Private ruling: Deduction-decline in value
Published: June 2012
Ruling period: Year ending 30 June 2012 | Year ending 30 June 2013
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to claim a deduction for decline in value of the plant and equipment when your property is available for rent? | A1: Yes | Q2: Are you entitled to claim a deduction for the written down value of depreciating assets when they are destroyed? | A2: Yes | Q3: Are you entitled to claim a deduction for the balance of capital works when your rental property is demolished? | A3: Yes


Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 s ection 40-25 | Income Tax Assessment Act 1997 subsection 40-25(2) | Income Tax Assessment Act 1997 subsection 40-285(1) | Income Tax Assessment Act 1997 subsection 40-285(2) | Income Tax Assessment Act 1997 paragraph 40-295(1)(a) | Income Tax Assessment Act 1997 section 43-40 | Income Tax Assessment Act 1997 section 43-70 | Income Tax Assessment Act 1997 section 43-250

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a deduction is allowable for expenses incurred in gaining or producing assessable income, provided those expenses are not capital, private or domestic in nature. Generally, the purchasing of plant and equipment and the costs in relation to the construction residential rental properties are generally of a capital nature and are deducible under Division 40 of the ITAA 1997or Division 43 of the ITAA 1997 respectively. | Detailed Reasoning - Decline in value: Division 40 of the ITAA 1997 deals with deductions for the cost of depreciating assets. Section 40-25 of the ITAA 1997 allows you to deduct an amount equal to the decline in value of a depreciating asset which is held for any time during an income year and used for a taxable purpose. A taxable purpose includes the purpose of producing assessable income. The deduction is reduced to reflect the extent to which the asset was used during the income year for a purpose other than a taxable purpose (that is for private or domestic purposes (subsection 40-25(2) of the ITAA 1997). In your case, as the tenants are moving out of the property and the items of plant and equipment will not be used for a taxable purpose as the property will not be available for rent. Therefore, you will need to apportion any deduction for the decline in value. The following example has been provided in regards to the apportionment: Gareth purchases an air conditioner in 2009 financial year for $2,400. The air conditioner is used 100% for income producing purposes. The effective life of the air conditioner is 10 years and Gareth chooses to use the diminishing value and depreciates the air conditioner over ten years. In 2009-10 financial year the adjustable value of the air conditioner was $2,286. On 15 June 2010 Gareth decides to cease renting his property. For the 2009-10 financial year the decline in value is calculated as follows: $2,286 x 352 x 200% 365 10 = $440 The amount of $440 is allowable as a deduction. The adjustable value of the air conditioner is now $2,286 - $440= $1,846. The additional amount of depreciation (the notional amount) for the duration of the 2009-10 financial year is not deductible as the assets held in the property are not being used for a taxable purposes. $2,286 x 14 x 200% 365 10 = $18 (notional amount) Note: If the property is held in joint names or as tenants in common, you can only claim your share of the available deduction for the decline in value of the plant and equipment. This would also apply to the balancing adjustment deduction and the balancing amount for the un-recouped capital works deduction. | Detailed Reasoning - Sale, disposal or destroyed items of plant and equipment: Paragraph 40-295(1)(a) of the ITAA 1997 states that a balancing adjustment event occurs for a depreciating asset if you stop holding the asset. This may happen where an asset is sold, lost or destroyed. When a balancing adjustment event occurs for a depreciating asset whose decline in value has been worked out under subdivision 40-B of the ITAA 1997, its termination value will be compared to its adjustable value to determine the balancing adjustment amount. Where the termination value exceeds adjustable value that amount will be included in assessable income (subsection 40-285(1) of the ITAA 1997). Where the adjustable value exceeds termination value that amount will be allowed as a deduction (subsection 40-285(2) of the ITAA 1997). In the case of a lost or destroyed asset subsection 40-300(2) of the ITAA 1997 advises that the termination value of the asset is the amount or value received or receivable under an insurance policy or otherwise for the loss. Where there is no amount received the termination value will be nil. In simple terms, where a deduction for decline in value (depreciation) has been claimed for an asset, but that asset is destroyed before it can be depreciated completely, an adjustment may be made to allow the balance of the decline in value to be claimed. Where the termination value is less than the adjustable value of the asset then a balancing adjustment deduction is allowed. In your case, it