Tax Law Improvement Act 1997 (121 of 1997)

Schedule 1   Amendment of the Income Tax Assessment Act 1997

9   After Division 41

Insert:

Division 42 - Depreciation of plant

Table of Subdivisions

Guide to Division 42

42-A Key operative provisions

42-B Cost of plant

42-C Effective life

42-D Depreciation rates

42-E Calculation of depreciation deductions

42-F Calculation of balancing adjustments

42-G Calculation of balancing adjustments for some cars

42-H Balancing adjustment relief

42-I Quasi-ownership

42-J Partial change of ownership

42-K Car depreciation limit

42-L Pooling

Guide to Division 42

42-1 What this Division is about

This Division sets out the basis on which you can deduct amounts for depreciation of property that is a unit of plant.

To work out how this Division applies to existing plant (and some plant where roll-overs are involved), you need to refer to the transitional provisions in Division 42 of the Income Tax (Transitional Provisions) Act 1997.

Table of sections

42-5 Key concepts used in this Division

42-5 Key concepts used in this Division

Key concepts used in Division 42
          

Subdivision 42-A - Key operative provisions

Guide to Subdivision 42-A

42-10 What this Subdivision is about

This Subdivision contains the key operative provisions for depreciation, including the main deduction provision.

Table of sections

Operative provisions

42-15 Deduction for depreciation

42-18 Meaning of plant

42-19 References to plant

42-20 Amount you deduct

42-25 Calculation

42-30 Balancing adjustments

42-35 Application of Division 41 Common rules

42-40 Choices

42-45 Exclusions

42-48 Debt forgiveness: amounts deducted for depreciation

Non-operative provisions

42-50 What are other “amounts deducted for depreciation”?

42-55 Signposting to other parts of the Act

Operative provisions

42-15 Deduction for depreciation

You deduct an amount for depreciation of a unit of *plant for an income year if, in that year:

(a) you are its owner or *quasi-owner; and

(b) you use it, or have it *installed ready for use, for the *purpose of producing assessable income.

Note: If there is a quasi-owner, the owner cannot deduct: see
section 42-320.

42-18 Meaning of plant

(1) Plant includes:

(a) articles, machinery, tools and rolling stock; and

(b) animals used as beasts of burden or working beasts in a *business, other than a *primary production business; and

(c) fences, dams and other structural improvements, other than those used for domestic or residential purposes, on land that is used for agricultural or pastoral operations; and

(d) structural improvements, other than a *forestry road or structural improvements used for domestic or residential purposes, on land used in a business involving:

(i) planting or tending trees in a plantation or forest that are intended to be felled; or

(ii) felling trees in a plantation or forest; or

(iii) transporting trees, or parts of trees, that you felled in a plantation or forest to the place where they are first to be milled or processed, or from which they are to be transported to the place where they are first to be milled or processed; and

(e) structural improvements, other than those used for domestic or residential purposes, that are used wholly for operations (carried out in the course of a business) relating directly to:

(i) taking or culturing pearls or pearl shell; or

(ii) taking or catching trochus, bêche-de-mer or green snails;

and that are situated at or near a port or harbour from which the business is conducted; and

(f) structural improvements that are excluded from paragraph (c), (d) or (e) because they are used for domestic or residential purposes if they are provided for the accommodation of employees, tenants or sharefarmers who are engaged in or in connection with the activities referred to in that paragraph.

(2) Plant also includes plumbing fixtures and fittings (including wall and floor tiles) provided by an entity mainly for:

(a) either or both:

(i) employees in a *business carried on by the entity for the *purpose of producing assessable income; or

(ii) employees in a business carried on for that purpose by a company that is a member of the same *wholly-owned group of which the entity is a member; or

(b) *children of any of those employees.

42-19 References to plant

References in the following provisions of this Division to *plant are to a unit of plant.

42-20 Amount you deduct

(1) The amount you deduct is worked out under Subdivision 42-E. However, for *plant in a *pool, you work out the amount under Subdivision 42-L.

(2) You cannot deduct more than the *undeducted cost of the *plant.

42-25 Calculation

(1) The calculation of your deduction is based on the *cost of the *plant to you.

(2) The rate you use to calculate your deduction is set out in Subdivision 42-D. Generally, the rate is based on the *effective life of the *plant.

(3) You have a choice of 2 calculation methods: the *diminishing value method and the *prime cost method. You make the choice for the income year in which a depreciation deduction is first allowable to you for the *plant.

Note: The diminishing value method calculates your deduction each year as a percentage of the balance you have left to deduct.

The prime cost method calculates your deduction each year as a percentage of your cost.

42-30 Balancing adjustments

(1) You must make a balancing adjustment calculation for *plant if:

(a) you have deducted or can deduct an amount for depreciation of it or, if Common rule 1 (roll-over relief for related entities) applied to your acquisition of it, the transferor or an earlier successive transferor deducted or can deduct an amount for depreciation of it; and

(b) a *balancing adjustment event occurs.

Note 1: However, no balancing adjustment calculation is required if Common rule 1 applies to the balancing adjustment event.

Note 2: A balancing adjustment calculation may include an amount in your assessable income or allow you to deduct an amount. If you are required to include an amount in your assessable income, balancing adjustment relief may be available: see sections 42-285, 42-290 and 42-295.

(2) Balancing adjustments are calculated under:

(a) Subdivision 42-F; or

(b) Subdivision 42-G for some *cars; or

(c) section 42-390 for *plant in a *pool.

(3) A balancing adjustment event occurs as shown in the table:

Note: Section 42-330 deals with partial change of ownership.

42-35 Application of Division 41 Common rules

The following Common rules apply to this Division:

(a) Common rule 1 (roll-over relief for related entities);

(b) Common rule 2 (non-arm’s length transactions);

(c) Common rule 3 (anti-avoidance - ownership).

For modifications to Common rule 1, see sections 42-275 and 42-280.

For modifications to Common rule 2, see sections 42-75 and 42-210.

