Private ruling: PBR - IT - Depreciating assets and decline in value
Published: June 2014
Ruling period: 2013 income tax year | 2014 income tax year | 2015 income tax year | 2016 income tax year | 2017 income tax year
Date scheme commenced: 1 July 2012

Ruling: Q1: Will the Commissioner accept the supplied value of certain intellectual property assets acquired by the taxpayer? | A1: Yes | Q2: Will the Commissioner accept the supplied value of certain in-house software assets acquired by the taxpayer? | A2: Yes | Q3: Is the taxpayer entitled to claim deductions in respect of the decline in value of certain assets using a low-value pool? | A3: Yes | Q4: Is the taxpayer entitled to claim deductions in respect of the decline in value of certain in-house software assets? | A4: Yes | Q5: If either or both of Questions 3 and 4 are answered in the affirmative, is the taxpayer able to claim deductions in connection to these in the current and specific future income years? | A5: Yes

Relevant facts and circumstances: In the 20XX income year the taxpayer acquired a number of assets consisting of intellectual property and in-house software. In month 20YY the Commissioner issued an objection decision in respect of the 20ZZ income year. In month 20YY the Commissioner issued an amended notice of assessment for the 20ZZ income year to the taxpayer based on the month 20YY objection decision. In the month 20YY objection decision the Commissioner accepted that the taxpayer had acquired the assets valued at the supplied value. In the month 20YY objection decision the Commissioner accepted that a number of the assets acquired by the taxpayer were eligible to be included in a low-value pool and that the taxpayer had made the choice to create a low-value pool. In the month 20YY objection decision the Commissioner accepted that the taxpayer was able to claim deduction for the decline in value of the assets acquired under Division 40 and Subdivision 40-E of the Income Tax Assessment Act (ITAA 1997)

Relevant legislative provisions: Division 40, Income Tax Assessment Act 1997 | Subdivision 40-E, Income Tax Assessment Act 1997 Section 40-130, Income Tax Assessment Act 1997 | Section 40-430, Income Tax Assessment Act 1997 | Section 40-95, Income Tax Assessment Act 1997 | Section 40-30, Income Tax Assessment Act 1997 | Section 40-440, Income Tax Assessment Act 1997 | Section 40-72, Income Tax Assessment Act 1997 | Section 40-75, Income Tax Assessment Act 1997

