Consider the following items to see whether you qualify for a deduction.
Any adjustments to your income and expense amounts are dealt with at Income and expense reconciliation adjustments.
Section 40-880 deduction
Immediate deductibility for small business start-up expenses
Section 40-880 of the Income Tax Assessment Act 1997 allows for certain start-up expenses, including costs associated with raising capital, to be immediately deductible where they are incurred by a small business entity or an entity that is not in business. These provisions applied from 2015–16 income year.
If you are an individual (operating either alone or in partnership), the non-commercial loss provisions may apply to defer your deduction to a later income year.
Claimable business related start-up costs
Expenses can be fully deductible in the year in which the expenditure is incurred if the expenditure relates to a small business that is proposed to be carried on and is either:
- incurred in obtaining advice or services relating to the proposed structure or the proposed operation of the business
- a payment to an Australian government agency of a fee, tax or charge incurred in relation to setting up the business or establishing its operating structure.
For more information, see Other capital expenses (including capital works deductions).
Five-year write-off for a range of business related costs not recognised elsewhere in the tax law
Section 40-880 also provides a five-year write-off for certain capital expenditure incurred by you in relation to a past, present or prospective business if the expenditure is not already taken into account or not denied a deduction by another provision.
You can claim a deduction for capital expenditure:
- in relation to your business
- in relation to a business that used to be carried on, such as capital expenses incurred in order to cease the business
- in relation to a business proposed to be carried on, such as the costs of feasibility studies, market research or setting up the business entity
- as a shareholder, beneficiary or partner to liquidate or deregister a company or to wind up a trust or partnership (the company, trust or partnership must have carried on a business).
If you incur expenditure in relation to your existing business, a business that you used to carry on or a business that you propose to carry on, the expenditure is deductible to the extent the business is, was or is proposed to be carried on for a taxable purpose.
You cannot deduct expenditure in relation to an existing business that is carried on by another entity. However, you can deduct expenditure you incur in relation to a business that used to be, or is proposed to be, carried on by another entity. The expenditure is only deductible to the extent that:
- the business was, or is proposed to be, carried on for a taxable purpose
- the expenditure is in connection with the business that was or is proposed to be carried on and with you deriving assessable income from the business.
Generally, you can deduct 20% of the expenditure in the year you incur it and in each of the following four years. However, for some pre- and post-business expenditure you may have to defer your claim for a deduction because the non-commercial loss rules apply.
For example, if you were carrying on a business during 2018–19, but your relevant capital expenditure relates to a new business that did not commence before 1 July 2019, you cannot claim a deduction for the expenses incurred until the business activity commences. If you incur such expenditure in these circumstances, you should not claim the deductible amount (20%) but note it in your business or taxation records and claim the amounts deferred for this item in the year the business commences. However, these claims may be subject to further deferral to the extent that they would otherwise give rise to a business loss in the current year.
For more information, see Losses.
The deduction cannot be claimed for capital expenditure if it:
- can be deducted under another provision
- forms part of the cost of a depreciating asset you hold, used to hold or will hold
- forms part of the cost of land
- relates to a lease or other legal or equitable right
- would be taken into account in working out an assessable profit or deductible loss
- could be taken into account in working out a capital gain or a capital loss
- would be specifically not deductible under the income tax laws if the expenditure was not capital expenditure
- is specifically not deductible under the income tax laws for a reason other than the expenditure is capital expenditure
- is of a private or domestic nature
- is incurred in relation to gaining or producing exempt income or non-assessable non-exempt income
- is excluded from the cost or cost base of an asset because, under special rules in the UCA or capital gains tax regimes respectively, the cost or cost base of the asset was taken to be the market value
- is a return of or on capital or is a return of a non-assessable amount (for example, repayments of loan principal).
Claim the amount deductible under section 40-880 here if you carried on a business as an individual at any time during the year, or if the amounts relates to a proposed primary production or performing arts business.
If you have incurred relevant capital expenses that relate to a business that ceased in a previous income year and you carried on the business as a sole trader or through a partnership, claim the expenses here. If you carried on the business through a company or trust, you claim the amount deductible (20%) at Other deductions on your tax return.
You must show any recoupment of the expenditure as assessable income, either at Other business income or Income reconciliation adjustments.