42-40 Choices

(1) Any choice you are required to make under this Division must be made:

(a) by the day you lodge your *income tax return for the income year to which the choice relates; or

(b) within a further time allowed by the Commissioner.

(2) Your choice, once made, applies to that income year and all later income years.

42-45 Exclusions

Primary production expenditure

(1) You cannot deduct an amount for depreciation of *plant if any expenditure incurred on it by any entity has been or can be deducted under Subdivision 387-A (Landcare operations) or 387-B (Facilities to conserve or convey water).

Research and development plant

(2) You cannot deduct an amount for depreciation of *plant that you have *installed ready for use exclusively for the purpose of carrying on *research and development activities unless you have elected under subsection 73B(18) of the Income Tax Assessment Act 1936 that the research and development provisions are not to apply to the plant.

Leisure facilities and boats

(3) You cannot deduct an amount for depreciation of a *leisure facility or a boat unless, at some time in the income year:

(a) its use constitutes a *fringe benefit; or

(b) you use the leisure facility or hold it for use as mentioned in subsection 26-50(3); or

(c) you use the boat or hold it for use as mentioned in
paragraph 26-50(5)(b), (c) or (d).

42-48 Debt forgiveness: amounts deducted for depreciation

(1) An amount applied in reduction of deductible expenditure (within the meaning of Division 245 of Schedule 2C to the Income Tax Assessment Act 1936) for *plant under section 245-155 of that Schedule is taken to be an amount you have deducted under section 42-15 for depreciation of the plant.

(2) The amount is taken to have been deducted as at the first day of your income year that corresponds to the forgiveness year of income for the reduction within the meaning of Division 245 of that Schedule.

Note: Therefore, the amount must be taken into account for the plant under paragraph (a) of the definition of undeducted cost in section 42-175. Also, because the amount is taken to have been deducted as at the first day of the income year, it will reduce the opening undeducted cost of the plant if you are using the diminishing value method.

Non-operative provisions

42-50 What are other “amounts deducted for depreciation”?

(1) A number of provisions in this Division require you to work out the amounts you have deducted or can deduct for depreciation of plant. Apart from amounts you have deducted or can deduct under section 42-15, other amounts may need to be taken into account.

(2) Those other amounts are:

(a) amounts you have deducted or can deduct for depreciation under Division 28 using the “log book” method or the “one-third of actual expenses” method; and

(b) amounts you treat as having been deducted for depreciation under section 42-285 or 42-290 (balancing adjustment relief); and

(c) amounts taken to be depreciation under paragraph 159GJ(1)(e) of the Income Tax Assessment Act 1936.

42-55 Signposting to other parts of the Act

Entertainment

(1) Section 32-15 treats some property that is used for entertainment as not being used for the purpose of producing assessable income.

Environment

(2) Even if you do not use property for the purpose of producing assessable income, you will be taken to do so in some circumstances. See section 330-455 (mine site rehabilitation) and sections 82BG and 82BR of the Income Tax Assessment Act 1936 (environmental impact or protection).

Debt forgiveness

(3) Your deductions under this Division may be reduced if any of your commercial debts have been forgiven in the income year: see Subdivision 245-E of Schedule 2C to the Income Tax Assessment Act 1936.

Anti-avoidance

(4) The anti-avoidance provisions in section 51AD, and Division 16D of Part III, of the Income Tax Assessment Act 1936 may deny a depreciation deduction.

Record-keeping

(5) The rules in Division 900 requiring individuals and certain partnerships to keep written evidence of work expenses and car expenses apply to this Division.

(6) There are special record-keeping rules that apply to this Division in section 262A of the Income Tax Assessment Act 1936.

Subdivision 42-B - Cost of plant

Guide to Subdivision 42-B

42-60 What this Subdivision is about

A depreciation deduction for plant is based on its cost. This Subdivision tells you how to work out its cost.

Table of sections

Operative provisions

42-65 How to work out your cost

42-70 Adjustment: acquiring a car at a discount

42-75 Adjustment: non-arm’s length transactions

42-80 Adjustment: car depreciation limit

42-85 Adjustment: double deduction

42-90 Adjustment: previously depreciated plant limit

Operative provisions

42-65 How to work out your cost

Method statement

Step 1. Work out the cost of the *plant using the following table. If more than one row applies, use the cost under the last applicable row.

Step 2. The table indicates provisions that may adjust the cost. Refer to them to see if an adjustment is necessary.

Step 3. If more than one provision adjusts the cost, apply them in the order they appear in the table to:

(a) the cost; or

(b) the adjusted cost after applying the last applicable provision.

Step 4. The result is your cost .

Example: An entity acquires a car in a non-arm’s length transaction for $80,000. The market value of the car is $60,000. Assume the car depreciation limit for the year is $55,000.

The provisional cost is $80,000 (item 1 of the table). The non-arm’s length rule is applied next to reduce it to $60,000. Then the car depreciation limit applies to further reduce it. Your cost is $55,000.

42-70 Adjustment: acquiring a car at a discount

(1) You must increase the cost of a *car designed mainly for carrying passengers and which you acquire at a discount if:

(a) it is reasonable to conclude that any portion ( discount portion ) of the discount is referable to you or another entity selling other *plant for less than its market value; and

(b) you, or another entity, deducted or can deduct an amount for depreciation of the other plant for any income year; and

(c) the sum of the cost of the car and the discount portion exceeds the *car depreciation limit calculated under
section 42-345 for the *financial year in which you first use the car for any purpose.

(2) The cost of the *car is increased by the discount portion.

Note: The termination value of the other plant is also increased by the discount portion: see section 42-205.

(3) This section does not apply to a *car that is excluded from
section 42-80 by subsection 42-80(2).

42-75 Adjustment: non-arm’s length transactions

Common rule 2 applies for the purpose of working out the cost of *plant, but with the following modifications:

(a) it applies to cost rather than expenditure; and

(b) it compares the cost with the amount that would have been the cost if the parties had dealt with each other at arm’s length, and substitutes that amount instead of market value.

