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Ruling

Subject: Deduction-decline in value-laptop

Question

Is the Trustee for the Superfund entitled to claim a deduction for decline in value of a laptop computer, where the laptop is used for 100% business purposes?

Answer:

Yes.

This ruling applies for the following period

Year ending 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts

The Superfund is a self managed superannuation fund (SMSF).

The Superfund is intending to purchase a laptop computer.

The laptop computer will be used for 100% business purposes.

The Superfund will purchase the laptop from funds held by the Superfund.

The Superfund will own the laptop.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1.

Income Tax Assessment Act 1997 section 40-25.

Income Tax Assessment Act 1997 subsection 40-25(7).

Reasons for decision

Superannuation fund deductions

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent that they are incurred in gaining or producing assessable income, or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

The courts have considered the meaning of 'incurred in gaining or producing assessable income'. In Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 56 ALR 785; (1949) 8 ATD 431 the High Court stated that:

For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end. The words "incurred in gaining or producing the assessable income" mean in the course of gaining or producing such income.

Capital expenses

Expenses of capital, or of a capital nature, cannot be claimed as a deduction under section 8-1 of the ITAA 1997.

An expense will usually be capital in nature where it is incurred with the intention to create an asset or advantage of a lasting and enduring nature (British Insulated & Helsby Cables Ltd v. Atherton (1926) AC 205; (1926) 10 TC 155).

Capital expenditure often produces an enduring benefit, that is, the structure of the advantage or asset. Revenue expenditure is often repetitious or recurring in nature and often does not produce assets or advantages of an enduring nature.

Taxation Ruling TR 93/17 explains the general principles governing the tax deductibility of expenditure incurred by a superannuation fund under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997). The tax deductibility of expenditure incurred by a superannuation fund is determined under section 8-1 unless a specific deduction provision in the income tax law applies.

In your case, the expenditure the Superfund will incur on the laptop is a one-off expense without any element of being recurrent expenditure. It brings into existence an enduring asset used in the derivation of the fund's assessable income. The laptop provides the Superfund with a long-term benefit in the fund's income earning activities. In these circumstances expenditure on the laptop is of a capital nature rather than of a revenue nature.

As the expenditure incurred on the laptop is capital in nature you are not entitled to a deduction for the cost of the laptop under section 8-1 of the ITAA 1997.

However, a deduction for the decline in value of a depreciating asset may be allowable under Division 40 of the ITAA 1997.

Decline in value

Division 40 of the ITAA 1997 deals with deductions for the cost of depreciating assets. Section 40-25 of the ITAA 1997 allows a taxpayer to deduct an amount equal to the decline in value of a depreciating asset which is held for any time during an income year and used for a taxable purpose. A taxable purpose includes the purpose of producing assessable income [subsection 40-25(7) 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 time.

The effective life of the asset is used in determining the amount of the deduction allowed for the decline in the value of the asset. You calculate this deduction using either the prime cost method (where the deduction is the same every year until it is written off or disposed of) or the diminishing value method (where the deduction is larger in the earlier years but reduces over the life of the asset).

In this case, the Superfund is entitled to a deduction for the decline in value of the laptop where the laptop is used for a taxable purpose under section 40-25 of the ITAA 1997.