Business deduction for project pool
Certain capital expenditure you incurred after 30 June 2001 which is directly connected with a project you carry on or propose to carry on for a taxable purpose can be allocated to a project pool and written off over the life of the project. Each project has a separate project pool. The project must be of sufficient substance and be sufficiently identified that it can be shown that the capital expenditure said to be a ‘project amount’ is directly connected with the project.
You are carrying on a project if it involves a continuity of activity and active participation. Merely holding a passive investment, such as a rental property, would not be regarded as carrying on a project.
Such capital expenditure, known as a project amount, is expenditure incurred on:
- creating or upgrading community infrastructure for a community associated with the project; this expenditure must be paid (not just incurred) to be a project amount
- site preparation for depreciating assets (other than to drain swamp or low-lying land or to clear land for horticultural plants, including grapevines)
- feasibility studies for the project
- environmental assessments for the project
- obtaining information associated with the project
- seeking to obtain a right to intellectual property
- ornamental trees or shrubs.
Project amounts also include mining capital expenditure and expenditure on certain facilities used to transport minerals or quarry materials. For more information, see Guide to depreciating assets.
The expenditure must not be otherwise deductible or form part of the cost of a depreciating asset. If the expenditure incurred arises from a non-arm’s length dealing and is more than the market value of what it was for, the amount of the expenditure is taken to be that market value.
Project amounts are allocated to a ‘project pool’. Your deduction for project amounts allocated to a project pool is spread over the ‘project life’. The project life is the period from the date on which the project starts to operate until the date on which it stops operating. The period must be limited by something inherent in the project. If there is no limited project life, no deduction is available under these rules.
A deduction is available from the income year in which you started to operate a project to gain or produce assessable income. The deduction is worked out on the value of the project pool at the end of the income year at the rate of 150%. For pools containing only project amounts incurred on or after 10 May 2006 for projects starting on or after that day, the rate is 200%. Your deductions are capped at 150% if on or after 10 May 2006 you abandon, sell or otherwise dispose of an existing project and then restart it after that date in circumstances where it would be reasonable to conclude that this was done for the main purpose of ensuring that deductions would be calculated using the higher rate.
Use worksheet 3A or worksheet 3B to work out your deduction.
Row |
Calculation elements |
Amount |
|---|---|---|
a |
Value of the project pool at 30 June 2019. This is the closing pool value for 2017–18 (if any) plus the sum of the project amounts you allocated to the pool in 2018–19. |
$ |
b |
Your estimate of the life of the project (in years). |
years |
c |
Divide the amount at row a by the amount at row b. |
$ |
d |
Multiply the amount at row c by 200%. This is your 2018–19 deduction for the project pool. |
$ |
Your deduction at row d must not be more than the amount at row a.
If a project operated in 2018–19 for purposes other than earning assessable business income, you must reduce your deduction at row d by a reasonable amount for the extent to which the project operated for such other purposes.
Row |
Calculation elements |
Amount |
|---|---|---|
a |
Value of the project pool at 30 June 2019. This is the closing pool value for 2017–18 (if any) plus the sum of the project amounts you allocated to the pool in 2018–19. |
$ |
b |
Your estimate of the life of the project (in years) |
years |
c |
Divide the amount at row a by the amount at row b. |
$ |
d |
Multiply the amount at row c by 150%. This is your 2018–19 deduction for the project pool. |
$ |
Your deduction at row d must not be more than the amount at row a.
If a project operated in 2018–19 for purposes other than earning assessable business income, you must reduce your deduction at row d by a reasonable amount for the extent to which the project operated for such other purposes.
The pool value can be subject to adjustments, for example, a foreign exchange (forex) adjustment may apply where you met an obligation to pay foreign currency incurred as a project amount which you had allocated to a project pool.
Closing pool value for 2018–19
This is row a minus row d in worksheet 3A and worksheet 3B. You will need the closing pool value for 2018–19 to work out your deduction for the project pool next year.
Any recoupment of the expenditure must be shown as assessable income either at Other business income or Income reconciliation adjustments.
Where a project was abandoned, sold or otherwise disposed of in 2018–19
In this case, whether or not the project had begun to operate, you can claim a deduction for the 2017–18 closing pool value (if any) plus any project amounts allocated to the pool in the 2018–19 year. You must show any proceeds from the abandonment, sale or disposal of the project as assessable income either at Other business income or Income reconciliation adjustments.
Landcare operations and deduction for decline in value of water facility, fencing asset and fodder storage asset
Landcare operations expenses
You can claim a deduction for capital expenditure you incur on a landcare operation for land in Australia in the year it is incurred.