42-80 Adjustment: car depreciation limit

(1) If the cost of a *car designed mainly for carrying passengers would exceed the *car depreciation limit for the *financial year in which you first use the car for any purpose, your cost is reduced to that limit.

(2) This section does not apply to a *car that, immediately before you first used it for any purpose, was specially fitted out for transporting disabled people in wheelchairs unless, at that time:

(a) it was for your personal transportation; and

(b) it would be covered by subitem 96(1) or 97(1) of Schedule 1 to the Sales Tax (Exemptions and Classifications) Act 1992.

42-85 Adjustment: double deduction

(1) The cost of *plant is reduced by any portion of its cost that you have deducted or can deduct, or that has been or will be taken into account in working out an amount you can deduct, other than for depreciation.

(2) Subsection (1) does not apply to deductions for:

(a) research and development (section 73B of the Income Tax Assessment Act 1936);

(b) development and investment allowances (Subdivisions B and BA of Division 3 of Part III of that Act);

(c) drought investment allowance (Part XII of that Act).

42-90 Adjustment: previously depreciated plant limit

(1) The Commissioner may limit the cost to you of *plant for which an amount has been deducted or can be deducted for depreciation by any earlier owner or *quasi-owner.

(2) The cost of the *plant may be limited to the sum of:

(a) its *written down value, immediately before the *balancing adjustment event occurred, in the hands of the last entity who had deducted or can deduct an amount for depreciation of it; and

(b) any balancing adjustment included in that entity’s assessable income for the plant under Subdivision 42-F or 42-G; and

(c) any balancing adjustment that would have been included in that entity’s assessable income for the plant if balancing adjustment relief under section 42-285 (same year relief) or 42-290 (later year relief) had not applied.

(3) If the last entity had the *plant in a *pool for the income year in which the *balancing adjustment event occurred, its cost may be limited to the sum of:

(a) any balancing adjustment included in that entity’s assessable income for the plant under section 42-390; and

(b) any balancing adjustment that would have been included in that entity’s assessable income for the plant if balancing adjustment relief under section 42-285 or 42-290 had not applied.

(4) The matters to be taken into account by the Commissioner in deciding whether to limit the cost of *plant include:

(a) whether you acquired the plant from an *associate; and

(b) the market value of the plant; and

(c) how the purchase price of the plant was calculated; and

(d) how the acquisition was financed; and

(e) whether the plant is for use by the entity from whom you acquired it or by an associate of the entity.

Subdivision 42-C - Effective life

Guide to Subdivision 42-C

42-95 What this Subdivision is about

The rate at which you depreciate plant is generally determined by its effective life. There are 2 methods of working out effective life.

Table of sections

Operative provisions

42-100 Choice of method

42-105 How to work out effective life

42-110 Commissioner’s determination of effective life

Operative provisions

42-100 Choice of method

(1) You must either:

(a) work out the *effective life of *plant; or

(b) adopt the *effective life specified by the Commissioner (if any) for the plant under section 42-110.

(2) You make the choice for the income year in which a depreciation deduction is first allowable to you for the *plant.

42-105 How to work out effective life

(1) You work out the *effective life of *plant by estimating how long it can be used by any entity for income producing purposes. You do this as at the time you first use it, or have it *installed ready for use, for the *purpose of producing assessable income.

(2) In making that estimate, you assume that the *plant:

(a) is new; and

(b) will be subject to wear and tear at a rate that was reasonable for you to expect when you were working it out having regard to the expected circumstances of your use; and

(c) will be maintained in reasonably good order and condition.

(3) If, at that time, you conclude that you would be likely to scrap the *plant, sell it for scrap or abandon it before the end of the period worked out under subsection (1), its *effective life ends at the earlier time. This conclusion is also to be made on the assumption that the plant is new.

42-110 Commissioner’s determination of effective life

(1) The Commissioner may make a written determination specifying the *effective life of *plant.

(2) Any conditions in the determination must be satisfied when you first use the *plant, or have it *installed ready for use, for the *purpose of producing assessable income.

Subdivision 42-D - Depreciation rates

Guide to Subdivision 42-D

42-115 What this Subdivision is about

This Subdivision sets out the depreciation rates. More than one rate can apply depending on the nature of the plant and its use.

Table of sections

Operative provisions

42-120 Which rate do you use?

42-123 Change of rate

42-125 General rates

42-130 Low cost plant

42-135 Cars and motor cycles

42-140 Artworks

42-145 Scientific research

42-150 Employee amenities

Operative provisions

42-120 Which rate do you use?

(1) If more than one rate can apply to your *plant, choose the one you prefer. However, in any case, you may choose a lower rate.

(2) You make the choice for the income year in which a depreciation deduction is first allowable to you for the *plant.

42-123 Change of rate

(1) You must make a new choice of rate if you were using the *plant as mentioned in section 42-145 (scientific research) or 42-150 (employee amenities) and you cease to use it in that way.

(2) You may make a new choice of rate if you start using the *plant as mentioned in section 42-150.

42-125 General rates

(1) The general rates are set out in the following table.

42-140 Artworks

(1) The *diminishing value rate for *artworks is the percentage worked out using the formula:

((1.8 / (No. of years in effective life))*100)

(2) The *prime cost rate for *artworks is the percentage worked out using the formula:

((1.2 / (No. of years in effective life))*100)

(3) However, the *prime cost rate for an *artwork having an *effective life of fewer than 3 years is 100%.

42-145 Scientific research

For *plant that you acquired before 1 July 1995 and use only for scientific research in the fields of natural or applied science:

(a) the *diminishing value rate is 50%; and

(b) the *prime cost rate is 33%.

42-150 Employee amenities

(1) There is a rate for *plant an entity uses mainly for providing clothing cupboards, first aid, rest-room or recreational facilities, or meals or facilities for meals for:

(a) either or both:

(i) employees in a *business carried on by the entity for the *purpose of producing assessable income; or

(ii) employees in a business carried on for that purpose by a company that is a member of the same *wholly-owned group of which the entity is a member; or

(b) *children of any of those employees.

