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Edited version of private ruling
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Ruling
Subject: Deductibility of guard dog expenses
1. Are you entitled to a deduction for a portion of the decline in value of the purchase and training costs of the guard dog?
Yes.
2. Are you entitled to a deduction for a portion of the expenses incurred in maintaining the guard dog?
Yes.
This ruling applies for the following periods:
Year ended 30 June 2011
Year ended 30 June 2012
Year ended 30 June 2013
Year ended 30 June 2014
The scheme commences on:
1 July 2010
The scheme that is the subject of this ruling
You run a home based business.
You store business plant and equipment in and at your home.
You are away from home during the day.
You intend to buy a guard dog to protect your business plant and equipment when you are not at home.
You will incur additional expenses training and maintaining the dog.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Income Tax Assessment Act 1997 Section 40-25
Income Tax Assessment Act 1997 Section 40-30
Reasons for decision
Are you entitled to a deduction for a portion of the decline in value of the purchase and training costs of the dog?
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that in order for an expense to be deductible there must be a connection between the expense and the gaining or producing of assessable income. However expenses that are capital or private and domestic in nature are not deductible.
Where an expense is capital, section 40-25 of the ITAA 1997 allows a deduction equal to the decline in value of a depreciating asset in certain circumstances. Section 40-30 of the ITAA 1997 provides that a depreciating asset is something that will decline in value over time. Plant is a depreciating asset.
ATO Interpretive Decision 2001/696 provides that a guard dog that is used to provide security to business premises is considered to be plant, as the dog serves a productive function of the business. Therefore, the purchase cost of a guard dog relates to a purchase of plant, which is a capital expense. The capital cost of the guard dog would include the initial purchase price of the dog and the training costs. Training the dog is a capital expense because it provides an enduring benefit to the business.
Where the expense provides both a business function and a private function it is necessary to apportion the expense. As it is often a question of fact and degree as to the portion of business and private use, the method of apportionment must be fair and reasonable in all the circumstances.
In your case, you run a home based business. You intend to buy a guard dog to protect the business plant and equipment you store in and at your home. The guard dog will be an item of plant and therefore capital as it will serve a productive function of the business. Therefore, you are not entitled to an immediate deduction for the cost of the dog.
Because the value of the dog will decline over time, it is a depreciating asset for the purposes of section 40-30 of the ITAA 1997. Therefore, you are entitled to claim a deduction for the decline in value of the purchase and training costs of the dog pursuant to section 40-25 of the ITAA 1997.
However, as the location of your business plant and assets is at your home, the guard dog will also be guarding your personal belongings. Therefore, it will be necessary for you to apportion the decline in value between the business function provided by the dog and the private function provided by the dog.
Are you entitled to a deduction for a portion of the expenses incurred in maintaining the guard dog?
Section 8-1 of the ITAA 1997 provides that in order for an expense to be deductible there must be a connection between the expense and the gaining or producing of assessable income. In addition, the expense must not be of a private or domestic nature.
In your case, the guard dog will provide protection to your business plant and equipment. Therefore, there is a connection between the expense of maintaining the dog and the production of assessable income. Because you store your business assets in and at your home the guard dog will also provide protection to your personal assets. As such it will be necessary for you to apportion the maintenance expenses between the business function provided by the dog and the private function provided by the dog. Therefore, you are entitled to claim the portion of maintenance expenses associated with the business function provided by the dog pursuant to section 8-1 of the ITAA 1997.
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