is considered you are still holding the items of plant and equipment during the financial year, although not for a taxable purpose. You are intending to destroy a number of items of plant and equipment for which you are entitled to a deduction for under Division 40 of the ITAA 1997. Therefore, you cannot claim a deduction for the notional amount of the decline in value of the assets. However, when the assets are destroyed there will be a balancing adjustment in the financial year. The following example has been provided in regards to the working out the decline in value and the balancing adjustment amount: | Detailed Reasoning - For example:: On 30 July 2010 Gareth decides to destroy the property and the associated items of plant and equipment located at the property such the air conditioner. In calculating the notional deprecation amount for the air conditioner in the 2010-11 financial year, the decline in value is calculated as follows: $1,846 x 30 x 200% 365 10 = $30 (notional amount) As the air conditioner is only held by Gareth for 30 days in this financial year. This means the adjustable value of the air conditioner just before it is destroyed (the balancing adjustment event) is $1,846 - $30 = $1,816. As Gareth will receive no monetary amounts for the destruction of the air conditioner, Gareth can claim the balancing adjustment amount of $1,816 as deduction in his 2010-11 income tax return. Essentially, this figure represents the remaining undeducted portion of the original cost of the air conditioner. The notional amount of $30 in not deductible in the 2010-11 financial year as the asset was not used for a taxable purpose. | Detailed Reasoning - Capital works: A deduction for capital expenditure incurred in constructing capital works, including buildings and structural improvements can be claimed under Division 43 of the ITAA 1997. A deduction for capital works is allowable from the day on which the building is first used for income-producing purposes. During periods when the building is not used for income-producing purposes, the associated write-off is forgone as a deduction. Taxation Ruling TR 97/25 paragraph 18 states that the Commissioner considers that section 43-40 of the ITAA 1997 applies to both voluntary and involuntary destruction of capital works. However, section 43-70 of the ITAA 1997 states that construction expenditure does not include expenditure on demolishing existing structures. | Detailed Reasoning - Balancing deduction for destroyed capital works: You can deduct an amount (called a balancing deduction), if all, or part of your capital works are destroyed in an income year, and: · you have been allowed or can claim a capital works deduction for the capital works · the capital works were used for income producing purposes before they were destroyed · there is an amount of undeducted construction expenditure for the capital works (section 43-40 of the ITAA 1997). Section 43-40(2) of the ITAA 1997 advises that deductions are allowable in the income year in which the building was destroyed and is calculated under section 43-250 of the ITAA 1997. Section 43-250 of the ITAA 1997 explains the calculation of the deduction as follows: Calculate the amount by which the undeducted construction expenditure for the part of your area that was destroyed exceeds the amounts you have received or have a right to receive for the destruction of that part. In your case, you have been allowed a deduction for capital works in previous financial year and there is an amount of un-deducted construction expenditure available for the property. In addition, neither you nor any other entity will use your property for any other purpose since it was last used by you to produce assessable income. As you satisfy all of the conditions set out in section 43-40 of the ITAA 1997, you are entitled to a deduction for the balance of your un-recouped capital works. The deduction is equal to the undeducted construction expenditure at the date of the destruction of the property. However, as the property ceased being used for income producing purposes for a period of time, the associated write-off in this period is forgone.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: You and your spouse purchased a property. | The property was rented at market rates. | The property was constructed a long time ago and additional capital works renovations were carried a few years ago. | You have claimed capital works deduction of 2.5% for the period of time the property was rented. | You and your spouse hold a number of assets at the property: | The tenants are expected to vacate the property soon and from this time the property will not be available for rent. | You are intending to demolish the property and destroy all of the plant and equipment located at the property. | The local council will issue a permit to demolish the property in the next few weeks. | No one will live in the property once the current tenants have moved out. | You will not receive any monetary amounts for the destruction of the property | The land will be used to build your private residence after the property is demolished.