(2) The *diminishing value rate is 50%, and the *prime cost rate is 33%.

Subdivision 42-E - Calculation of depreciation deductions

Guide to Subdivision 42-E

42-155 What this Subdivision is about

This Subdivision shows you how to work out the amount of a depreciation deduction. There are 2 calculation formulae: one for each calculation method.

Table of sections

Operative provisions

42-160 Diminishing value method

42-165 Prime cost method

42-170 Reducing deductions

42-175 Meaning of undeducted cost

Operative provisions

42-160 Diminishing value method

Calculate your deduction using the formula:

(((Opening undeducted cost * Days owned)/365) * Diminishing value rate)

where:

opening undeducted cost is the *undeducted cost of the *plant on the first day of the income year on which you were its owner or *quasi-owner.

days owned is the number of days in the income year you were the owner or *quasi-owner of the *plant.

42-165 Prime cost method

(1) Calculate your deduction using the formula:

(((Cost * Days owned)/365) * Prime cost rate)

where:

days owned is the number of days in the income year you were the owner or *quasi-owner of the *plant.

(2) However, if you are using the 100% rate, your deduction is your *cost.

(3) In applying this section, the *cost of the *plant is reduced by:

(a) any amount that you choose under section 42-285 or 42-290 (balancing adjustment relief) to treat as having been deducted for depreciation of the plant; and

(b) any amount you are taken to have deducted for depreciation of the plant under subsection 42-48(2) (debt forgiveness).

Note: You cannot deduct more than the undeducted cost of the plant.

42-170 Reducing deductions

General

(1) Reduce your deduction by an amount that reasonably reflects the extent (if any) you neither used the *plant, nor had it *installed ready for use, for the *purpose of producing assessable income during the period in the income year you were its owner or *quasi-owner.

Leisure facilities and boats

(2) You may have to make a further reduction if your *plant is a *leisure facility or a boat. That reduction is made for any period in the income year during which you:

(a) were its owner or *quasi-owner; and

(b) used it, or had it *installed ready for use, for the *purpose of producing assessable income.

(3) The reduction must reflect the extent (if any) to which you did not satisfy any of the exceptions in paragraphs 42-45(3)(a), (b) and (c) for the *leisure facility or boat in that period.

Note: Paragraphs 42-45(3)(a), (b) and (c) set out the limited circumstances in which you can deduct an amount for a leisure facility or a boat.

42-175 Meaning of undeducted cost

The undeducted cost of *plant is its *cost less the sum of:

(a) for plant that is not a *car - the amounts you have deducted or can deduct for depreciation of the plant; and

(b) for plant that is not a car - any further amounts you could have deducted for depreciation of the plant for any period you were its owner or *quasi-owner and used it, or had it *installed ready for use, assuming that:

(i) you used it wholly for the *purpose of producing assessable income during that period; and

(ii) you used the same rate and method during that period as you used for the income year in which a depreciation deduction was first allowable to you for the plant; and

(iii) no provision of this Act denied a depreciation deduction for it; and

(c) if the plant is a car - the amounts you could have deducted under this Division for any period you were its owner and used it, or had it installed ready for use, assuming that:

(i) you used it wholly for the purpose of producing assessable income during that period; and

(ii) you used the same rate and method during that period as you used for the income year in which a depreciation deduction was first allowable to you for the car; and

(iii) no provision of this Act denied a depreciation deduction for it; and

(iv) Division 28 (Car expenses) did not apply; and

(d) if Common rule 1 applied to your acquisition of the plant - the sum of the amounts that would apply under paragraphs (a), (b) and (c) to the transferor and earlier successive transferors.

Subdivision 42-F - Calculation of balancing adjustments

Guide to Subdivision 42-F

42-180 What this Subdivision is about

This Subdivision explains how to calculate your balancing adjustment when a balancing adjustment event occurs.

The calculation may result in:

· an amount being included in your assessable income; or

· you being able to deduct an amount; or

· no further action being required.

Table of sections

42-182 Diagram showing the application of this Subdivision

Operative provisions

42-185 When do you make a balancing adjustment calculation?

42-190 Including an amount in assessable income

42-195 Deducting an amount

42-200 Meaning of written down value

42-205 Meaning of termination value

42-210 Adjustment: non-arm’s length transactions

42-215 Adjustment: car depreciation limit

42-220 Plant used for research and development

42-182 Diagram showing the application of this Subdivision

Diagram showing the application of Subdivision 42-F
          

Operative provisions

42-185 When do you make a balancing adjustment calculation?

You must make a balancing adjustment calculation for the income year in which a *balancing adjustment event occurs.

42-190 Including an amount in assessable income

(1) You include an amount in your assessable income if the *termination value of *plant exceeds its *written down value.

(2) You include the lesser of:

(a) the amounts you have deducted or can deduct for depreciation of the *plant; and

(b) the excess referred to in subsection (1).

For balancing adjustment relief, see sections 42-285, 42-290 and 42-295.

For plant used for research and development, see section 42-220.

(3) If Common rule 1 applied to your acquisition of the *plant, the amounts you have deducted or can deduct are taken to include amounts the transferor, and earlier successive transferors, deducted or can deduct for depreciation of it.

42-195 Deducting an amount

(1) You deduct an amount if the *termination value of *plant is less than its *undeducted cost.

(2) The amount you deduct is the difference between those amounts.

(3) However, you reduce that difference to reasonably reflect the extent (if any) to which you used the *plant, or had it *installed ready for use, other than for the *purpose of producing assessable income when you were its owner or *quasi-owner.

42-200 Meaning of written down value

The written down value of *plant is its *cost less the sum of:

(a) the amounts you have deducted or can deduct for depreciation of it; and

(b) if Common rule 1 applied to your acquisition of it - the amounts the transferor, and earlier successive transferors, deducted or can deduct for depreciation of it.

