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Ruling

Subject: Classification of an asset for depreciation purposes

Question

Is this asset, a depreciating asset under subsection 40-30(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commenced on

1 July 2010

Relevant facts

You have acquired an asset to be displayed in a business.

This asset will not be subject to normal wear and tear, the condition of the asset is excellent and has been restored to be preserved in a controlled environment, and therefore you consider the physical life of the asset is expected to continue indefinitely.

You consider that there is no likelihood of this asset becoming obsolete or being sold for less than the purchase price.

The history behind the asset has made it one of the most desirable and unprocurable of its type in the world today.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 40-30

Income Tax Assessment Act 1997 Subsection 40-30(1)

Income Tax Assessment Act 1997 Section 40-105

Income Tax Assessment Act 1997 Division 40

Reasons for decision

A depreciating asset is defined in section 40-30 of the ITAA 1997. A depreciating asset is an asset that has:

· a limited effective life; and

· can reasonably be expected to decline in value over the time it is used.

The best definition of what is meant by 'effective life' is found in section 40-105 of the ITAA 1997 - Self-assessing effective life. You work out the effective life of a depreciating yourself by estimating the period in years that it can be used by any entity for a taxable purpose or for producing exempt income or non-assessable non-exempt income and, if relevant for the asset:

· having regard to the wear and tear you reasonably expect from your expected circumstances of use; and

· assuming that it will be maintained in reasonably good order and condition.

You have made the statement that: "This asset will not be subject to normal wear and tear, the condition of the asset is excellent and has been restored to be preserved in a controlled environment, and therefore the physical life of the asset is expected to continue indefinitely."

In Taxation Ruling TR 2011/2 the Commissioner discusses the methodology of determining effective life. You may choose to use the Commissioner's determination of the effective life or you may make your own estimate.

There is a determination in the category Arts and Recreation Services, for items similar to this asset and an effective life of 100 years has been determined, this indicating that these assets have a very long effective life.

The second factor in considering whether it is a depreciating asset is whether it can reasonably be expected to decline in value over the time it has been used.

It is unclear whether, and if so how, Division 40 of the ITAA 1997 is intended to apply to certain assets which are not expected to decline in value over the time they are used. Although the explanatory memorandum envisaged that depreciating assets could hold or even increase in value in the short term, their essential feature is that they will lose value overall. The very long effective life of certain assets (100 years) partly recognises this difficulty.

The inclusion of such items in the current effective life ruling indicates that it is the intention to treat such items as depreciating assets. Therefore this asset will be considered a depreciating asset for the purposes of subsection 40-30(1) of the ITAA 1997.