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Ruling

Subject: Decline in value

Question 1

Can you depreciate equipment purchased for work-related purposes?

Answer

Yes.

Question 2

Does the value of a depreciating asset include the international transaction fee charged by your bank upon purchase of the asset, shipping fees and related tariffs?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 2011
Year ending 30 June 2012

The scheme commenced on

1 July 2010

Relevant facts and circumstances

You purchased equipment for work-related purposes. The transactions included the following expenses:

· purchase cost of equipment which exceeded $300 for each item

· international transaction fees charged by your bank

· shipping fees, and

· importation tariffs.

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 40-70
Income Tax Assessment Act 1997 Section 40-75
Income Tax Assessment Act 1997 Section 40-80

Reasons for decision

Summary

You can claim a deduction for the decline in value of equipment purchased for work-related purposes. The cost of the equipment includes the international transaction fees charged by your bank, shipping costs and related tariffs. The equipment is to be depreciated over its effective life.

Detailed reasoning

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing your assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income. If an expense is incurred partly for work purposes and partly for private purposes, only the work-related portion is an allowable deduction.

Section 40-25 of the ITAA 1997 provides a basis for writing off the capital cost of depreciating assets over their estimated effective life where the item is owned by you and either used during the year of income or installed ready for use for the purpose of earning your assessable income.

You may choose to determine the effective life of the asset or can use the effective life determined by the Commissioner. The effective life of depreciable plant is listed in Taxation Ruling TR 2010/2.

The decline in value of a depreciating asset starts when you first use it, or install it ready for use, for any purpose, including a private purpose. This is known as a depreciating asset's start time.

You are allowed to choose between one of the two methods to work out the decline in value of your depreciating assets. These methods are the diminishing value method (section 40-70 of the ITAA 1997) and the prime cost method (section 40-75 of the ITAA 1997).

You may have an immediate deduction under subsection 40-80(2) of the ITAA 1997 when the total cost of an item that you started to hold in the income year does not exceed $300.

If the item is used for both work and private purposes, the decline in value must be apportioned between the work-related purpose and the private purpose. Only the work-related portion of the decline in value can be claimed as a deduction.

Similarly, if the depreciating asset is only used, or available for use, for work-related purposes for part of the year, the decline in value deduction must be apportioned on a time basis.

The cost of a depreciating asset consists of two elements.

The first element of cost is, generally, amounts you are taken to have paid to hold the asset such as the purchase price. The amounts must be directly connected with holding the asset.

The first element of cost is worked out as at the time you begin to hold the asset.

The second element of cost is, generally, amounts you are taken to have paid after that time to bring the asset to its present condition and location, such as the cost of improving the asset.

Application to your circumstances

You have purchased equipment for use in your employment. The purchase of the equipment is considered to be capital in nature and the cost is not immediately deductible under section 8-1 of the ITAA 1997.

The equipment is depreciating plant and, as such, a deduction is allowable for the decline in value of the items to the extent they are used for work-related purposes.

In purchasing the equipment you incurred shipping fees, international transaction fees and various tariffs associated with bringing some items to Australia.

The international transaction fees charged by your bank form part of the first element of the cost of the equipment as they are directly related to the purchase of these items.

The shipping fees and tariffs form part of the second element of the cost of this equipment.

Thus, the shipping fees, tariffs and international transaction fees charged by your bank form part of the cost of the equipment purchased and will be included in calculating the decline in value of each item of equipment.

As the total cost of each item of equipment exceeds $300, you will need to depreciate each item of equipment over its effective life.