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Edited version of your written advice
Authorisation Number: 1013072095156
Date of advice: 17 August 2016
Ruling
Subject: Depreciation and capital works
Questions and answers
1. Are you entitled to a deduction for the following depreciating assets: IT cabling patch and fly leads?
Yes.
2. Are you entitled to claim a capital works deduction for the data outlets?
Yes.
This ruling applies for the following periods:
Year ended 30 June 2016
The scheme commenced on:
1 July 2015
Relevant facts and circumstances
A refurbishment was carried out on the premises you carry out your business from.
A new computer system was installed.
IT cabling patch and fly leads along with data outlets were installed.
Data outlets would not be removed if you were to move premises.
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 43-25
Reasons for decision
Deductions for capital expenditure on assets used to produce assessable income will generally be available under either:
(a) Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997) for depreciating assets, or
(b) Division 43 of the ITAA 1997 for capital works.
Depreciating assets
A depreciating asset is an asset that has a limited effective life and can be expected to decline in value over the time it is used.
Section 40-25 of the ITAA 1997 allows you a deduction equal to the decline in value of a depreciating asset to the extent to which it is used to produce assessable income or is installed ready for use for that purpose.
The decline in value is calculated by spreading the cost of the asset over its effective life. You can use one of two methods, either the prime cost method or diminishing value method, to calculate the deduction. If the asset is only used for part of the year, any deduction should be apportioned on a pro-rata basis.
Once you have made the choice on which method you are going to use for an asset you cannot change the method.
An asset's effective life is either self-assessed or determined by the Commissioner. Taxation Ruling TR 2016/1 lists the effective life of various assets as determined by the Commissioner.
Depreciating assets include plant, articles, machinery, tools and rolling stock. An item qualifies as plant if its function is essentially the permanent means or apparatus used to produce the income, for example machines or manufacturing equipment. This is regardless of whether the item is fixed or movable.
If an items function is to provide the setting or environment within which income producing activities are conducted then the item does not qualify as plant. In deciding whether an item is part of the setting or environment, the following must be considered:
_ whether the item appears visually to retain a separate identity
_ the incompleteness of the structure without it
_ the degree of permanence with which it has been attached, and
_ the extent to which it was intended to be permanent or whether it was likely to be replaced within a relatively short period.
If an item does not form part of the premises, it will come within the ordinary meaning of plant and will be considered to be a depreciating asset.
The IT cabling patch and fly leads are considered plant and therefore is a depreciating asset.
Capital works deduction
Section 43-10 of the ITAA 1997 allows you to claim a deduction for capital expenditure incurred in constructing buildings, or extensions, alterations or improvements to buildings.
Assets which form part of premises will be included in calculating a buildings capital works deduction.
Deductions may only be claimed for the period during the year a property is used for income producing purposes.
The data outlets form part of the fabric of the building and have a level of permanency which qualifies them for a capital works deduction.
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