Reasons for decision: Detailed Reasoning - Will the Commissioner accept the supplied value of certain intellectual property assets acquired by the taxpayer?: In the objection decision dated dd/mm/20YY the Commissioner accepted that the supplied value of the intellectual property assets. Subsequently the Commissioner issued a notice of assessment on in respect of the 20ZZ income year which was based on this objection decision. Section 40-130 of the ITAA 1997 provides that any choices under Division 40 of the ITAA 1997 must be made by the date that the return for the income tax year is lodged or within a further time allowed by the Commissioner and further, that once a choice has been made, it applies to that and all subsequent income tax years. As a result of the objection decision issued in month 20YY the Commissioner had exercised his discretion in allowing the taxpayer additional time to make the choices allowed under Division 40 of the ITAA 1997, and this was given effect in the notice of assessment issued in month 20YY. Subsequently, the taxpayer is now required to continue to apply those choices for all subsequent income years. Due to the Commissioner's objection decision, the taxpayer made a series of choices in respect of how to treat these assets under Division 40 of the ITAA 1997. As the Commissioner has accepted the value the supplied value for determining the assessment of income tax for the 20ZZ income year, the Commissioner will continue to do so for the 2013, 2014, 2015, 2016 and 2017 income years. Therefore, the taxpayer is required to use the supplied value for the intellectual property acquired in the 20XX income year in accordance with their choices made under Division 40 of the ITAA 1997. | Detailed Reasoning - Will the Commissioner accept the supplied value of certain in-house software assets acquired by the taxpayer?: In the objection decision dated dd/mm/20YY the Commissioner accepted that the supplied value of the in-house software assets. Subsequently the Commissioner issued a notice of assessment on in respect of the 20ZZ income year which was based on this objection decision. Section 40-130 of the ITAA 1997 provides that any choices under Division 40 of the ITAA 1997 must be made by the date that the return for the income tax year is lodged or within a further time allowed by the Commissioner and further, that once a choice has been made, it applies to that and all subsequent income tax years. As a result of the objection decision issued in month 20YY the Commissioner had exercised his discretion in allowing the taxpayer additional time to make the choices allowed under Division 40 of the ITAA 1997, and this was given effect in the notice of assessment issued in month 20YY. Subsequently, the taxpayer is now required to continue to apply those choices for all subsequent income years. Due to the Commissioner's objection decision, the taxpayer made a series of choices in respect of how to treat these assets under Division 40 of the ITAA 1997. As the Commissioner has accepted the value the supplied value for determining the assessment of income tax for the 20YY income year, the Commissioner will continue to do so for the 2013, 2014 and 2015 income years. Therefore, the taxpayer is required to use the supplied value for the intellectual property acquired in the 20XX income year in accordance with their choices made under Division 40 of the ITAA 1997. | Detailed Reasoning - Is the taxpayer entitled to claim deductions in respect of the decline in value of certain assets using a low-value pool?: As previously discussed, per subsection 40-130(2) of the ITAA 1997, a taxpayer is required to apply any choice about a depreciating asset made under Division 40 of the ITAA 1997 to the income year in which the choice is made and in all subsequent income years. Further, per subsection 40-430(2) of the ITAA 1997, once a depreciating asset has been allocated to the low-value pool it must remain in the pool. As the Commissioner has previously determined that the certain assets acquired by the taxpayer had been added to the taxpayer's low value pool (per the Commissioner's objection decision of month 20YY) the taxpayer is required to continue to continue to apply Subdivision 40-E of the ITAA 1997 in calculating any applicable deductions, so long as all other requirements of the subdivision are met (for example, should a balance adjustment event occur). Therefore, the taxpayer is entitled to claim the deductions in respect of the decline in value those assets acquired by the taxpayer and included in the taxpayer's low value pool. | Detailed Reasoning - Is the taxpayer entitled to claim deductions in respect of the decline in value of certain in-house software assets?: In the objection decision of month 20YY the Commissioner stated that the taxpayer was able to deduct the decline in value of the in-house software assets it acquired in the 20XX income year under Division 40 of the ITAA 1997. The decline in value of a depreciating asset must be deducted over time. The time over which the deductions are claimed is based on the effective life of the asset, and the ITAA 1997 provides mechanisms by which the effective life of an asset can be determined. Subsection 40-95(7) of the ITAA 1997, as at 9 December 2010, provided that the effective life of in-house software was four years. Therefore, the decline in value of the in-house software acquired by the taxpayer is to be calculated using an effective life of 4 years. The objection decision of month 20YY determined that the choice to deduct the decline in value of the in-house software had been made in the 20XX income year. As such, per subsection 40-130(2) of the ITAA 1997 the taxpayer is required to continue to deduct the decline in value under Division 40 of the ITAA 1997 for the remainder of its effective life. With an effective life of 4 years, this means that the taxpayer is entitled to deductions for the decline in value in the 2011, 2012, 2013 and 2014 years. Therefore the taxpayer is entitled to claim deductions in respect of the decline in value of the in-house software assets it acquired in the 20XX income year. Based on the effective life of the assets these deductions will be exhausted in the 2015 income year. If either or both of Questions 3 and 4 are answered in the affirmative, is the taxpayer able to claim deductions in connection to these in the 2013, 2014, 2015, 2016 and 2017 income years? As the taxpayer is entitled to deductions under Division 40 of the ITAA 1997 in respect of both the intellectual property and in-house software assets it acquired in the 20XX income year, and in the 2013, 2014, 2015, 2016 and 2017 income years some or all of these assets will decline in value, the taxpayer is entitled to claim deductions in respect of any such decline using the mechanisms set out in Division 40 of the ITAA 1997.