ATO ID 2003/754: Capital Allowances: Division 40 - use of effective life former holder was using where 'same user' rule applies
Date of decision: 15 May 2003
Year of income: Year ended 30 June 2002
Business line: Private Groups and High Wealth Individuals

Issue
For the purposes of the 'same user' rule in subsection 40-95(5) of the Income Tax Assessment Act 1997 (ITAA 1997), was the former holder of a depreciating asset using an effective life to work out their decline in value deduction for that asset if they were using a rate in their calculation formula?

Decision
No. The former holder was not using an effective life for the purposes of the 'same user' rule in subsection 40-95(5) of the ITAA 1997 to work out their decline in value deduction because the rate they were using was accelerated and does not bear any direct relationship to the effective life of the asset.

Facts
The taxpayer acquired a depreciating asset after 30 June 2001 in circumstances where the 'same user' rule in subsection 40-95(5) of the ITAA 1997 applied to the acquisition. The asset was being written off by the former holder (who had acquired the plant prior to 11.45am, by legal time in the Australian Capital Territory, on 21 September 1999) using an 'accelerated' diminishing value rate set out in former Subdivision 42-D of the ITAA 1997. The taxpayer did not allocate the asset to a low-value pool (Subdivision 40-E of the ITAA 1997).

Reasons for decision
Summary: The amount you deduct for the decline in value of a depreciating asset under Division 40 of the ITAA 1997 is generally worked out by using the formula for either the diminishing value method or the prime cost method (sections 40-70 and 40-75 of the ITAA 1997 (See Note). A choice of the method you use is generally available (subsection 40-65(1) of the ITAA 1997). However, because of the application of the 'same user' rule in subsection 40-65(3) of the ITAA 1997 the taxpayer must use the diminishing value method because the former holder used that method. The formula the taxpayer must use for the diminishing value method is contained in subsection 40-70(1) of the ITAA 1997 (see note). A component of this formula is the asset's effective life. A choice of the effective life you use is generally available (subsection 40-95(1) of the ITAA 1997). However, because of the application of the 'same user' rule in subsection 40-95(5) of the ITAA 1997 the taxpayer must use the same effective life that the former holder was using (paragraph 40-95(5)(c) of the ITAA 1997). The former holder was using the diminishing value method formula in former subsection 42-160(1) of the ITAA 1997 because they acquired the asset before 21 September 1999. That formula contains a diminishing value 'rate' component which is set out in former Subdivision 42-D of the ITAA 1997. While the starting point of working out that rate is the effective life of the plant, the rate incorporates a factor of loading and a factor of broad banding. The result is a rate of depreciation that is 'accelerated' in comparison to the effective life of the plant. In these circumstances, the former holder is not 'using' an effective life for the purposes of paragraph 40-95(5)(c) of the ITAA 1997. This means that the taxpayer must, under subsection 40-95(6) of the ITAA 1997, use an effective life determined by the Commissioner.

Legislative references: Income Tax Assessment Act 1997 subsection 40-65(1) subsection 40-65(3) section 40-70 subsection 40-70(1) section 40-75 subsection 40-95(1) subsection 40-95(5) paragraph 40-95(5)(c) subsection 40-95(6) subsection 42-160(1) (repealed as of 30 June 2001)
Related ATO interpretative decisions: ATO ID 2003/753
Subject references: Accelerated depreciation Capital Allowances CoE Commissioner's determination of effective life Decline in value Decline in value methods Diminishing value Diminishing value method Depreciating assets Effective life Plant acquired post 21 September 1999 Removal of accelerated depreciation Retention of accelerated depreciation