42-205 Meaning of termination value

Method statement

Step 1. Work out the termination value of the *plant using the following table. If more than one row applies, use the value under the last applicable row.

Step 2. The table indicates provisions which may adjust the value. Refer to them to see if an adjustment is necessary.

Step 3. If more than one provision adjusts the value, apply them in the order they appear in the table to:

(a) the termination value; or

(b) the adjusted termination value after applying the last applicable provision.

Step 4. The result is your termination value .

Note 1: Section 42-70 increases the cost of a car you acquire at a discount in certain circumstances.

Note 2: Section 42-330 sets out the circumstances in which a partial change of ownership results in a balancing adjustment event.

42-210 Adjustment: non-arm’s length transactions

(1) Common rule 2 applies for the purpose of working out the *termination value of *plant.

(2) However, that Common rule has a different application for depreciation purposes in 2 respects:

(a) it only applies to disposals by sale; and

(b) instead of requiring the party disposing of the property to have incurred capital expenditure, it is taken to require that party to have incurred a *cost.

42-215 Adjustment: car depreciation limit

For a *car the *cost of which was worked out by applying section 42-80 (Car depreciation limit), adjust the value by multiplying it by the fraction:

(CDL / Original cost)

where:

CDL is the *car depreciation limit for the *car for the *financial year in which you first used it for any purpose.

original cost is the *cost of the *car (ignoring the *car depreciation limit).

42-220 Plant used for research and development

(1) The amounts referred to in paragraph 42-190(2)(a) are increased if you have deducted or can deduct an amount for the *plant under section 73B of the Income Tax Assessment Act 1936. However, this subsection does not apply if subsection (3) applies.

(2) The increase for *plant to which subsection (1) applies is the difference between:

(a) its cost under section 73B, ignoring subsection 73B(6); and

(b) its written down value under that section.

Note: Subsection 73B(6) imposed a ceiling of $10,000,000 on the cost of certain pilot plant for research and development purposes.

(3) The amounts referred to in paragraph 42-190(2)(a) are increased if you acquired the *plant under a disposal to which Common rule 1 or section 73E of the Income Tax Assessment Act 1936 (roll-over relief) applied and:

(a) the transferor had deducted or could deduct an amount for the plant under section 73B of that Act; or

(b) your acquisition of the plant was the last of 2 or more successive transfers to which Common rule 1 or section 73E applied and any of the prior transferors had deducted or could deduct an amount for the plant under section 73B.

(4) The increase for *plant to which subsection (3) applies is worked out using the formula:

(Transferor's original cost - Modified written down value)

where:

transferor’s original cost means:

(a) the *plant’s cost; or

(b) if paragraph (3)(b) applies - the plant’s cost to the earliest successive transferor;

under section 73B, ignoring subsection 73B(6).

modified written down value means the written down value under section 73B worked out as though:

(a) the transferor's original cost were your cost; and

(b) the amount mentioned in paragraph (3)(a) or (b) had been deducted or deductible by you.

Subdivision 42-G - Calculation of balancing adjustments for some cars

Guide to Subdivision 42-G

42-225 What this Subdivision is about

This Subdivision explains how to calculate your balancing adjustment when a balancing adjustment event occurs for a car for which you have:

· deducted depreciation; and

· chosen the “cents per kilometre” method or the “12% of original value” method for deducting your car expenses.

Table of sections

42-230 Explanatory material

42-232 Diagram showing the operation of this Subdivision

Operative provisions

42-235 When do you use this Subdivision for a car?

42-240 Including an amount in assessable income

42-245 Deducting an amount

42-250 Reduction to take account of days when depreciation not claimed

42-255 Meaning of notional depreciation amount

42-260 Meaning of notional written down value

42-230 Explanatory material

(1) This Subdivision has limited application because:

(a) if you have used only the “cents per kilometre” method or the “12% of original value” method since you began using the car, you will not have been able to deduct depreciation and so balancing adjustments are not relevant; and

(b) if you have used only the “log book” method or the
“one-third of actual expenses” method since you began using the car, balancing adjustments are calculated under Subdivision 42-F.

(2) If this Subdivision applies, you have to reduce your balancing adjustment to reflect the extent to which you have chosen the “cents per kilometre” method or the “12% of original value” method: see section 42-250.

42-232 Diagram showing the operation of this Subdivision

Diagram showing the application of Subdivision 42-G
          

Operative provisions

42-235 When do you use this Subdivision for a car?

(1) A balancing adjustment for a *car is calculated under this Subdivision if, for the period you were its owner:

(a) you deducted or can deduct an amount for depreciation of the car in one or more income years; and

(b) you chose:

(i) the “cents per kilometre” method in
Subdivision 28-C; or

(ii) the “12% of original value” method in
Subdivision 28-D;

for deducting your *car expenses for the car for one or more other income years.

(2) You must make that calculation for the income year in which a *balancing adjustment event occurs for the *car.

42-240 Including an amount in assessable income

(1) You include an amount in your assessable income if the *termination value of the *car exceeds its *notional written down value.

(2) First, work out the lesser of:

(a) the sum of the *notional depreciation amount and the amounts you have deducted or can deduct for depreciation of the *car; and

(b) the excess referred to in subsection (1).

(3) Then apply the reduction rule in section 42-250 and include the result in your assessable income.

For balancing adjustment relief, see sections 42-285, 42-290 and 42-295.

(4) If Common rule 1 applied to your acquisition of the *car, the amounts you have deducted or can deduct are taken to include amounts the transferor, and earlier successive transferors, deducted or can deduct for depreciation of it.

42-245 Deducting an amount

(1) You deduct an amount if the *termination value of the *car is less than its *undeducted cost.

(2) Work out the difference between those amounts.

(3) Reduce that difference to reasonably reflect the extent (if any) to which you used the *car, or had it *installed ready for use, other than for the *purpose of producing assessable income when you were its owner. In working out the reduction for the income years for which you chose the “cents per kilometre” method or the “12% of original value” method for the car, you apply the assumptions in section 42-255.

