Private ruling: Decline in value
Published: May 2013
Ruling period: Year ending 30 June 2013 | Year ending 30 June 2014
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to claim a deduction for the decline in value (depreciation) of an asset in the year ended 30 June 20XX? | A1: No. | Q2: Are you entitled to claim a deduction for the decline in value (depreciation) of an asset in the year ended 30 June 20YY? | A2: Yes.

Relevant facts and circumstances: You are carrying on a business of making and selling assets. You have started building an asset and expect construction to be finished in the 20YY financial year. The asset will be used as a prototype for future production assets. You will use it for testing and presentation to potential future customers. You have determined the effective life of the asset.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 40-25

Reasons for decision: Summary: You may claim a deduction for the decline in value of the asset from the time it has been fully constructed and is available for use in your business activities. | Detailed Reasoning - Detailed reasoning: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income or a provision of the taxation legislation excludes it. In your case, you are building an asset to use in your business activities. The cost of building an asset is generally of a capital nature and is therefore not immediately deductible as an ordinary business expense. However, section 40-25 of the ITAA 1997 may allow a capital allowance deduction for the decline in value of a depreciating asset used for income producing activities. A depreciating asset is an asset that has a limited effective life and that is reasonably expected to decline in value over the time it is used. Your asset is considered to be a depreciating asset. A depreciating asset starts to decline in value when you first use it for any purpose, including a private purpose. This is known as the depreciating asset's start time. Although an asset is treated as declining in value from its start time, a deduction for its decline in value is only allowable to the extent that it is used for an income producing purpose. Thus, if the asset is used partly for non-income producing purposes the total decline in value amount for an income year must be apportioned between income and non-income producing use. Only the income producing use portion can be claimed as a deduction. Similarly if the asset is only used for part of the year for income producing purposes, the deduction must also be apportioned on a time basis. In calculating the deduction, you must also determine the effective life of the asset. Generally the effective life of a depreciating asset is how long it can be used by any entity for a taxable purpose: · having regard to the wear and tear you reasonably expect from your expected circumstances of use · assuming that it will be maintained in reasonably good order and condition, and · having regard to the period within which it is likely to be scrapped, sold for no more than scrap value or abandoned. For most depreciating assets, you have the choice of either working out the effective life themselves or using an effective life determined by the Commissioner. Taxation Ruling TR 2012/2 lists the Commissioner's determination of the effective life for various depreciating assets for the 2012-13 financial year. You are allowed to choose between one of the two methods to work out the decline in value of your depreciation assets. These methods are the diminishing value method and the prime cost method. Details of how to calculate depreciation using these methods can be found in our publication Guide to depreciating assets 2012 which can be found on our website www.ato.gov.au. When a depreciating asset is sold, a balancing adjustment (the difference between the sale price and the depreciated value of the asset) is calculated. This amount will be included in your income if the sale price is greater than the depreciated value or will be an additional deduction if the depreciated value is greater than the sale price. In your case, you do not expect to finish construction on the asset until the 20YY financial year and, based on its expected usage, have determined its effective life of ten years. The decline in value of the asset will not commence until the asset has been completed. As the asset will not be finished in the 20XX financial year, no deduction for depreciation is allowable in this year. A deduction for depreciation will be allowable in the 20YY financial year. The deduction will need to be apportioned as the asset will not be available for income related purposes for the full year.