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Ruling

Subject: Effective life of accommodation units

Question

Can you claim decline in value deductions under subsection 40-25 and self assess an effective life for accommodation units taking into account intended harsh conditions of use arising from their location?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You intend to place rental accommodation units on land in a remote part of Australia.

You have purchased accommodation building structures that are built at a factory away from the site.

The buildings are designed so that they can be de-complexed, lifted and removed if required.

The buildings and the land will not be damaged or injured when de-complexed.

The area where the accommodation will be located is in an area that is subjected to harsh weather conditions.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 40-25(1)

Income Tax Assessment Act 1997 Subsection 40-25(7)

Income Tax Assessment Act 1997 Subsection 40-30(3)

Income Tax Assessment Act 1997 Subsection 40-45(2)

Income Tax Assessment Act 1997 Section 40-95

Income Tax Assessment Act 1997 Subsection 40-105(1)

Income Tax Assessment Act 1997 Paragraph 43-70(2)(e)

Income Tax Assessment Act 1997 Subsection 45-40(1)

Reasons for decision

Division 40 of the ITAA 1997 provides that a taxpayer can deduct an amount for the decline in value for an income year of depreciating assets that have been held during that year and used for a taxable purpose.

A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over time. The deduction must be reduced to take into account any decline in value that is attributable to use or availability for use other than for a taxable purpose. Taxable purpose has the meaning given by subsection 40-25(7) of ITAA 1997 which includes the purpose of producing assessable income.

The decline in value of a depreciating asset owned by a taxpayer and used or installed for the purpose of producing assessable income is an allowable deduction under sub-section 40-25 (1) of ITAA 1997.

A building is a depreciating asset and is treated as separate from the land. See section 40-30(3) of the ITAA 1997.

Generally, the cost of accommodation structures is taken into account in calculation of deductions allowable under section subsection 43-10(1) and not subsection 40-25(1). However, expenditure on plant that is a depreciating asset can be deductible under section 40-25. See section 40-45(2) and section 43-70 (2) (e).

Plant is defined under section 45-40 (1) of the ITAA 1997 as including articles in paragraph (a).

It is considered that Taxation Determination TD 97/24 is relevant to your circumstances. Paragraph 4 of that determination provides in part that:

..An accommodation unit is a chattel when it merely rests on land or it is affixed in such a way as to facilitate easy removal, or where the purpose and mode of affixing are for the more complete enjoyment of the unit as a chattel….

It is considered that the accommodation units are affixed in such a way as to facilitate easy removal. Accordingly, the accommodation units, while being accommodation structures, are considered chattels that are plant. Deductions are calculated under division 40, rather than Division 43, for these items.

Paragraph 10 of TD 97/24 provides that:

..10. We accept that accommodation units such as relocatable homes or park cabins constructed with chassis, where they are 'articles', have an effective life of 20 years. Other accommodation units such as manufactured homes, where they are 'articles', have an effective life of 30 years….

Section 40-95 states you must chose either to use an effective life determined by the Commissioner for a depreciating asset under section 40-100, or to work out the effective life of the asset yourself under section 40-105.

The Commissioner has determined effective lives of a large range of depreciating assets. These are set out in published ATO views, including TR 2011/2 and TD 97/24.

The explanation of the methodology used by the Commissioner in making his determinations of effective life provided in Taxation Ruling TR 2011/2 is intended also to assist taxpayers who choose to make their own estimate of the effective life for a depreciating asset.

TR 2011/2 outlines the factors the Commissioner takes into account when he determines the effective life of an item. Paragraphs 38 - 64 outline in detail the factors considered which include:

§ the physical life of the asset

§ engineering information

§ the manufacturer's specifications

§ the way in which the asset is used by an industry

§ the past experience of users of the asset

§ the level of repairs and maintenance adopted by users of the asset

§ industry standards

§ the use of the asset by different industries

§ retention periods

§ obsolescence

§ scrapping or abandonment practices

§ if the asset is leased, the period of the lease

§ economic or financial analysis indicating the period over which that asset is intended for use

§ where the asset is actively traded in a secondary market, conditions in that market.

Working out your own effective life

Subsection 40-105(1) of the ITAA 1997 states that you work out the effective life of a depreciating asset yourself by estimating the period (in years, including fractions of years) it can be used by any entity for a taxable purpose or for the purpose of producing exempt income or non-assessable non-exempt income and, if relevant for the asset:

(a) having regard to the wear and tear you reasonably expect from your expected circumstances of use

(b) assuming that it will be maintained in reasonably good order and condition.

TR 2011/2 states at paragraphs 65-66 that:

…65. The non-exhaustive factors outlined in paragraphs 38 to 64 of this Ruling are essentially the same factors the Commissioner considers you would use if you worked out the effective life of an asset yourself. There is, however, one critical difference.

66. The Commissioner only takes account of normal industry practices when estimating effective life. However, taxpayers who choose to self-assess can take account of their own particular circumstances of use (see subsection 40-105(1))….

Based on your situation, your particular circumstances of use involve the placement of the accommodation units in harsh environmental conditions. In self assessing effective life you can take into account these particular circumstances in calculating effective life of the accommodation units.

Your circumstances 

You have purchased accommodation building structures that are built at a factory away from the site. These accommodation units will be set up on the site for the purpose of producing assessable rental income.

The accommodation units will not be permanently fixed to the ground and can be decomplexed, lifted and removed. The accommodation units are considered chattels and therefore depreciating assets for which a decline in value deduction is allowable.

It can reasonably be expected that the accommodation units will have a limited effective life and decline in value over time. You are able to claim a deduction for decline in value in relation to the accommodation units that you hold and use for a taxable purpose.

TD 97/24 sets out an ATO view on the effective life of accommodation units. However you are able to self-assess a different effective life of your accommodation units taking into account the conditions in the location where the units will be placed. The factors outlined under TR 2011/2 should be taken into account when self assessing effective life.