All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless specified otherwise.
The new rule, which applies from 1 July 2012, allows an immediate write-off for an asset costing less than $6,500 where the entity is a small business entity and chooses to apply the simplified capital allowances rules for a small business entity contained in Subdiv 328-D (s 328-180).
The provisions rely on the definition of a depreciating asset itself. The definition of a depreciating asset is contained in ITAA 1997 s 40-30. The issue here is whether the items purchased constitute a single depreciating asset or are separate depreciating assets.
Whether a particular item (rather than its components) is a depreciating asset is a question of fact and degree to be determined in the light of all the circumstances of the case (s 40-30(4)).
Also relevant will be whether the additional components purchased form part of the second element of cost of the original asset purchased. These issues are detailed separately below.
Second cost element
The second element of cost is:
- the amount the taxpayer is taken to have paid under s 40-185 for each economic benefit that has contributed to bringing the asset to its present condition and location from time to time since the taxpayer started to hold the asset
- expenditure the taxpayer incurred that is reasonably attributable to a balancing adjustment event occurring for the asset (s 40-190(2)).
For example, the second element of cost would include the cost of modifications, alterations or improvements made to the asset by the taxpayer during the relevant income year.
Where the costs of the additional items constitute the second element of cost, they will go into the cost of the main asset purchased and be subject to the depreciation rules.
Composite assets
Where the cost is not a part of the second element of cost, a determination will still need to be made as to whether the components are separate depreciating assets.
The functionality test that was used to identify a unit of plant under the former depreciation rules can be used and the function of the asset need only be separately identifiable or definable, rather than be self-contained or isolated (Taxation Ruling TR 94/11).
In that ruling, the Commissioner said that, although the determination as to whether a particular item is a unit of property is a question of fact and degree, an item generally satisfies the description if it has one or more of the following characteristics:
- it is an item that is entire in itself, capable of being separately identified or regarded as having a separate function
- it is functionally complete in itself. However, the item need not be self-contained or considered in isolation. It is not necessary that the item function on its own. It should, however, be capable of performing its intended discrete function
- when attached to another unit of property having its own independent function, the item varies the performance of that unit
- it performs a definable identifiable function.
The relevant function is the actual function the item has to serve in the taxpayer’s income-producing activity, rather than any theoretical function that the item could perform in other circumstances. Whether the items acquired will be separate depreciating assets will be a question of fact and degree in the circumstances.
[21-06-2012]
