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Ruling
Subject: Business - deductions
Question 1
Are you entitled to claim a deduction for depreciation of the printing machine?
Answer
No
Question 2
Are you entitled to claim a tax deduction for your share of the cost of the printing machine?
Answer
No
This ruling applies for the following periods:
Year ended 30 June 2011
The scheme commences on:
1 July 2010
Relevant facts and circumstances
You purchase products from overseas suppliers.
One of your overseas suppliers was required to purchase a printing machine to stamp products which are made exclusively for you.
You have agreed to pay a share of the purchase price of the machine.
The machine is installed in the supplier's factory. It is fixed to the floor and is linked with other machines on the assembly line.
The machine is used by the supplier to engrave your logo on to products made for you, and to stamp the products that Australian Standards have been met.
By paying half the costs of the machine, the overseas supplier is able to supply products to you at a competitive price and your relationship with the supplier is strengthened.
You agree that the overseas supplier owns the machine, however there is no written agreement stating this.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 40-25
Income Tax Assessment Act 1997 Section 8-1
Reasons for decision
Section 40-25 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for the decline in value of a depreciating asset that you hold. A depreciating asset is an asset that can reasonably be expected to decline in value over the time it is used (section 40-30 ITAA 1997). The machine would be considered a depreciating asset under this section.
The table in section 40-40 of the ITAA 1997 identifies the holder of a depreciating asset in any particular circumstance. In broad terms a holder of a depreciating asset is its economic owner. In most cases the economic owner will also be the legal owner. The machine would fall under Item 10 of the table, which identifies the holder as the owner of the asset.
In your case, although you contributed money towards the purchase of the machine you have stated the overseas supplier is the owner of the machine and indeed possesses the machine. Therefore, as you are not the holder of the machine you are not entitled to a deduction for the decline in value of the asset.
Question 2
Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent that they are incurred in gaining or producing assessable income and they are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.
However, you cannot deduct a loss or outgoing under this section to the extent that it is a loss or outgoing of capital, or of a capital nature.
In your case, you have made a financial contribution towards the purchase of an item of plant which is a depreciating asset (as identified above) and therefore capital in nature. Accordingly the cost is not deductible under section 8-1 of the ITAA 1997.