ATO ID 2004/116: Capital Allowances: cost of depreciating asset - motor home construction
Date of decision: 22 January 2003
Year of income: Year ended 30 June 2003
Business line: Private Groups and High Wealth Individuals

Issue
Do all of the taxpayer's costs of constructing a motor home form part of the first element of cost of a depreciating asset they hold under section 40-180 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes. The taxpayer's cost of constructing a motor home forms part of the first element of cost of a depreciating asset under section 40-180 of the ITAA 1997.

Facts
The taxpayer carries on the business of constructing motor homes and renting them on completion. To construct the motor homes the taxpayer acquires a cab chassis and employs a third party to construct the home unit. Once this is done the taxpayer then incurs electrical, mechanical, fibre glassing, lighting and plumbing costs to affix the home unit to the cab chassis.

Reasons for decision
Summary: The cost of a depreciating asset consists of both first and second elements (section 40-175 of the ITAA 1997). The first element of cost is worked out as at the time you begin to hold the asset. Generally the first element of cost is the amount paid, or taken to have been paid, to hold the asset (sections 40-180 and 40-185 of the ITAA 1997). The second element of cost is worked out after you have begun to hold the asset and includes the amount you are taken to have paid for economic benefits that have contributed to bringing the asset to its present condition and location (section 40-190 of the ITAA 1997). The relevant depreciating asset in this case is the completed motor home. The means by which a taxpayer may hold a depreciating asset may vary. In this case the taxpayer holds the motor home through having constructed it. The expenses that are incurred by the taxpayer to construct the motor home are first elements of cost because they are amounts that the taxpayer has paid to hold the motor home.

Legislative references: Income Tax Assessment Act 1997 section 40-180 section 40-185 section 40-190
Related public rulings and determinations: Taxation Ruling TR 94/11 | Draft Taxation Ruling TR 2017/D1
Subject references: Cost of a depreciating asset First element of cost Second element of cost