Edited version of private advice

Authorisation Number: 1052147244655

Date of advice: 26 July 2023

Ruling

Subject: Deductibility - installation of rainwater tank

Question

Can the trust claim deductions for expenses incurred in the purchase and installation of a tank in accordance with Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The Trust owns a truck business where they deliver goods to various local businesses.

The Trust conducts its business activities on the trustee's property. The trust does not have an office.

To date, the Trust owns the following vehicles:

•                     two ridged trucks - 5-tonne truck and 8-tonne truck

•                     one van

•                     two cars

The vehicles are kept on the business premises except for the 8-tonne truck.

The Trust intends to purchase another 8-tonne truck before the end of next financial year.

To maintain trucks, employees were washing them on a regular basis (at least once per week) free of charge at a depot owned by one of the contractors they are engaged with.

The contractor is no longer providing this free service and have instructed that all trucks are to be washed off-site at cost to the owner/s.

The trustee is currently utilising scheme water to wash trucks on a weekly basis and the cost of the water bill has escalated by double, therefore it is not feasible for the trust to incur further costs to maintain trucks.

The Trust plans to purchase and install a suitably sized rainwater tank on the property belonging to the trustee for the sole purpose of maintaining trucks.

The rainwater tank will be installed at the far-left rear of the trustee's property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 section 40-25

Income Tax Assessment Act 1997 section 40-30

Reasons for decision

Division 40 of the ITAA 1997 provides a deduction for the decline in value of depreciating assets based on their effective life.

As per subsection 40-30(1), 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, except:

a)            land; or

b)            an item of trading stock; or

c)            an intangible asset, unless it is mentioned in subsection (2).

Section 40-25 of the ITAA 1997 allows a deduction for the decline in value of a depreciating asset held by the taxpayer to the extent to which it is used to produce assessable income or is installed ready for use for that purpose.

The decline in value is calculated by spreading the cost of the asset over its effective life. You can use one of two methods, either the prime cost method or diminishing value method, to calculate the deduction. If the asset is only used for part of the year or for private purposes, any deduction should be apportioned on a pro-rata basis.

Once you have made the choice on which method you are going to use for an asset you cannot change the method.

An asset's effective life is either self-assessed or determined by the Commissioner. Taxation Ruling TR 2021/3 Income tax: effective life of depreciating assets lists the effective life of various assets as determined by the Commissioner.

It is accepted that the rainwater tank is used to produce assessable income and is an asset which Division 40 of the ITAA 1997 applies.