Taxation Ruling
IT 2248
Income tax: depreciation of video tapes in video library
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FOI status:
May be releasedFOI number: I 1205856PREAMBLE
Advice was sought from this office as to whether it was open to adopt an accounting method in which (in effect) all video cassettes of a video library would be treated as trading stock. Under the accounting method, it was proposed that all purchases and sales of video cassettes would be treated as on revenue account with an adjustment made for variations between opening and closing stock figures.
2. The request arose as a consequence of the laborious task claimed to be required to keep suitable records for the preparation of a correct depreciation schedule. It was stated that the need to offer the latest films and not be burdened with low volume video tapes resulted in a video library having to sell or scrap a large number of used tapes each year and to replace those tapes with new ones.
RULING
3. Approval cannot be given for the adoption of the accounting method proposed. The fact of the matter is that video cassettes used in a video library are purchased for hire to customers and not for sale. Expenditure on purchasing cassettes for that purpose is capital expenditure and a deduction under sub-section 51(1) would not be allowable. The cassettes do not constitute trading stock of the video library and it is not acceptable to account for them as if they were. Rather, the cassettes are plant or articles in respect of which depreciation would be allowable and any accounting method adopted must reflect this.
4. The prime cost rate of depreciation of video cassettes used for hire has been determined to be 50% per annum. The rate is based on the effective life of the video cassettes as section 55 of the Income Tax Assessment Act requires. No accounting method having the effect of varying the rate can be adopted merely for such reasons as administrative convenience, obsolescence or the fact that a video operator may wish to dispose of a cassette because it is rarely hired.
5. Where video cassettes used in a video library are disposed of, lost or destroyed, the provisions of section 59 of the Act apply to bring to account as assessable income the excess of the consideration received over the depreciated value, or, where the consideration received is less than the depreciated value, to allow a further deduction.
COMMISSIONER OF TAXATION
30 January 1986