(4) Then apply the reduction rule in section 42-250 and deduct the result.

42-250 Reduction to take account of days when depreciation not claimed

Multiply the amount from subsection 42-240(2) or 42-245(3) by the fraction calculated using the formula:

((Depreciation days) / (Depreciation days + Non-depreciation days))

where:

depreciation days is the total number of days you were the owner of the *car in each income year for which you have deducted or can deduct an amount for depreciation of it.

non-depreciation days is the total number of days you were the owner of the *car in each income year for which you chose the “cents per kilometre” method or the “12% of original value” method for deducting your *car expenses.

42-255 Meaning of notional depreciation amount

The notional depreciation amount for a *car is the sum of the amounts you could have deducted for depreciation of the car for the income years for which you chose the “cents per kilometre” method or the “12% of original value” method for the car assuming that:

(a) you had not chosen either of those methods for the car; and

(b) Division 28 (car expenses) had not applied to the car; and

(c) you used the car for the *purpose of producing assessable income:

(i) to the extent of 20% if you used the “cents per kilometre” method; or

(ii) to the extent of one-third if you used the “12% of original value” method.

42-260 Meaning of notional written down value

The notional written down value of a *car is its *written down value less its *notional depreciation amount.

Subdivision 42-H - Balancing adjustment relief

Guide to Subdivision 42-H

42-265 What this Subdivision is about

This Subdivision explains how to apply the various forms of relief that may be available when a balancing adjustment event occurs.

Table of sections

42-270 Explanatory material

Roll-over relief

42-275 Modifications of Common rule 1

42-280 Additional consequences

Offsetting

42-285 Same year relief

42-290 Later year relief

Concessional rate

42-295 Concessional rate

42-300 Working out notional income and abnormal income for the concessional rate

42-270 Explanatory material

(1) There are 3 forms of balancing adjustment relief.

(2) The first is in Common rule 1. If it applies, you do not have to make a balancing adjustment calculation.

(3) The second is an alternative, or partial alternative, to including an amount in your assessable income.

(4) The third may reduce your income tax payable in certain circumstances where a balancing adjustment amount is included in your assessable income.

Roll-over relief

42-275 Modifications of Common rule 1

(1) The following provisions of Common rule 1 do not apply for the purposes of this Division:

(a) section 41-40;

(b) section 41-45.

(2) Despite section 41-30, the transferor and the transferee must
pro-rate their depreciation deductions for the income year in which the *roll-over event occurred on the basis of the number of days in the income year each of them was its owner or *quasi-owner.

(3) The obligation in subsection 41-50(4) applies to the transferee as if the period for keeping the notice referred to in subsection 41-50(2) were until the end of 5 years after the next *balancing adjustment event occurs for the *plant.

(4) The obligation in subsection 41-55(5) applies to the transferee as if the period for keeping the election referred to in subsection 41-55(2) or a copy of it were until the end of 5 years after the next *balancing adjustment event occurs for the *plant.

42-280 Additional consequences

(1) In addition to the consequences of the roll-over set out in
section 41-30 (about the transferor’s and transferee’s right to a deduction), the roll-over has the consequences set out in this section for the purposes of this Division.

Note: For other consequences of the roll-over, see the definitions of written down value in section 42-200 and undeducted cost in section 42-175 and the provisions dealing with balancing adjustments.

Cost

(2) The *cost of the *plant is the same for the transferee as it is for the transferor.

Method

(3) The transferee must use the same method for calculating depreciation deductions for the *plant as the transferor was using for the income year in which the *roll-over event occurred.

Effective life

(4) The *effective life of the *plant in the hands of the transferee is the same as that worked out by the transferor, or the earliest successive transferor, under Subdivision 42-C.

Scientific research

(5) If the transferor was deducting amounts for depreciation of the *plant using the special rate for plant used for scientific research in the fields of natural or applied science - the transferee is taken to have acquired the plant before 1 July 1995.

Note: This subsection allows the transferee to satisfy the condition of the special rate about date of acquisition, but the transferee will still have to satisfy the other conditions of the special rate in order to use it.

Offsetting

42-285 Same year relief

(1) You do not have to include an amount in your assessable income for *plant as a result of a balancing adjustment calculation to the extent that you choose to treat that amount as an amount you have deducted for depreciation of other *plant.

(2) You make the choice, for the same income year in which the *balancing adjustment event occurred, successively for:

(a) any replacement *plant you acquire in that year; and

(b) other *plant you acquire in that year; and

(c) any other *plant.

(3) You can only make this choice if:

(a) at the end of the income year in which the *balancing adjustment event occurred, you used the replacement or other *plant, or had it *installed ready for use, wholly for the *purpose of producing assessable income; and

(b) you can deduct an amount for depreciation of that plant.

(4) The amount covered by the choice is taken to be an amount you have deducted for depreciation of the replacement or other *plant as at the first day of the income year in which the *balancing adjustment event occurred.

Note: Therefore, the amount must be taken into account for the plant under paragraph (a) of the definition of undeducted cost in section 42-175. Also, because the amount is taken to have been deducted as at the first day of the income year, it will reduce the opening undeducted cost of the plant if you are using the diminishing value method.

42-290 Later year relief

(1) You may exclude an amount that has been included in your assessable income for *plant as a result of a balancing adjustment calculation to the extent that you choose to treat that amount as an amount you have deducted for depreciation of replacement *plant.

(2) You can only make this choice for the replacement *plant if:

(a) you acquire it within 2 income years after the end of the income year in which the *balancing adjustment event occurred; and

(b) at the end of the income year in which you acquired it, you used it, or had it *installed ready for use, wholly for the *purpose of producing assessable income; and

(c) you can deduct an amount for depreciation of it; and

(d) you have not made a choice under section 42-285 for the balancing adjustment event.

(3) The amount covered by the choice is taken to be an amount you have deducted for depreciation of the replacement *plant as at the first day of the income year in which you acquired it.

