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Edited version of your written advice
Authorisation Number: 1012904545984
Date of advice: 2 November 2015
Ruling
Subject: Decline in value method
Question
Are you able to use the prime cost method to depreciate your commercial yachts?
Answer
Yes.
This ruling applies for the following period:
Year ending 30 June 2016
The scheme commences on
1 July 2015
Relevant facts and circumstances
You own commercial yachts that you use to produce assessable income.
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 40-65
Reasons for decision
Section 40-25 of the Income Taxation Assessment Act 1997 (ITAA 1997) allows a deduction for the decline in value (depreciation) of a depreciating asset you hold, to the extent the asset is used for a taxable purpose. You are also able to start recording the decline in value of your asset when it is ready to be used to produce assessable income.
Section 40-65 of the ITAA 1997 states that you must choose either the diminishing value or prime cost method to work out the decline in value of a depreciating asset.
The diminishing value method assumes the decline in value each income year is a constant percentage of the base value each year and produces a progressively smaller decline in the item's value over time. The prime cost method assumes the value of a depreciation asset decreases constantly over its effective life and produces a consistent decline in the item's value over time. Both of these methods are based on the effective life of an asset and once you choose one of the methods for depreciating an asset you cannot change it.
Taxation Ruling TR 2015/2 states that you may choose to use the Commissioner's determination of the effective life of a depreciating asset. Table A of TR 2015/2 indicates that a yacht has an effective life of fifteen years. However you can make your own estimate for the effective life of your yachts.
As you use your yachts to produce assessable income, you can claim a deduction for their decline in value. You are able to use the prime cost method to work out the decline in value of your yachts if you so choose.
Please refer to the Guide to depreciating assets 2015 for further details in relation to calculating your allowable depreciation amount. This booklet can be found on the Australian Taxation Office website www.ato.gov.au.