If the water facilities and landcare operation rules both apply, you can only deduct the expenditure as expenditure on a water facility; see Water conservation and conveyance facilities. If the carbon sink forest and landcare operation rules both apply, you can only deduct the expenditure as expenditure on carbon sink forests.
Unless you are a rural land irrigation water provider, the deduction is available if you use the land for either:
- a primary production business, or
- in the case of rural land, a business for the purpose of producing assessable income from the use of that land, except a business of mining or quarrying.
However your deduction is reduced by a reasonable amount to reflect your use of the land other than for the purpose of carrying on the relevant business in an income year after you incurred the expenditure.
You may claim the deduction even if you are only a lessee of the land.
Rural land irrigation water providers can claim a deduction for certain expenditure they incur. A rural land irrigation water provider is an entity whose business is primarily and principally supplying water to entities for use in primary production businesses on land in Australia or businesses (except mining or quarrying businesses) using rural land in Australia. The supply of water by using a motor vehicle is excluded.
If you are a rural land irrigation water provider, you can claim a deduction for capital expenditure you incurred on a landcare operation for land used by other entities that you supply with water if the land is:
- land in Australia that those entities use at the time for primary production businesses, or
- rural land in Australia that those entities use at the time for carrying on businesses for a taxable purpose, except a business of mining or quarrying.
If you are a rural land irrigation water provider your deduction is reduced by a reasonable amount to reflect an entity’s use of the land for other than a taxable purpose in an income year after you incurred the expenditure.
A landcare operation is one of the following:
- erecting fences to separate different land classes in accordance with an approved land management plan
- erecting fences primarily and principally to keep animals out of areas affected by land degradation in order to prevent or limit further damage and assist in reclaiming the areas
- constructing a levee or similar improvements
- constructing drainage works, other than the draining of swamps or low-lying land, primarily and principally to control salinity or assist in drainage control
- an operation primarily and principally for eradicating or exterminating animal pests from the land
- an operation primarily and principally for eradicating, exterminating or destroying plant growth detrimental to the land
- an operation primarily and principally for preventing or fighting land degradation other than by erecting fences, or
- an extension, alteration or addition to any of the assets described in 1 to 4 above or an extension of an operation described in 5 to 7 above.
A landcare operation also includes:
- a repair of a capital nature to an asset described in 1 to 4 above
- constructing a structural improvement that is reasonably incidental to levees (or similar improvements) or drainage works deductible as capital expenditure on a landcare operation
- a repair of a capital nature, or an alteration, addition or extension to a structural improvement that is reasonably incidental to levees (or similar improvements) or drainage works deductible as capital expenditure on a landcare operation.
An example of a structural improvement that may be reasonably incidental to drainage works is a fence constructed to prevent livestock entering a drain that was constructed to control salinity.
No deduction is available if the capital expenditure is on plant unless it is on certain fences, dams or other structural improvements.
If the expenditure incurred arose from a non-arm’s length dealing and was more than the market value of what the expenditure was for, the amount of the expenditure is taken to be that market value instead.
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 for their share of the expenditure.
You may need to show any recoupment of the expenditure as assessable income either at Other business income or Income reconciliation adjustments.
For further information, see Guide to depreciating assets or phone 13 28 66.
Water conservation and conveyance facilities
You can claim a deduction for the decline in value of a water facility. A water facility includes plant or a structural improvement, or an alteration, addition or extension to plant or a structural improvement, that is primarily or principally for the purpose of conserving or conveying water.
Water facility includes dams, tank stands, bores, wells, irrigation channels, pipes, pumps, water towers and windmills. Water facility also includes certain other expenditure incurred on or after 1 July 2004 for:
- a repair of a capital nature to plant or a structural improvement that is primarily or principally for the purpose of conserving or conveying water, for example, if you purchase a pump that needs substantial work done to it before it can be used in your business, the cost of repairing the pump may be treated as a water facility
- a structural improvement, or an alteration, addition or extension to a structural improvement that is reasonably incidental to conserving or conveying water
- a repair of a capital nature to a structural improvement that is reasonably incidental to conserving or conveying water.
Examples of structural improvements that are reasonably incidental to conserving or conveying water include a bridge over an irrigation channel, a culvert (a length of pipe or multiple pipes that are laid under a road to allow the flow of water in a channel to pass under the road), or a fence preventing livestock entering an irrigation channel.
