Private ruling: Depreciation deduction
Published: May 2013
Ruling period: Year ending 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Are the assets considered to be separate depreciating assets? | A1: Yes | Q2: Is the entity entitled to elect to use Division 328 instead of Division 40 for the assets that it holds? | A2: Yes | Q3: Is the entity entitled to an immediate deduction for the cost of each asset if they are predominately used for short-term hire and cost less than $6,500 each? | A3: Yes


Relevant legislative provisions: Income Tax Assessment Act 1997 section 40-30 | Income Tax Assessment Act 1997 subsection 328-175(1) | Income Tax Assessment Act 1997 subsection 328-180(1) | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: The assets are considered separate depreciating assets. The entity is entitled to a deduction under subsection 328-180(1) of the Income Tax Assessment Act 1997 (ITAA 1997) for all assets costing less than $6,500 in the 2012-13 income year. | Detailed Reasoning - Separate depreciating asset: Section 40-30 of the ITAA 1997 states a depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used except: (a) land (b) an item of trading stock; or (c) an intangible asset, unless it is mentioned in subsection 2. The Commissioner's effective life tables as outlined under Taxation Ruling TR 2012/2 provide a practical checklist of what constitutes a depreciating asset. The asset is included in TR 2012/2. As the asset is included in the Commissioner's effective life tables it is considered a separate depreciating asset. | Detailed Reasoning - Capital allowances for small business entities: Subsection 328-175(1) of the ITAA 1997 states you can choose to calculate your deductions and some amounts of assessable income under this Subdivision instead of under Division 40 for an income year for all the depreciating assets that you hold if: (a) you are a small business entity for the income year; and (b) you started to use the assets or have them installed ready for use, for a taxable purpose during or before that income year. Subsection 328-175(1) of the ITAA 1997 has effect unless one of the exceptions apply. One such exception, under subsection 328-175(6) of the ITAA 1997, states you cannot deduct amounts for a depreciating asset under this Subdivision if the asset is being or might reasonably be expected to be let predominantly on a depreciating asset lease. Under subsection 995-1(1) of the ITAA 1997 a depreciating asset lease is defined as an agreement (including a renewal of an agreement) under which the entity that holds the depreciating asset and grants a right to use the asset to another entity. However, a depreciating asset lease does not include a hire purchase agreement or a short-term hire agreement. Under subsection 995-1(1) of the ITAA 1997 a short-term hire agreement is an agreement for the intermittent hire of an asset on an hourly, daily, weekly or monthly basis. However, an agreement for the hire of an asset is not a short-term hire agreement if, having regard to any other agreements for the hire of the same asset to the same entity or an associate of that entity, there is a substantial continuity of hiring so that the agreements together are for longer than a short-term basis. In this case the entity is a small business entity and started to use the assets for a taxable purpose during the 2012-13 income year. The entity is therefore entitled to calculate deductions under Division 328 of the ITAA 1997 instead of Division 40, provided none of the exceptions apply. As the assets are hired for very short periods it is considered that the assets are hired on an intermittent short-term basis therefore the definition of a short-term hire agreement is met. As the arrangement is considered a short-term hire agreement it is excluded from being a depreciating asset lease. As the exception is not satisfied the entity is entitled to calculate deductions for the assets under Division 328 instead of Division 40. | Detailed Reasoning - Assets costing less than $6,500: Under subsection 328-180(1) of the ITAA 1997 you deduct the taxable purpose proportion of the adjustable value of a depreciating asset for the income year in which you start to use the asset, or have it installed ready for use, for a taxable purpose if: (a) you were a small business entity for that year and the year in which you started to hold it; and (ab) you chose to use this Subdivision for each of those years; and (b) the asset is a depreciating asset whose cost as at the end of the income year in which you start to use it, or have it installed ready for use, for a taxable purpose is less than $6,500. In this case the entity was a small business entity for the 2012-13 income year and chose to use Subdivision 328-D of the ITAA 1997. The assets are depreciating assets whose cost as at the end of the income year in which the entity started to use it for a taxable purpose was less than $6,500. The entity is therefore entitled to deduct the taxable purpose proportion of the adjustable value of each asset in the 2012-13 income year.

Relevant facts: The entity hires out assets to the general public. | Assets have been hired out for one night and up to several months. | All hire contracts are at arm's length and not with related parties. | The assets were purchased in bulk and cost less than $6,500 each. | The assets are hired out on a short-term intermittent basis.