ATO Interpretative Decision
ATO ID 2004/940 (Withdrawn)
Capital Allowances: low-value pool - change of taxable use of depreciating assets after those assets have been allocated to the pool
FOI status: may be released
Status of this decision: Decision withdrawn 20 April 2017.
|CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.|
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Does a taxpayer continue to work out the decline in value of a depreciating asset allocated to a low-value pool based on their original reasonable estimate of the taxable use percentage of that asset under section 40-435 of the Income Tax Assessment Act 1997 (ITAA 1997), if the percentage of their use of that asset for a taxable purpose changes?
Yes. The taxpayer must continue to work out the decline in value of a depreciating asset allocated to a low-value pool based on their original reasonable estimate of the taxable use percentage of that asset under section 40-435 of the ITAA 1997, even though the percentage of their use of that asset for a taxable purpose has changed.
The taxpayer allocated some depreciating assets in their rental property to a low-value pool. At the time of allocation, the taxpayer intended to rent the property on a long-term basis. As such, the taxpayer estimated the taxable use percentage of the assets allocated to the low-value pool to be 100 per cent.
The taxpayer later moved into the rental property due to a change of circumstances that was neither expected nor foreseeable by the taxpayer. Therefore, the depreciating assets in the property were no longer being used for a taxable purpose.
Reasons for Decision
Under Subdivision 40-E of the ITAA 1997, a taxpayer may choose to work out the decline in value of certain low-cost and low-value depreciating assets through a low-value pool using set rates.
When a taxpayer allocates a depreciating asset to a low-value pool, section 40-435 of the ITAA 1997 requires the taxpayer to make a reasonable estimate of the percentage of their use of the asset for a taxable purpose. This percentage is known as the asset's taxable use percentage. It is this taxable use percentage of the cost or opening adjustable value of the depreciating assets in the pool that is used to work out the decline in value of the assets under section 40-440 of the ITAA 1997.
The estimate needs to take into account the taxpayer's use of the asset (including any past use) that will be for a taxable purpose over:
- the asset's effective life (for a low-cost asset), or
- any period of the asset's effective life that is yet to elapse at the start of the income year for which the asset is allocated to the pool (for a low-value asset).
The estimate must be done on a reasonable basis. This determination is an objective test that requires reasonable judgement to be exercised as to the prospective use of a depreciating asset. As a result, a taxpayer needs to estimate the taxable use percentage of a depreciating asset on a reasonable basis as a reasonable, independent person would having regard to the relevant facts and circumstances about the depreciating asset.
In this case, since the taxpayer intended to rent the property on a long-term basis and the change of circumstances was neither expected nor foreseeable, it is considered that the taxpayer made a reasonable estimate of the taxable use percentage of the assets allocated to the low-value pool. As such, the taxpayer can continue to work out the decline in value of those assets based on that percentage notwithstanding the percentage of their use of the assets for a taxable purpose has changed.
Subsection 40-25(2) of the ITAA 1997 reduces the deduction for decline in value of a depreciating asset for an income year if there is any non-taxable use of the asset. However, subsection 40-25(5) of the ITAA 1997 prevents this rule applying to depreciating assets allocated to a low-value pool.
For a depreciating asset allocated to a low-value pool, any use of the asset for a non-taxable purpose is reflected purely in the asset's taxable use percentage, which is worked out when the asset is allocated to the pool.
Date of decision: 22 October 2004
|Year of income:||Year ended 30 June 2004|
Income Tax Assessment Act 1997
Decline in value
Low value pool
Siebel/TDMS Reference Number: 4262746; 1-AVKKTXV
Business Line: Small Business/Individual Taxpayers
Date of publication: 26 November 2004