ATO ID 2002/1010: Division 40: preservation of accelerated depreciation
Date of decision: 7 September 2002
Business line: Public Groups and International

Issue
If a taxpayer can work out the decline in value of a depreciating asset using the prime cost formula in subsection 40-75(1) of the Income Tax Assessment Act 1997 (ITAA 1997) as modified by paragraph 40-10(3)(b) of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997), does the formula have to be adjusted if any of the events in subsection 40-75(2) of the ITAA 1997 occur?

Decision
No. The taxpayer continues to use the prime cost formula in subsection 40-75(1) of the ITAA 1997 as modified only by paragraph 40-10(3)(b) of the IT(TP)A 1997. In certain circumstances, transitional rules apply to preserve in Division 40 of the ITAA 1997 the use of accelerated rates of depreciation that applied to certain plant acquired before 1 July 2001. One of these transitional provisions is paragraph 40-10(3)(b) of the IT(TP)A 1997. It modifies the prime cost formula in subsection 40-75(1) of the ITAA 1997 by: Accordingly, the modified prime cost formula becomes: (Cost of the plant under Division 42 plus any second element of cost after 30 June 2001) * [days held/365] * accelerated rate that was being used under Division 42 This modification has the effect of preserving accelerated rates of depreciation in the hands of a continuing holder of the asset. Another transitional provision that makes the same modification to the prime cost formula is section 40-340 of the IT(TP)A 1997. It preserves accelerated rates of depreciation in the hands of a subsequent holder if the asset was rolled-over from a former holder who was using accelerated rates. If an event under subsection 40-75(2) of the ITAA 1997 occurs, the prime cost formula must be adjusted as set out in subsection 40-75(3) of the ITAA 1997. These adjustments are: However, because these components in the formula have already been replaced under paragraph 40-10(3)(b) of the IT(TP)A 1997, the adjustments required by subsection 40-75(3) of the ITAA 1997 will have no effect on the modified prime cost formula.

Facts

Reasons for decision
Summary: In certain circumstances, transitional rules apply to preserve in Division 40 of the ITAA 1997 the use of accelerated rates of depreciation that applied to certain plant acquired before 1 July 2001. One of these transitional provisions is paragraph 40-10(3)(b) of the IT(TP)A 1997. It modifies the prime cost formula in subsection 40-75(1) of the ITAA 1997 by: Accordingly, the modified prime cost formula becomes: (Cost of the plant under Division 42 plus any second element of cost after 30 June 2001) * [days held/365] * accelerated rate that was being used under Division 42 This modification has the effect of preserving accelerated rates of depreciation in the hands of a continuing holder of the asset. Another transitional provision that makes the same modification to the prime cost formula is section 40-340 of the IT(TP)A 1997. It preserves accelerated rates of depreciation in the hands of a subsequent holder if the asset was rolled-over from a former holder who was using accelerated rates. If an event under subsection 40-75(2) of the ITAA 1997 occurs, the prime cost formula must be adjusted as set out in subsection 40-75(3) of the ITAA 1997. These adjustments are: However, because these components in the formula have already been replaced under paragraph 40-10(3)(b) of the IT(TP)A 1997, the adjustments required by subsection 40-75(3) of the ITAA 1997 will have no effect on the modified prime cost formula.

Legislative references: Income Tax Assessment Act 1997 subsection 40-75(1) subsection 40-75(2) subsection 40-75(3)
Subject references: Prime cost method Accelerated depreciation Effective life Cost of plant Second element of cost Decline in value