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Ruling

Subject: Deductibility of expenses incurred in purchasing an excavator.

Question

Can the trustee claim a deduction for depreciation for the excavator purchased to complete work on the driveway giving access to the business premises on the property?

Answer

Yes, to the extent that the excavator is used for business purposes each year.

This ruling applies for the following period

For the year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

The Trustee for the Family Trust purchased an excavator, to perform work on the access driveway on the residential property from which they conduct a business.

Related parties to the trust own the property.

There is a residence on the property. Behind the residence is a display/workshop.

You carry on a business of manufacturing and selling the product.

The shed is used for manufacturing, display and storage.

There is a gravel driveway on the property. The gravel driveway works when the weather is dry and the driveway is firm, but after rain it is difficult for vehicles to drive up it.

You regularly receive deliveries to the workshop on large trucks to supply your business and it reached the point where truck drivers refused to deliver unless the access to the property improved.

You decided to dig a trench/driveway from the gate to the workshop to enable easier vehicular access to the workshop. The ground is mainly shale rock so it was virtually impossible to excavate manually. Therefore, you purchased an excavator to dig the trench/driveway.

You would not have dug the trench/driveway, if you did not have vehicles driving to the workshop.

Part of the trench/driveway will branch out to go to the residence.

You have also used the excavator to remove large trees with overhanging branches, fallen trees and boulders.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Income Tax Assessment Act 1997 Section 25-10.

Income Tax Assessment Act 1997 Division 40.

Income Tax Assessment Act 1997 Subdivision 328-D.

Reasons for decision

Deductions for the decline in value of depreciating assets are available under the uniform capital allowance system, Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997). Small business entities can choose to deduct amounts for most of their depreciating assets under the special depreciation regime under Subdivision 328-D of the ITAA 1997. If they do, they are not subject to the provisions of Division 40.

The cost of a depreciating asset is generally of a capital nature and is therefore not immediately deductible as an ordinary business expense under section 8-1 or as a repair under section 25-10 of the ITAA 1997.

A deduction is available for the decline in value of a "depreciating asset" that is held by the taxpayer at any time during the year. The deduction is reduced to reflect the extent to which the asset was used during the income year for a purpose other than a "taxable purpose", for example, private or domestic purposes. "Taxable purpose" is the purpose of producing assessable income.

You have indicated that there is a substantial workshop/display area in the shed on the property and as part of conducting the business from that shed, there is the requirement to transport materials and goods to and from the property. It is essential to have suitable access for trucks from the main road to the shed. The excavator would not have been purchased had a business not been conducted on the property.

The excavator you purchased is a depreciating asset and the cost is capital expenditure. To determine the amount that is deductible as depreciation, you have to consider the use of the excavator during the year. It has been used for work on the driveway that provides access to both the shed where a business is conducted and a residential home. Apportionment would be required for this use as the amount related to the residence is of a private nature. You would also have to consider for what other purposes the excavator was used for during the year and make a further apportionment depending on the business and private nature of this use.