ATO ID 2002/818: Depreciating assets - reasonable attribution of cost
Date of decision: 19 April 2002
Year of income: Year ended 30 June 2002
Business line: Public Groups and International

Issue
If a number of depreciating assets are purchased for a single undissected amount, would a reasonable method of attribution of cost to each asset, under section 40-195 of the Income Tax Assessment Act 1997 (ITAA 1997), be to apportion the single purchase amount among each of the depreciating assets in proportion to their market value at the time of purchase?

Decision
Yes, to apportion the single purchase amount among each of the depreciating assets in proportion to their market value at the time of purchase would be a reasonable method of attribution cost to each asset under section 40-195 of the ITAA 1997.

Facts
The taxpayer purchased, in an arm's length transaction, an existing business. The business comprised different classes of assets, including depreciating assets. While the parties to the transaction allocated the contract price to each class of assets, the amount allocated to each class was not further allocated to each asset in the class.

Reasons for decision
Summary: If you pay a single undissected amount for 2 or more things that include at least one depreciating asset, section 40-195 of the ITAA 1997 requires you to take into account as part of the asset's cost only that part of what you paid that is reasonably attributable to the asset. What is reasonable will often depend on the particular circumstances. If property, including depreciating assets, is acquired under a contract and parties dealing with each other at arm's length allocate the overall contract price to the separate assets in the contract, the Commissioner will accept such an allocation for the purpose of working out the cost of the depreciating assets under Subdivision 40-C of the ITAA 1997. An allocation in these circumstances to only a class of assets will also be acceptable but, in the case of depreciating assets, the purchaser will then need to make their own reasonable apportionment of the amount so allocated to the class of assets to each of the assets in that class. In making their apportionment, it is expected that the purchaser will generally have regard to and be able to justify their reasonable apportionment based on the relevant market values of the separate depreciating assets at the time of the making of the contract. The Commissioner does not accept that the adjustable value of a depreciating asset necessarily represents the market value of the asset.

Legislative references: Income Tax Assessment Act 1997 Section 40-195 Subdivision 40-C
Related public rulings and determinations: Taxation Determination TD 98/24
Subject references: Depreciating assets Cost of a depreciating asset Apportionment of cost