If you incurred the expenditure from 7.30pm (AEST), 12 May 2015 you claim the full amount in the year you incurred it. If you incurred the expenditure before this time, you deduct one-third of the amount in the income year in which you incurred it, and one-third in each of the following two years.
Unless you are an irrigation water provider, the expenditure must be incurred primarily and principally for conserving or conveying water for use in a primary production business you conduct on land in Australia. You may claim the deduction even when you do not own the land. Therefore, if you are a lessee carrying on a business of primary production on the land, you can still claim the deduction. Your deduction is reduced where the 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.
Irrigation water providers are entitled to a deduction for water facilities expenditure incurred on or after 1 July 2004. An irrigation water provider is an entity whose business is primarily and principally the supply of water to entities for use in primary production businesses on land in Australia. The supply of water by using a motor vehicle is excluded.
If you are an irrigation water provider, you must incur the expenditure primarily and principally for the purpose of conserving or conveying water for use in primary production businesses conducted by other entities on land in Australia (being entities supplied with water by you). The deduction is reduced if the facility is not used wholly for a taxable purpose.
If the expenditure incurred arose from a non-arm’s length dealing and was more than the market value of what the expenditure was for, the amount of the expenditure is taken to be that market value instead.
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 for their share of the expenditure.
You may need to show any recoupment of the expenditure as assessable income either at Other business income or Income reconciliation adjustments. For further information, see Guide to depreciating assets or phone 13 28 66.
Fencing assets
You can claim a deduction for the decline in value of a fencing asset. A fencing asset includes a structural improvement, a repair of a capital nature, or an alteration, addition or extension to a fence.
If you incurred the expenditure from 7.30pm (AEST), 12 May 2015 you claim the full amount in the year you incurred it. If you incurred the expenditure before this time (or if the expenditure relates to a stockyard, pen or portable fence), the previous decline in value rules that apply to fences based on their effective life continue to apply.
The expenditure must be incurred by you on the construction, manufacture, installation or acquisition of a fencing asset that is used primarily and principally in a primary production business you conduct on land in Australia. You may claim the deduction even when you do not own the land. Therefore, if you are a lessee carrying on a business of primary production on the land, you can still claim the deduction. Your deduction is reduced where the fencing asset is not wholly used for either:
- carrying on a primary production business on land in Australia
- a taxable purpose, for example, producing assessable income.
If the expenditure incurred arose from a non-arm’s length dealing and was more than the market value of what the expenditure was for, the amount of the expenditure is taken to be that market value instead.
These deductions are not available to a partnership. Costs incurred by a partnership on fencing assets are allocated to each partner who can then claim the relevant deduction for their share of the expenditure.
You may need to show any recoupment of the expenditure as assessable income either at Other business income or Income reconciliation adjustment. For further information, see Guide to depreciating assets or phone 13 28 66.
Fodder storage assets
You can claim a deduction for the decline in value of a fodder storage asset. A fodder storage asset is an asset that is primarily and principally for the purpose of storing fodder. It includes a structural improvement, a repair of a capital nature, or an alteration, addition or extension, to an asset or structural improvement, that is primarily and principally for the purpose of storing fodder.
Fodder refers to food for livestock, usually but not exclusively dried, such as grain, hay or silage. Fodder can include liquid feed and supplements. Examples of typical fodder storage assets include:
- silos
- liquid feed supplement storage tanks
- bins for storing dried grain
- hay sheds
- grain storage sheds
- above-ground bunkers.
If you incurred the expenditure from 19 August 2018 you deduct the full amount in the income year in which you incurred it. If you incurred the expenditure between 7.30pm (AEST), 12 May 2015 and 18 August 2018 you deduct one-third of the amount in the income year in which you incurred it, and one-third in each of the following two years, except if you first used the asset or installed it ready for use on or after 19 August 2018. In that case, you deduct the full amount in the income year in which you incurred it (this may require an amendment to a prior year tax return).
If you incurred the expenditure before 7.30pm (AEST), 12 May 2015, the previous decline in value rules that apply to fodder storage assets based on their effective life continue to apply.