Note: Therefore, the amount must be taken into account for the plant under paragraph (a) of the definition of undeducted cost in section 42-175. Also, because the amount is taken to have been deducted as at the first day of the income year, it will reduce the opening undeducted cost of the plant if you are using the diminishing value method.

Concessional rate

42-295 Concessional rate

(1) If this section applies, you may choose to request, in writing, the Commissioner to determine a *notional income under section 42-300 that is less than your taxable income. That notional income must be used for the purposes of any Act that fixes an income tax rate by reference to a notional income.

(2) This section applies if:

(a) a *balancing adjustment event causes the cessation of a *business carried on by:

(i) you; or

(ii) a partnership of which you are a partner; or

(iii) the trustee of a trust in which you have a present entitlement to a share of the net income and are not under a legal disability; and

(b) as a result of the following balancing adjustment calculation, an amount is included in your assessable income or the assessable income of the partnership or trust.

(3) This section does not apply if, for the income year in which the *balancing adjustment event occurred:

(a) you are a company, other than a corporate trustee; or

(b) you are the trustee of a trust and are liable to be assessed under section 99A of the Income Tax Assessment Act 1936 (Certain trust income to be taxed at special rate); or

(c) the *plant was in a *pool; or

(d) Division 16 of Part III of that Act (averaging of income) applies to your assessment; or

(e) you chose balancing adjustment relief under section 42-285 (same year relief) or 42-290 (later year relief) for the balancing adjustment event.

42-300 Working out notional income and abnormal income for the concessional rate

(1) Your notional income for the income year in which the *balancing adjustment event occurred is:

(a) if your taxable income is greater than your *abnormal income - your taxable income less 2/3 of your abnormal income;

(b) if your taxable income is equal to or less than your abnormal income - 1/3 of your taxable income;

(c) if section 86 of the Income Tax Assessment Act 1936 (Notional income of a taxpayer deriving a premium) applies to you and your notional income under that section is:

(i) greater than your abnormal income - your notional income under that section less 2/3 of your abnormal income;

(ii) equal to or less than your abnormal income - 1/3 of your notional income under that section.

(2) Your abnormal income is worked out using the following table.

Subdivision 42-I - Quasi-ownership

Guide to Subdivision 42-I

42-305 What this Subdivision is about

This Subdivision explains the circumstances in which you are the quasi-owner of plant.

Table of sections

Operative provisions

42-310 Meaning of quasi-owner

42-315 Grant of new quasi-ownership right

42-320 Only one entity can deduct

Operative provisions

42-310 Meaning of quasi-owner

(1) You are a quasi-owner of *plant if:

(a) it is attached to land you hold under a *quasi-ownership right granted by an *exempt Australian government agency or an *exempt foreign government agency; and

(b) you either:

(i) attached the plant to the land after you acquired the right; or

(ii) acquired the right from the entity that attached the plant or from a later successive holder of the right; and

(c) you are not its owner.

(2) You are not a *quasi-owner under subsection (1) if, when you would otherwise have become a quasi-owner, you had entered into a *scheme:

(a) under which an entity, other than the grantor of the right or that person’s successor, would become the owner of the *plant at a later time; or

(b) that has a purpose of providing finance to enable an entity, other than you, the grantor of the right or that person’s successor, to become the end-user of the plant:

(i) if you attached the plant to the land - for the whole, or a substantial part, of the *effective life of the plant as worked out or adopted by you; or

(ii) if the plant was already attached to the land when you acquired the *quasi-ownership right - for the whole, or a substantial part, of the remainder of the *effective life of the plant as worked out or adopted by the person who first attached the plant to the land.

42-315 Grant of new quasi-ownership right

If your *quasi-ownership right over land expires, is surrendered or is terminated and that event is followed by a grant of a new *quasi-ownership right over the land to you:

(a) the new right is taken to be a continuation of the original right; and

(b) you are taken not to have ceased to be the *quasi-owner of *plant attached to the land.

42-320 Only one entity can deduct

If there is both an owner and a *quasi-owner of *plant, only the quasi-owner can deduct an amount for depreciation.

Subdivision 42-J - Partial change of ownership

Guide to Subdivision 42-J

42-325 What this Subdivision is about

This Subdivision sets out when a partial change of ownership will result in a balancing adjustment event.

Table of sections

Operative provisions

42-330 Partial change of ownership

42-335 Acquisition and roll-over relief

Operative provisions

42-330 Partial change of ownership

(1) This subsection applies if:

(a) for any reason, a change occurs in the ownership of, or in the interests of entities in, *plant; and

(b) the entity or one of the entities that owned the plant before the change has an interest in it after the change.

(2) This subsection applies if:

(a) there is a *quasi-owner of *plant; and

(b) for any reason, a change occurs in the quasi-ownership of, or in the interests of quasi-owners in, the plant; and

(c) the entity or one of the entities that was a quasi-owner of the plant before the change has an interest in it after the change.

Note: If subsection (1) or (2) applies, a balancing adjustment event occurs for the plant, see subsection 42-30(3).

(3) However, subsection (1) or (2) applies only if a *balancing adjustment event does not otherwise occur for the *plant.

(4) The reasons for the change occurring include:

(a) the formation or dissolution of a partnership; and

(b) a variation in the constitution of a partnership, or in the interests of the partners.

42-335 Acquisition and roll-over relief

(1) If subsection 42-330(1) applies, the owners of the *plant after the change (the transferee ) are taken to have acquired it from its owners before the change (the transferor ).

(2) If subsection 42-330(2) applies, the *quasi-owners of the *plant after the change (the transferee ) are taken to have acquired it from its *quasi-owners before the change (the transferor ).

(3) Common rule 1 applies if the transferor and transferee jointly elect for roll-over relief.

Note: For the conditions relating to the election, see section 41-55.

Subdivision 42-K - Car depreciation limit

Guide to Subdivision 42-K

42-340 What this Subdivision is about

This Subdivision explains how to calculate the car depreciation limit referred to in section 42-80.

