ATO ID 2002/915: Income tax: first element of cost of a depreciating asset
Date of decision: 26 August 2002
Year of income: Year ended 30 June 2002
Business line: Public Groups and International

Issue
Is the first element of cost of a depreciating asset, under section 40-180 of the Income Tax Assessment Act 1997 ('ITAA 1997'), the market value of the asset at the time the holder starts to hold it, where the asset is acquired by redeeming reward points under a consumer loyalty program?

Decision
Yes. The first element of cost of a depreciating asset under section 40-180 of the ITAA 1997 is the market value of the asset at the time the holder started to hold it, where the asset is acquired by redeeming reward points under a consumer loyalty program.

Facts
A taxpayer, an individual, received reward points as a consequence of the use of a personal credit card and membership of a consumer loyalty program. The taxpayer redeemed the reward points under the consumer loyalty program by acquiring a fax/printer. The taxpayer is the owner of the fax/printer and uses it for a taxable purpose.

Reasons for decision
Summary: The tables in sections 40-180 and 40-185 of the ITAA 1997 provide the rules for working out the amount of the first element of cost of a depreciating asset. The first element of cost is either amounts that have been paid or are taken to have been paid, or a specific amount in particular cases. Item 9 of the table in subsection 40-180(2) of the ITAA 1997 provides that where a depreciating asset started to be held under an arrangement that was private or domestic in nature to the holder of the asset, the first element of cost is the market value of the asset at that time. Rewards, including depreciating assets, are generally received under a consumer loyalty program as a consequence of a personal (that is, non-employment/non-business) contractual relationship between an individual taxpayer and the consumer loyalty program organisation. The taxpayer customer is dealing with the consumer loyalty program supplier (such as a credit card provider), in a personal capacity, and in accordance with the normal arm's length relationship that exists between consumers and suppliers. This characteristic was recognised in Payne v. Commissioner of Taxation (1996) 66 FCR 299; (1996) 96 ATC 4407; (1996) 32 ATR 516 and Taxation Ruling TR 1999/6. Where the reward received under a consumer loyalty program and held by a taxpayer is a depreciating asset, item 9 of the table in subsection 40-180(2) of the ITAA 1997 applies and the first element of cost of the asset is specifically provided to be the market value of the asset at the time the holder started to hold it.

Legislative references: Income Tax Assessment Act 1997 section 40-180 section 40-185
Case references: Payne v. Commissioner of Taxation (1996) 66 FCR 299 (1996) 96 ATC 4407 (1996) 32 ATR 516
Related public rulings and determinations: Taxation Ruling TR 1999/6
Subject references: Depreciation Uniform capital allowances system Cost of a depreciating asset First element of cost