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Ruling
Subject: Deductibility of certain items of equipment
Question 1
Are the expenses incurred in purchasing certain items of equipment used in the company's vehicles deductible in full under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
No.
Question 2
Are the items used in the company's vehicles considered depreciating assets?
Answer
Yes.
Question 3
Is the company entitled to claim a decline in value deduction for the items used in its vehicles under Division 40 of the ITAA 1997?
Answer
Yes.
This ruling applies for the following periods:
Year ended 30 June 2011
The scheme commences on:
1 July 2010
Relevant facts and circumstances
The company owns numerous vehicles which it uses in the production of its assessable income.
To comply with the policies of its clients which use the vehicles, the company was required to fit the vehicles with certain items of equipment.
Some items of equipment were purchased for over $1,000 and others were under $1,000.
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 40-65
Income Tax Assessment Act 1997 Section 40-425
Reasons for decision
Summary
The items are capital assets which have a limited effective life and can reasonably be expected to decline in value over time. Therefore they are considered depreciating assets for which a decline in value deduction may be claimed.
An outright deduction is not allowable under section 8-1 of the ITAA 1997 as the cost of the items is capital in nature.
Detailed reasoning
Section 8-1 of the ITAA 1997 states:
You can deduct from your assessable income any loss or outgoing to the extent that:
(a) it is incurred in gaining or producing your assessable income; or
(b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.
However, you cannot deduct a loss or outgoing under this section to the extent that:
(a) it is a loss or outgoing of capital, or of a capital nature; or
(b) it is a loss or outgoing of a private or domestic nature; or
(c) it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income; or
(d) a provision of this Act prevents you from deducting it.
The items which have been installed in the company's vehicles are considered assets which are capital in nature. Therefore the cost of these items is not deductible under section 8-1 of the ITAA 1997.
Section 40-30 of the ITAA 1997 states in part that 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 items have a limited effective life and can reasonably be expected to decline in value over time. Therefore they are considered depreciating assets.
Subsection 40-25(1) of the ITAA 1997 states you can deduct an amount equal to the decline in value for an income year of a depreciating asset that you hold for any time during the year.
Section 40-65 of the ITAA 1997 states in part, that there are two methods to work out the decline in value of a depreciating asset. You can choose to use either the diminishing value method or the prime cost method.
Instead of using one of the two above methods the company may choose to use a low-value pool if certain conditions are met.
Subsection 40-425 of the ITAA 1997 states in part that you may choose to allocate a low-cost asset that you hold to a low-value pool for the income year in which you start to use it or have it installed ready for use for a taxable purpose. A low-cost asset is a depreciating asset whose cost, as at the end of the income year in which you start to use it, or have it installed ready for use, for a taxable purpose is less than $1,000.
You may also choose to allocate a low-value asset to a low-value pool. Subsection 40-425(5) of the ITAA 1997 states in part that a low-value asset is a depreciating asset, you hold:
(a) if you have deducted, or can deduct amounts for it under Division 40 for a previous income year - for which you used the diminishing value method; and
(b) that has an opening adjustable value for the current year of less than $1,000; and
(c) that is not a low-cost asset.
The company may choose to allocate the items which cost less than $1,000 to a low-value pool. The company may also allocate the items which have an opening adjustable value for the current year of less than $1,000 to the low value pool.