Table of sections

Operative provisions

42-345 Calculation of limit

Operative provisions

42-345 Calculation of limit

(1) The car depreciation limit for the 1996-97 *financial year is $55,134.

(2) The car depreciation limit for a later *financial year is the amount calculated using the formula:

Depreciation limit * Indexation factor

where:

depreciation limit is the *car depreciation limit for the *financial year immediately before the financial year for which the limit is being calculated.

indexation factor is the number calculated, to 3 decimal places, under subsection (3) for the *financial year for which the limit is being calculated.

(3) The indexation factor for a *financial year is the number calculated using the formula:

((Sum of index numbers for quarters in first March year) / (Sum of index numbers for quarters in second March year))

where:

index number , for a quarter, means the index number for the motor vehicle purchase sub-group of the Consumer Price Index, being the weighted average of the 8 capital cities, first published by the Australian Statistician for the quarter.

first March year means the period of 12 months ending on
31 March immediately before the *financial year for which the limit is being calculated.

second March year means the period of 12 months immediately before the first March year.

(4) If the Australian Statistician changes the reference base for the motor vehicle purchase sub-group of the Consumer Price Index, only index numbers published in terms of the new base are to be used after the change.

(5) The Commissioner must publish before the beginning of each *financial year the indexation factor and the *car depreciation limit for that financial year.

Subdivision 42-L - Pooling

Guide to Subdivision 42-L

42-350 What this Subdivision is about

You can reduce the number of depreciation calculations you have to make by allocating a number of units of plant that have the same depreciation rate to a pool. One calculation is made for all plant in the pool.

You cannot pool plant for the year you acquire it.

Table of sections

Operative provisions

42-355 Creating a pool

42-360 Allocating plant to a pool

42-365 What plant is eligible for allocation to a pool?

42-370 Removal of plant from a pool

42-375 Calculating depreciation deductions for pooled plant

42-380 Meaning of opening balance

42-385 Meaning of closing balance

42-390 Calculation of balancing adjustments for pooled plant

42-395 Application of CGT to pooled plant

Operative provisions

42-355 Creating a pool

You may choose to create a pool by recording in writing:

(a) the first income year for which *plant may be allocated to it; and

(b) the pool percentage.

42-360 Allocating plant to a pool

You may choose to allocate *plant to a *pool by recording in writing:

(a) the pool to which you are allocating it; and

(b) the income year for which it is allocated.

42-365 What plant is eligible for allocation to a pool?

You can only allocate *plant to a *pool for an income year if:

(a) you can deduct an amount for depreciation of it for that year; and

(b) the *diminishing value rate for the plant matches the pool percentage; and

(c) during the period you were its owner or *quasi-owner before that year, you used it, or had it *installed ready for use, wholly for the *purpose of producing assessable income; and

(d) you were its owner or *quasi-owner immediately after the beginning of that year; and

(e) it has not been allocated to another *pool for that year.

42-370 Removal of plant from a pool

(1) *Plant is removed from a *pool if you choose to remove it and you record the removal and the date of removal in writing.

Note: You may re-allocate the plant to a pool under section 42-360.

(2) *Plant is automatically removed from a *pool if:

(a) you cease to use it, or to have it *installed ready for use, wholly for the *purpose of producing assessable income and the cessation was not caused by a *balancing adjustment event; or

(b) the *diminishing value rate for the plant no longer matches the pool percentage; or

(c) a balancing adjustment event occurs for the plant and Common rule 1 applies to that event.

Note: Property removed from a pool because of paragraph (b) can be allocated to another pool under section 42-360.

(3) If *plant is removed from a *pool:

(a) it is taken not to have been in the pool for the income year in which it is removed; and

(b) you are taken to have deducted amounts for depreciation of it for the period it was in the pool as if you had used the pool percentage as your rate and the *diminishing value method; and

(c) you must use the diminishing value method in calculating future depreciation deductions for it.

42-375 Calculating depreciation deductions for pooled plant

Calculate your deduction for a *pool using the formula:

(Opening balance * Pool Percentage)

42-380 Meaning of opening balance

The opening balance of a *pool for an income year is worked out using the formula:

(Closing balance for last year + Undeducted cost of new plant - Reduction for removed plan)

where:

closing balance for last year means the *closing balance for the *pool for the preceding income year worked out under section 42-385.

undeducted cost of new plant means the sum of the *undeducted costs, as at the beginning of the income year, of *plant allocated to the *pool for that year that was not in the pool for the preceding year.

reduction for removed plant means the sum of the *undeducted costs, as at the beginning of the income year, of any *plant removed for that year that was in the *pool for the preceding year. You work out those undeducted costs as if you had deducted amounts for depreciation of it for the period it was in the pool using the pool percentage as your rate and the *diminishing value method.

42-385 Meaning of closing balance

The closing balance of a *pool for an income year is worked out using the formula:

(Opening balance - Total depreciation)

where:

total depreciation means the total amount you have deducted for depreciation for the income year for all *plant in the *pool for that year.

42-390 Calculation of balancing adjustments for pooled plant

(1) You must make a balancing adjustment calculation under this section for *plant if it is in a *pool for the income year in which a *balancing adjustment event occurs for it.

Note: However, if the plant is removed from the pool for the year in which the balancing adjustment event occurred, your balancing adjustment is calculated under Subdivision 42-F or 42-G.

(2) You include in your assessable income the lesser of:

(a) the *termination value of the *plant; and

(b) its *cost.

For balancing adjustment relief, see sections 42-285 and 42-290.

(3) If a balancing adjustment calculation is made under this section, you can continue to deduct amounts for depreciation of the *plant as part of the *pool.

42-395 Application of CGT to pooled plant

(1) This section applies if *plant that is in a *pool for an income year is disposed of within the meaning of Part IIIA of the Income Tax Assessment Act 1936 (Capital gains and capital losses).

(2) Section 160ZK of that Act (Reduction of amounts for purposes of reduced cost base) applies to the disposal as if you had deducted amounts for depreciation of it for the period it was in the *pool using the pool percentage as your rate and the *diminishing value method.