The expenditure must be incurred by you on the construction, manufacture, installation or acquisition of a fodder storage asset that is used primarily and principally in a primary production business you conduct on land in Australia. You may claim the deduction even when you do not own the land. Therefore, if you are a lessee carrying on a business of primary production on the land, you can still claim the deduction. Your deduction is reduced where the fodder storage asset is not wholly used for either:
- carrying on a primary production business on land in Australia
- a taxable purpose, for example, producing assessable income.
If the expenditure incurred arose from a non-arm’s length dealing and was more than the market value of what the expenditure was for, the amount of the expenditure is taken to be that market value instead.
These deductions are not available to a partnership. Costs incurred by a partnership on fodder storage assets are allocated to each partner who can then claim the relevant deduction for their share of the expenditure.
You may need to show any recoupment of the expenditure as assessable income either at Other business income or Income reconciliation adjustments. For further information, see Guide to depreciating assets or phone 13 28 66.
Small business entities
Small businesses are able to claim an immediate deduction for assets they start to use, or have installed ready for use for a taxable purpose, provided they choose to use the simplified depreciation rules.
Under these rules, if you purchased assets from 7.30pm (AEST) on 12 May 2015 and first used or installed them ready for use:
From 7.30pm (AEST) on 12 May 2015 until 28 January 2019 |
From 29 January 2019 until before |
From 7.30pm (AEDT) on |
|---|---|---|
You can immediately deduct the business portion of most depreciating assets costing less than $20,000 each (the instant asset write-off threshold) |
You can immediately deduct the business portion of most depreciating assets costing less than $25,000 each (the instant asset write-off threshold). |
You can immediately deduct the business portion of most depreciating assets costing less than $30,000 each (the instant asset write-off threshold). |
The amount you show here must not include any amount relating to a depreciating asset used in your primary production business if you have chosen to claim a deduction for it under the small business entity depreciation rules.
Income and expense reconciliation adjustments
You may need to make income reconciliation adjustments or expense reconciliation adjustments. These adjustments reconcile your business operating profit or loss with your business taxable income.
Do not complete any income reconciliation adjustments or expense reconciliation adjustments if all the amounts you have shown between ABN not quoted and Landcare operations and deduction for decline in value of water facility, fencing asset and fodder storage asset (inclusive) are assessable income or allowable tax deductions for income tax purposes.
If you have included amounts such as exempt income or non-deductible expenses or have not included amounts which are assessable income or expenditure that is deductible, you must work out your reconciliation adjustments.
Worksheet 4 will assist you with your calculations.
What are income reconciliation adjustments?
Income reconciliation adjustments include:
- income add backs; this is income not shown in the accounts which is assessable income for tax purposes, such as
- assessable balancing adjustment amounts on disposal of depreciating assets
- other assessable income not included in the profit and loss statement
- income subtractions; this is income shown in the accounts which is not assessable income, such as
- profit on sale of depreciating assets
- other income that is not assessable for income tax purposes, for example, gross exempt income.
Your income reconciliation adjustment is your total income add backs less your total income subtractions.
Use worksheet 4 to work out your income reconciliation adjustments for your primary and non-primary production businesses.
What are expense reconciliation adjustments?
Expense reconciliation adjustments include the following.
- Expense add backs are expenses shown in the accounts which are not tax deductible, such as
- prepaid expenses not deductible in this year
- depreciation
- loss on sale of a depreciating asset
- other items not allowable as a deduction, for example, capital expenditure, additions to provisions and reserves, income tax expense, expenses relating to exempt income, debt deductions denied by the thin capitalisation rules, other non-deductible expenses.
- Expense subtractions are items not shown as expenses in the accounts but which are deductible for tax purposes, such as
- prepaid expenses from a prior year that are deductible this year but not included elsewhere
- deduction for decline in value of depreciating assets
- deductible balancing adjustment amounts on disposal of depreciating assets
- deduction for environmental protection expenses
- other items deductible for tax purposes.
Your expense reconciliation adjustment is your total expense add backs less your total expense subtractions.
Use worksheet 4 to work out your expense reconciliation adjustments for your primary and non-primary production businesses.
See Thin capitalisation and PSI deductions.
Specific reconciliation adjustments
Following are examples of specific reconciliation adjustments that may apply to you.
If you were previously in the STS read Former STS taxpayers below first. Otherwise, go to Depreciating assets deducted under the simplified depreciation rules.
Former STS taxpayers
Make adjustments in this section if you:
- are eligible and have chosen to continue using the STS accounting method and the amounts you have shown at the Income and Expense sections are not based on the STS accounting method, or
- stopped using the STS accounting method in 2018–19.
