Private ruling: Depreciation
Published: December 2014
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 claim decline in value of investment trading software? | A1: Yes. | Q2: Is there a balancing adjustment when trading management software ceases to be used? | A2: Yes.

Relevant facts and circumstances: You purchased and installed a share trading software system (system) to assist in trading shares to gain capital gains. You commenced using the system and you earned some dividends and managed a small profit. The supporting company that supplied the system disappeared without being able to be traced and no support was available. Therefore in the same month you sold all your shares and ceased trading.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 Division 40

Reasons for decision: Summary: Section 40-25 of the ITAA 1997 states you can deduct an amount equal to the decline in value for an income year of a depreciating asset that you held for any time during the year. You held the system in the 2012-13 financial year. Share trading software used for the purpose of obtaining assessable income is considered deductible. However you will not be entitled to claim an outright deduction for the share trading software under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997). The reason is that expenditure on the purchase of software is considered to be of a capital nature. Division 40 of the ITAA 1997 however allows a decline in value (depreciation) deduction on software used in gaining assessable income. The deduction is calculated using the prime cost method with an effective life of 4 years (a rate of 25%). This rate and method is prescribed by subsection 40-95(7) of the ITAA 1997 is the only rate available for calculating decline in value for software expenditure. Therefore, you will be entitled to claim a deduction for the decline in value of the share trading software under section 8-1 of the ITAA 1997 using the following formula: Software Decline in Value = (Cost * Days Owned * 0.25) / 365 Section 40-285 of the ITAA 1997 provides that if a balancing adjustment event occurs for a depreciating asset you held, you need to calculate a balancing adjustment amount to be included in your assessable income or to claim as a deduction. Section 40-295 of the ITAA 1997 states that when you stop holding the asset, for example if the asset is sold, lost or destroyed, a balancing adjustment event occurs. You work out the balancing adjustment amount by comparing the asset's termination value (such as the proceeds from the sale of an asset) and its adjustable value at the time of the balancing adjustment event. If the termination value is greater than the adjustable value, you include the excess in your assessable income. If the termination value is less than the adjustable value, you can deduct the difference.