Capital Write Offs and Allowances Flashcards
What is capital allowance, section
Division 40 ITAA97 provides deduction for the decline in value of depreciating assets
What is the formula for the deduction, section
What is the meaning of taxable purpose
Section 40-25
Deduction = Decline in value of depreciating asset held during the income year - part of the assets decline in value that is not attributable to a taxable purpose
Taxable purpose means for the purpose of producing assessable income, exploration or prospecting, mining site rehabilitation or environment protection activities
What is the definition of depreciating asset.
What are some exceptions
S 40-30
Depreciating asset is an asset that has a limited “effective life” and can reasonably be expected to declin in value over the time it is used
Excludes:
Land
Building are excluded under s 40-30
Trading stock
Certain intangible assets (e.g. Goodwill )
To get a deduction what must you be the “XXXX” of the asset
What are some factors that determine if your are the “XXXX” of the asset
To get a deduction you must hold the asset
Holder of a depreciating asset determined in accordance with table in s 40-40
Generally, the holder is the “legal owner” of the asset
However, in some cases, the holder is the “economic owner” of the asset
Hire purchase owner, they hold the asset and can exercise the option to be the legal owner of the asset
When does an assets value begin to decline, section
Asset begins to decline in value from its ‘start time’ – the time it is used or installed ready for any use: S 40-60
How many method can a taxpayer choose for capital write offs and what is the conditions after it chooses a method
What are the formula for the methods
What is the main difference between tax and accounting purpose
The taxpayer can choose between the two methods and once a method is chosen it sticks for the assets effective life S 40-65
Diminishing Value Method
Pre 10 may 2006 —- S 40-7O
Base value × ( days held / 365 )× ( 150% / Asset’ s effective life )
Post 9 may 2006 —- S 40-72
Base value × ( days held / 365 )× ( 200% / Asset’ s effective life )
Prime cost method S 40-75
Asset’s cost × ( days held / 365 )× ( 100% / Asset’ s effective life )
The main difference between tax purposes and accounting purposes is that the salvage value is not taken into account for tax purposes
What are the elements that is taken into account for cost, section
What is excluded from cost
Cost Subdiv 40-C
1st element generally is the amount paid to hold the asset worked out at the time you begin to hold the asset
—- Simple arm’s length transaction is the price you pay to get the asset
2nd element – amounts paid since you began to hold the assets to bring it to present conditions
—- Modification or improvements in the elements
Excludes GST when input take credits available S 27-80
What is the base value, Section
BASE VALUE S40-70
The base value is equal to the Opening adjustable value after the first year, In the first year it based on the initial costs
How is the effective life determined, Section
What is the implication of statutory effective life
EFFECTIVE LIFE S40-95
Commissioner determination
You can have own estimates but must consider similar factors to the commissioner determination
S 40-95(7)
Certain intangible depreciating assets is determined through the statues and the effective life cannot be changed, the method is also determined for in-house software
• E.g. In-house software: 4 years, depreciation method is also determined
Explain the special asset rules
Immediate deductions available for certain assets that do no cost more than $300, can deduct 100% in the year it is obtained
Car Limit, limit deduction in respect of luxury cars $57 466 (2013/14 and 2014/15 )
- What is the balancing adjustment
- When is balancing adjustment required give some examples
- What are the formulas to determine if the balancing adjustment is assessable income or deductible. Give explanations of the variable in the equations
- A balancing adjustment is the disposal of asset after depreciation for a certain amount of years
- Balancing adjustments are required to be made where a “balancing adjustment event” arises, e.g. when an entity:
o Stops holding a depreciating asset
o Stops using a depreciating asset for any purpose and expects never to use it again
o Has not used a depreciating asset and decides never to use it again
o Had not used a depreciating asset and decides never to use it, or
o Changes its interest or holding in a depreciating asset, Changed in the constitution of an asset
- Assessable income = Terminating value - Adjustable Value and TV > AV
Deductible = Terminating value - Adjustable Value and AV > TV
Termination value” is usually the amount the entity to have received in respect of the balancing adjustment event reduced by GST (sales proceeds)
The “Adjustable Value” is broadly the assets written down value under DVM or PCM
DIV 40
Explain how pooling of low cost asset operates and the rules that apply to the pooled assets
Pool low cost or low value assets instead of accounting for each individual assets can be pooled and the decline in the value pool can be used. Once an asset is allocated to the pool it must remain in the pool.
Pooling rules apply to:
“low-cost assets i.e assets costing less than $1 000 and
“Low – value assets “ assets that have an opening adjustable value less than $1 000
Pooled assets are written off at the DVM rate of 37.5%,
18.75% applies in first year of allocation of low cost assets to pool
DIV 40
What are the special rules that apply to the small business entity rules, section
Small business entities entitled to:
Simplified pooling arrangements, Assets that are more than $1 000 can be pooled and deprecate at a rate of 30% and 15% in the first year
Immediate deduction for low cost assets , Assets =
How does the business-related “blackhole” capital expenditure operate, section
Section 40-880 allows certain capital expenditure to be deducted in equal proportions over 5 years i.e Capital expenditure for legal purposes can be deducted
The expenditure must, Relate to a business that the taxpayer carries on for a “taxable purpose”
Not be excluded, eg”
Must not otherwise be deductible
Must not form cost of land
Must not form cost of depreciating asset
Must not be taken into account working out capital gain or loss
- How does the capital work regime work
what are the exceptions - what is the annual rate of write offs
what does the rate depend on
what are the main type of capital works
- Capital works regime allows “construction expenditure ” incurred in constructing “ capital works” that are used for income-producing and certain other purpose to be written of over a period of either 25 or 40 years
Deduction are only available where the capital works commenced after specified times
Construction expenditure excludes
o Cost of acquiring land, and
o Cost of demolishing existing structures or landscaping
- Annual rate of write off is 2.5% and 4%
The rate depends on:
o The type of capital works
o Use of “construction expenditure area”
o Date construction commended
Non-residential buildings, Residential buildings and structural improvements
Look at the table
