Edited version of your written advice

Authorisation Number: 1012663512010

Ruling

Subject: Deductions

Question 1

Are you entitled to a deduction under Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997) for the construction costs?

Answer

Yes, to the extent they are used to produce assessable income.

This ruling applies for the following period:

Year ended 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You have started a business.

You built a structure which is enclosed, weather-proof and transparent and a second structure that is netted off to prevent wild animals from getting in (on all four sides and the roof) but is not weather-proof.

Both structures were completed during the 2011-12 financial year but were only used to produce income in the 2013-14 financial year.

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 40-30(1).

Income Tax Assessment Act 1997 Section 40-65.

Income Tax Assessment Act 1997 Section 40-70.

Income Tax Assessment Act 1997 Section 40-75.

Reasons for decision

For assets that are capital in nature, you cannot claim deductions under section 8-1. Instead, under the capital allowances system you may be able to claim deductions for the decline in value of the cost of a capital asset used in gaining your assessable income.

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 (subsection 40-30(1) of the ITAA 1997). A depreciating asset starts to decline in value when you first use it (or install it ready for use) for any purpose, including a private purpose. However, a deduction for the decline in value is only allowable to the extent the asset is used for a taxable purpose.

An asset's effective life is either self-assessed or determined by the Commissioner. Taxation Ruling TR 2014/4 lists the effective life of various assets as determined by the Commissioner.

TR 2014/4 provides an effective life of 20 years in respect of both of your structures.

The effective life of a depreciating asset is the period it can be used to produce income. The effective life starts when you begin to use the asset or have it installed ready for use.

The deduction for the decline in value is reduced if the asset is not used (or installed ready to be used) for the purpose of producing assessable income.

In your case, the structures were completed and ready for use in the 2011-12 income year. They were not used to produce assessable income until the 2013-14 financial year. Although the structures are treated as declining in value from the date it was installed, you are only entitled to a deduction for its decline in value from the time you started using it for a taxable purpose (i.e. when you were using them to produce income).

You have a choice of two methods to work out your decline in value deduction for your structures (section 40-65 of the ITAA 1997). You must choose to use either: 

1. the diminishing value method (section 40-70 of the ITAA 1997), or

2. the prime cost method (section 40-75 of the ITAA 1997).

The calculation details for each of these methods are outlined in Tax Office publication Guide to depreciating assets 2013 (NAT 1996-6.2013) which is enclosed. Irrespective of the method you choose, your deduction will be nil in the 2011-12 and 2012-13 as the structures were not used to produce income until the 2013-14 financial year.