These adjustments are explained in more detail at Adjustments when ceasing to use the STS accounting method.
Worksheet 4 will assist you with your calculations.
Income derived but not received as at 30 June 2019 and expenses incurred but not paid as at 30 June 2019
If you are eligible and have chosen to continue using the STS accounting method and have included amounts of ordinary income that have been derived but not received in 2018–19, the amounts not received are not assessable this year, for example, trade debtors as at 30 June 2019.
These amounts form part of your income reconciliation adjustments. Include these amounts at row f on worksheet 4.
If you are eligible and have chosen to continue using the STS accounting method and have included amounts for general deductions, repairs and tax-related expenses that have been incurred but not paid in 2018–19, the amounts not paid are not deductible this year, for example, trade creditors as at 30 June 2019.
These amounts form part of your expense reconciliation adjustments. Include these amounts at row n on worksheet 4
Adjustments when ceasing to use the STS accounting method
If you have discontinued using the STS accounting method read on.
If you have not included at the Business income section any amounts of ordinary income that were derived but not received while using the STS accounting method, these amounts are assessable this year, for example, trade debtors as at 30 June 2018.
Include these amounts at row b on worksheet 4.
If you have not included at the Business expenses section any amounts of general deductions, repairs or tax-related expenses that were incurred but not paid while using the STS accounting method, these amounts are deductible this year, for example, trade creditors as at 30 June 2018.
Include these amounts (other than tax-related expenses) at row t on worksheet 4. Enter your deduction for tax-related expenses at Cost of managing tax affairs on your tax return.
Depreciating assets deducted under the simplified depreciation rules
Disposal of depreciating assets
If you disposed of any depreciating assets during the income year, the following amounts (if any) form part of your income reconciliation adjustments:
- the taxable purpose proportion of the termination value of assets that have been disposed of for which an immediate deduction has been claimed either this year or in a prior year
- if the closing pool balance of a general small business pool is less than zero, the amount below zero
- assessable balancing adjustment amounts on the disposal of depreciating assets not allocated to a general small business pool.
See Definitions for an explanation of these terms.
Include the amounts at row b on worksheet 4.
Any deductible balancing adjustment amounts on the disposal of depreciating assets that you have not allocated to a small business pool form part of your Expense reconciliation adjustments. Include these amounts at q on worksheet 4.
See also: Guide to depreciating assets, or you can work out your depreciation and capital allowance claims by using the Depreciation and capital allowances tool.
Prepaid expenses
Special rules may affect the timing of deductions for prepaid expenditure. Under these rules you may need to apportion certain prepaid expenses over more than one income year. You must make an expense reconciliation adjustment to add back that part of the expense that is not deductible in the year it is incurred. Show the adjustment at row k on worksheet 4.
If you had a prepaid expense in a prior year which is to be apportioned over the service period and you are entitled to a deduction for part of the expense this year but have not included it elsewhere, show the adjustment as an expense subtraction at row s on worksheet 4.
For more information, see Deductions for prepaid expenses.
Deduction for decline in value
A deduction for a decline in value of a depreciating asset calculated under income tax law may differ from the accounting or book calculation of depreciation. Different rules regarding such things as effective life, the calculation of balancing adjustment amounts and the treatment of debt forgiveness amounts can produce a discrepancy between the two calculations.
Under income tax law you can deduct an amount equal to the decline in value of a depreciating asset in 2018–19 if you held the depreciating asset for any time during the year and used it (or installed it ready for use) for a taxable purpose, such as for producing assessable income.
The deduction is reduced to the extent you do not use the asset for a taxable purpose.
To help you calculate your deduction for decline in value, use the Depreciation and capital allowances tool, or see Guide to depreciating assets which also provides explanations of relevant terms. The publication also explains the $30,000 instant asset write off for businesses with a turnover from $10 million and less than $50 million and the option to allocate to a low-value pool depreciating assets that cost less than $1,000 (excluding input tax credit entitlements) and depreciating assets that have an opening adjustable value of less than $1,000.
If you choose to use the low-value pool method to calculate the decline in value of low-cost or low-value depreciating assets and the pool contains assets used for work-related, self-education or non-business rental purposes, read Low value pool deduction. Do not include the deduction at the Business income or losses section. If none of the depreciating assets in the pool is used for any of those purposes, include the amount of your low-value pool deduction at row r on worksheet 4. Where necessary, make a reasonable apportionment between primary production and non-primary production activities.
