFC, or
    • not necessary to take depreciation on the asset into account in working out the attributable income of the CFC.

    In such cases, the depreciation rules apply as if the asset were held solely for the production of notional assessable income during the period.

    Example 20

    Deduction for depreciation in non-attributable period

    A CFC purchased a depreciable asset on 1 July 2001 and used it for the production of income. It was not necessary to work out the attributable income of the CFC for the period ending 30 June 2002. For the statutory accounting period ended 30 June 2003, only 50% of the usage was for the production of notional assessable income. In working out the depreciation for the 2002-03 period using the diminishing value method, the first step is to notionally depreciate the asset to the beginning of the income year.

    Cost at 1 July 2001

    $60,000

    20% depreciation to 30 June 2002

    $4,000

    Notional written down value at 30 June 2002

    $16,000

    The next step is to determine the depreciation for the 2002-03 income year

     

    $

    Notional written down value at 30 June 2002

    $16,000

    20% depreciation to 30 June 2003

    $3,200

    Notional written down value at 30 June 2003

    $12,800

    The last step is to apportion the depreciation because the asset is not used wholly for the production of notional assessable income.

    Depreciation in 2002-03 (50% of $3,200)

    $1,600

    Sale of a depreciable asset

    Under the normal operation of the Act, a deduction for the difference may be allowed where an asset is sold for less than the notional depreciated value of the asset. This deduction is also allowable in working out the attributable income of a CFC.

    Example 21

    Deduction on disposal

    In the next statutory accounting period the depreciable asset in example 20 was again used for 50% of the time to derive notional assessable income. At the end of the year it was sold for $9,000. The depreciation calculation would be as follows.

    Notional written down value at 30 June 2003

    $12,800

    20% depreciation to 30 June 2004

    $2,560

    Notional written down value at 30 June 2004

    $10,240

    Proceeds of sale

    $9,000

    Notional loss

    $1,240

    Depreciation in 2003-04 (50% of $2,560)

    $1,280

    Deduction for loss (50% of $1,240)

    $620

    An amount may also be included in notional assessable income as a result of the sale of the asset.

    Example 22

    Notional assessable income on disposal

    Assume that the asset was sold for $18,000. In this case an amount would be included in notional assessable income as follows.

     

    $

    Cost at 1 July 2001

    20,000

    Depreciation allowed

    2,800

    Actual written down value at 30 June 2004

    17,120

    Proceeds of sale

    18,000

    Actual written down value

    17,120

    Notional assessable income on disposal

    880

    Contact the tax office where you lodge your return for further details.

    Last modified: 05 Dec 2006QC 18000