capital allowances

Question 1

Capital allowances

Answer 1

0
Under the ITAA97 Depreciation is known as Capital Allowances
Capital allowances for depreciating assets are allowable
deductions if the asset is used for income producing purposes
An asset can be used partially for income producing purposes and
can apportion the deduction
The capital allowance sections don’t apply to capital works,
essentially buildings. ITAA97840-45
Deductions for capital expenditure on buildings and other capital
works are deducted under another division ITAA97 division 43
Therefore the capital allowance sections apply to plant and
equipment but not to buildings

Question 2

Capital allowances system

Answer 2

Taxpayer can deduct an amount equal to the decline in value of a
depreciating asset that is used for taxable purposes or is installed
ready for use.
ITAA97 s40-25 (1)
.
Depreciating assets are assets with a limited effective life that
can be reasonably expected to decline in value over the time that
it is used.
s40-30(1)
.
s40-30(1)
Specifically excluded assets
Land
Trading stock
Intangible assets - (but not all)

Question 3

Intangible assets

Answer 3

The following intangible assets are still depreciating assets
ITAA97 s40-30(2)
Mining rights
Intellectual property – depreciate over life of property
In house software - write off over 4 years s40-95(7)
Communication licences

Question 4

Diminishing value method

Answer 4

Diminishing value,
Base value X 200%
Effective life
s40-72
Example:
Cost $30,000 and life expectancy 8 years
Depreciation rate is 200%/8 = 25%
Decline in value: 30,000 X 25% = $7,500
Adjustable value start of year 2: $22,500

Adjustable value start of year 2
$30,000 - $7,500 = $22,500
Year 2 decline in value $22,500 x 25% = $5,625
Adjustable value year 3 - $22,500 - 5,625 = $16,875

Question 5

Prime cost method

Answer 5

Prime cost or straight line method
Asset cost x 100%
Effective life
s40-75
Example:
Cost $30,000 and estimated life is 8 years
Depreciation rate is 100%/8 = 12.5%
Decline in value: $30,000 x 12.5% = $3,750
Adjustable value start of year 2: $26,250

Question 6

Asset partly used for business

Answer 6

Cost if car $32,000
Decline in value (200%/8) $8,000
Value at end of period $24,000
Value at end of new period $24,000
If car used 60% business 
Claim (60% x $8,000) $4,800

Question 7

Depreciation methods

Answer 7

Once you have made the choice of a method for depreciating an asset you cannot change it s40-130

Question 8

Separate items in a building

Answer 8

• In buildings the carpet, desk, chair, bookshelf, stove, hot-water
service are separate articles or plant. They do not form part of
the building
However
Ducting, piping or wiring and telephone installations are
probably not separate items but form part of the building which
is not plant

Question 9

Determination of cost:

Answer 9

The cost of a depreciating assets includes both:
(a) First element of Cost
Expenses you incur to start holding the asset are generally what you
pay for the asset. However it may be the market value of a non cash
benefit. If not an “arms length”price then market value.
ITAA97 s40-180
(b) Second element of Cost
Additional expenses that contribute to its present condition and
location. This may be the cost of modifications, alterations or an initial
repair. Generally installation costs do not include cost of structural
alterations except when necessary to support the machine
ITAA97 s40-190

Question 10

Effective life

Answer 10

Taxpayer can work out the effective life of the asset or rely on ATO
determination
ITAA97 S40-100
Decision must be made in the year asset is first used
If TP makes calculation of the effective life it must be the total useful
life of the asset which may be longer than the time it will be used by
the original purchaser
s40-105
Apportionment of expense for part-used assets is allowed
Statutory effective life for intangible assets
s40-95(7)
In house software 4 years
Copyright: life of copyright or 25 years whichever is
the shorter

Question 11

Balancing adjustments

Answer 11

When you stop holding or using an asset because it has been sold
or scrapped:
Disposal for more than the adjustable value:
Include balancing adjustment in assessable income
Disposal for less than the adjustable value:
Claim a deduction for the balancing adjustment.
The adjustment reconciles the decline in value with the actual
change in value.
s40-295

Question 12

Balancing adjustment events

Answer 12

Purchase 1 July (Year 1) $3,000
decline in value in years 1,2,3,and 9 months of yr 4 $2,250
Adjustable value s40-285(1) $750

IF: Termination value = market value s40-300(1) $600
THEN - Balancing deduction s40-285(2) $150
OR
IF: Termination value (MV) s40-300 $800
THEN Assessable income s40-285(1) $50

• Stop using asset 
1. Market value when ceased to use asset
• In house software never to use again
1. Market value is zero 
• Lost or destroyed 
1. Insurance value       s40-300(2)

Question 13

Black hole expenses

Answer 13

Business relayed costs

These are the blackhole expenses that are deductible under ITAA s40-880

Question 14

Decline in value of pooled assets

Answer 14

• Non business use assets costing less than $300 can be written off immediately s40-80(2)
• Low cost assets ($1,000) can be pooled and treated as a single asset and a deduction is allowed for a decline in the value of the pool. s40-425
• Using this method is optional ITAA97 s40-425(1)

Question 15

Deductions for capital works

Answer 15

• Capital allowances don’t apply to capital works ITAA97540-45
• Capital works include expenditure on the construction, extensions or alterations to buildings. S43-20
• Building a new factory for industrial purposes, block of flats or hotel write off at 4% for 25 years. S43-145
• Other buildings such as office buildings at 2.5% $43-25
• Write off commences when construction has been completed
• A subsequent purchaser of the building can only claim on the original cost NOT the market value S43-25