You should also include the deduction for decline in value of depreciating assets not allocated to a pool at row r on worksheet 4.
You should also add back the depreciation charged in your accounts and shown at Depreciation expenses in the Business Expenses section as an expense reconciliation adjustment. Include the amount at row h on worksheet 4. The amount at row h should not include any small business pool deductions which you have claimed at Depreciation expenses.
A leased car, either new or second-hand, is a luxury car if its cost exceeds the car limit that applies for the income year in which the lease commences. The car limit for 2018–19 is $57,581.
A luxury car lease entered into after 7.30pm (by legal time in the ACT) on 20 August 1996 (other than genuine short-term hire arrangements) is treated as a notional sale-and-loan transaction.
The cost or value of the car specified in the lease (or the market value if the parties were not dealing at arm’s length in connection with the lease) is taken to be the cost of the car for the lessee and the amount loaned by the lessor to the lessee to buy the car.
In relation to the notional loan, the actual lease payments are divided into notional principal and finance charge components. That part of the finance charge component for the notional loan applicable for the particular period (the accrual amount) is deductible to the lessee, subject to any reduction required under the thin capitalisation rules.
The amount forms part of your expense reconciliation adjustments. Include the amount at row p on worksheet 4.
In relation to the notional sale, the lessee is treated as the holder of the luxury car and may be entitled to claim a deduction for the decline in value of the car. If the lessee is a small business entity using the simplified depreciation rules for the income year in which the lease is entered into, the lessee allocates the car to their general small business pool.
For the purpose of calculating the deduction, the cost of the car is limited to the car limit for the income year in which the lease is granted.
For more information on deductions for the decline in value of leased luxury cars, see Guide to depreciating assets.
In summary, the lessee is entitled to deductions equal to:
- the accrual amount
- the decline in value of the luxury car, based on the applicable car limit, unless the car is allocated to the general small business pool.
You reduce both deductions to reflect any use of the car for a non-taxable purpose.
Where you allocated the car to the general small business pool with the cost based on the applicable car limit, see Calculating your depreciation deductions.
If you have included the lease expense at Lease expenses in the Business expenses section, the amount should also form part of your expense reconciliation adjustments. Include the amount at row i on worksheet 4. Include the deduction for the accrual amount at row p.
If the lease terminates or is not extended or renewed and the lessee does not actually acquire the car from the lessor, the lessee is treated under the rules as disposing of the car by way of sale to the lessor. This constitutes a balancing adjustment event. If the car is not subject to the simplified depreciation rules, any assessable or deductible balancing adjustment amount for the lessee must be determined. If the car has been allocated to the lessee’s general small business pool, see calculation 4 for small business entities.
Hire-purchase agreements
Hire-purchase and instalment sale agreements of goods are treated as a sale of the property by the financier (or hire-purchase company) to the hirer (or instalment purchaser).
The sale is treated as being financed by a loan from the financier to the hirer at a sale price of either their agreed cost or value or the property’s arm’s length value.
The periodic hire-purchase (or instalment) payments are treated as payments of principal and interest under the notional loan. The interest component is deductible to the hirer, subject to any reduction required under the thin capitalisation rules. This amount forms part of the expense reconciliation adjustments. Include the amount at row t on worksheet 4.
In relation to the notional sale, the hirer of a depreciating asset is treated as the holder of the asset and either allocates the asset to the appropriate small business pool if they are a small business entity using the simplified depreciation rules for the income year, or may be entitled to claim a deduction for the decline in value of the depreciating asset. The cost of the asset for this purpose is taken to be the agreed cost or value, or the arm’s length value if the dealing is not at arm’s length.
If you have included hire-purchase charges as an expense, the amount should also form part of your expense reconciliation adjustments. Include the amount at row n on worksheet 4.
Termination of a limited recourse debt
Excessive deductions for capital allowances are included in assessable income under the limited recourse debt rules contained in Division 243 of the ITAA 1997. This will occur where:
- expenditure on property has been financed or re-financed wholly or partly by the limited recourse debt
- the limited recourse debt is terminated after 27 February 1998 but has not been paid in full by the debtor
- because the debt has not been paid in full, the capital allowance deductions allowed for the expenditure exceed the deductions that would be allowable if the unpaid amount of the debt was not counted as capital expenditure of the debtor. Special rules apply in working out whether the debt has been fully paid.
