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Edited version of your written advice
Authorisation Number: 1013092816348
Date of advice: 10 October 2016
Ruling
Subject: Instrument purchase
Question
Are you entitled to an immediate deduction for the cost of your instrument?
Answer
No.
This ruling applies for the following period
Year ended 30 June 2016
The scheme commenced on
1 July 2015
Relevant facts
You purchased an instrument for less than $10,000.
You have the receipt for the purchase.
You use the instrument for your employment.
Your instrument will increase in value.
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.
Income Tax Assessment Act 1997 section 102-20.
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for a loss or an outgoing to the extent to which it is incurred in gaining or producing assessable income, except where the loss or outgoing is of a capital, private or domestic nature.
Whether a loss or outgoing is of a capital nature has been set down by the High Court in Sun Newspapers Ltd. and Associated Newspapers Ltd. v. Federal Commissioner of Taxation (1938) 5 ATD 23; 5 ATD 87; 61 CLR 337. An expense is capital in nature where:
• the nature of the advantage has lasting and enduring benefit, or
• the payment is 'once and for all' for the future use of the asset or advantage rather than being recurrent and ongoing.
The cost of your instrument is considered to be a capital expense as it provides a lasting and enduring benefit and the payment is a one-off payment.
As the instrument is regarded as a capital asset, the purchase cost is capital in nature. Therefore no deduction is allowed under section 8-1 of the ITAA 1997 for the cost of your instrument.
Section 40-25 of the ITAA 1997 allows a deduction for the decline in value (depreciation) of a depreciating asset you hold, to the extent the asset is used for a taxable purpose.
A depreciating asset is defined in section 40-30 of the ITAA 1997 to be an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used.
The Commissioner has issued Taxation Ruling TR 2016/1 Income tax: effective life of depreciating assets which lists the effective life of instruments as being 10 years. Therefore it is accepted that instruments can generally be depreciated over 10 years.
However, you advised that your instrument will not decline in value and will instead increase in value over time and therefore Division 40 of the ITAA 1997 will not apply.
The only other relevant legislation for capital assets is the capital gains tax (CGT) provisions.
Section 102-20 of the ITAA 1997 states that a capital gain or capital loss is made only if a CGT event happens. When you dispose of a CGT asset, CGT event A1 occurs. Therefore if you sell your instrument, a capital gain may arise.
In your case, you have purchased a CGT asset. The purchase cost of your instrument forms part of the cost base for CGT purposes.
The CGT provisions do not allow any deduction for the purchase cost of assets. Rather the purchase cost is used in calculating any capital gain or loss when sold.
As no CGT event has occurred in relation to your instrument in the 20XX-XX financial year, the CGT provisions do not apply.
There are no other provisions that allow a deduction for the cost of your instrument. Therefore you are not entitled to a deduction for the purchase cost of your instrument.
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