Private ruling: Depreciation
Published: July 2012
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to a deduction for depreciation on a caravan used 100% for business purposes? | A1: Yes.

Relevant facts and circumstances: You run a business. Many of the jobs you complete are in remote areas and in some cases access to a work site may be limited. You have spoken with Work Safe (WS) in your state in relation to your work practices. You have been informed by WS that you cannot have your employees dressing and undressing into chemical suites outside of their regular vehicles. To comply with WS regulations, you must supply a lunch or tea room that has a suitable wash room, eating and sitting areas as well as an emergency shower facility in case of a chemical spill. You intend to purchase a caravan which you could move around to the work site as required. The caravan will be used 100% for business purposes.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 40-25, and | Income Tax Assessment Act 1997 section 40-30.

Reasons for decision: Summary: Section 40-25 of the ITAA 1997 allows a deduction for the decline in value of a depreciating asset used for a taxable purpose. A taxable purpose is, among other things, defined as carrying on a business for the purpose of gaining or producing assessable income. A private purpose is not a taxable purpose. Section 40-30 of the ITAA 1997 states in part that 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. Where you use a depreciating asset or hold it ready for use in producing assessable income, you can claim a deduction for the decline in the asset's value under section 40-25 of the ITAA 1997. | Detailed Reasoning - Calculating decline in value: The amount of the decline in the asset's value is worked out by applying a formula using the acquisition cost of the asset and its expected effective life (sections 40-70 and 40-75 of the ITAA 1997). To work out the decline in value of a depreciating asset, you must choose between the prime cost method and the diminishing value method. Both methods are based on the effective life of the asset and work out a statutory decline in value regardless of changes to the actual market value of the asset. The caravan you intend to purchase is a depreciating asset that you will hold ready for use to produce assessable income. Therefore, you can claim a deduction for the decline in value of the caravan using either the prime cost method or diminishing value method based on the effective life of the asset.

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