A limited recourse debt is a debt where the rights of the creditor as against the debtor, in the event of default in payment of the debt or of interest, are limited wholly or predominantly to the property which has been financed by the debt or is security for the debt, or rights in relation to such property. A debt is also a limited recourse debt if, notwithstanding that there may be no specific conditions to that effect, it is reasonable to conclude that the creditor’s rights as against the debtor’s are capable of being so limited.
A limited recourse debt includes a notional loan under a hire-purchase or instalment sale agreement of goods to which Division 240 of the ITAA 1997 applies, see section 243-20.
The amount that is included within assessable income as a result of these provisions forms part of your income reconciliation adjustments. Include the amount at row b on worksheet 4.
Worksheet 4 – Reconciliation statement
Reconcile your primary production and non-primary production items separately.
Row |
Calculation elements |
Primary production |
Non-primary production |
|---|---|---|---|
a |
Assessable balancing adjustment amounts on disposal of depreciating assets |
$ |
$ |
b |
Assessable business income not included in the profit and loss statement |
$ |
$ |
c |
Subtotal: add the amounts at row a and row b. |
$ |
$ |
Row |
Calculation elements |
Primary production |
Non-primary production |
|---|---|---|---|
d |
Net exempt income (gross exempt income less expenses relating to that exempt income) |
$ |
$ |
e |
Profit on sale of depreciating assets included in accounts |
$ |
$ |
f |
Other non-assessable income included in the profit and loss statement |
$ |
$ |
g |
Subtotal: add the amounts at rows d, e and f. |
$ |
$ |
|
Income reconciliation adjustments: take the amount at row g away from the amount at row c. |
$ |
$ |
Row |
Calculation elements |
Primary production |
Non-primary production |
|---|---|---|---|
h |
Depreciation charged in accounts |
$ |
$ |
i |
Lease payments for luxury cars |
$ |
$ |
j |
Loss on sale of depreciating assets included in accounts |
$ |
$ |
k |
Part of prepaid expenses not deductible this year |
$ |
$ |
Row |
Calculation elements |
Primary production |
Non-primary production |
|---|---|---|---|
l |
Capital expenditure |
$ |
$ |
m |
Additions to provisions and reserves |
$ |
$ |
n |
Other non-deductible items, including income tax |
$ |
$ |
o |
Subtotal: add the amounts at rows h, i, j, k, l, m and n. |
$ |
$ |
Row |
Calculation elements |
Primary production |
Non-primary production |
|---|---|---|---|
p |
Accrual amount deduction for lessee of luxury cars |
$ |
$ |
q |
Deductible balancing adjustment amounts on disposal of depreciating assets |
$ |
$ |
r |
Deduction for decline in value of depreciating assets |
$ |
$ |
s |
Part of prepaid expenses deductible this year but not included elsewhere |
$ |
$ |
t |
Other items deductible for tax purposes not included in the profit and loss statement |
$ |
$ |
u |
Subtotal: add the amounts at rows p, q, r, s and t. |
$ |
$ |
|
Expense reconciliation adjustments: take the amount at row u away from the amount from row o. |
$ |
$ |
Notes:
- Include amounts at row h only if you are not using the simplified depreciation rules. However, exclude any pool deductions which you have included at
Depreciation expenses which relate to a continuing small business pool. - See Guide to depreciating assets for an explanation of depreciating assets.
- If you have included an amount of capital expenditure incurred to terminate a lease or licence at Lease expenses, make a reconciliation adjustment at Expense reconciliation adjustments by including the amount of capital expenditure as an expense add back and taking away that part of the expense which is allowed as a tax deduction.
Completing Income and Expense reconciliation adjustments
- Complete worksheet 4 using the explanations provided. This will give you your total income and expense reconciliation adjustment amounts.
- Transfer the totals in the Income reconciliation adjustments (below row g) and the Expense reconciliation adjustments (below row u) on the worksheet to the appropriate fields.
Do not include in the amount at row t on worksheet 4:
- section 40-880 deductions
- business deductions for project pools
- deductions for landcare operations, water facilities, fencing assets and fodder storage assets.
Reconciliation adjustments for these amounts are shown separately at:
- Section 40-880 deduction
- Business deduction for project pool
- Landcare operations and business deduction for decline in value of water facility, fencing asset and fodder storage.