Capital Allowances And Capital Works Accounting Essay
The main aim of this report is to research for further information regarding the capital write-offs and capital allowance under Division 40 ITAA97. Starting from 1 July 2001, a set of uniform capital allowance rules was established under Division 40 ITAA97. The Uniform Capital Allowance (UCA) has consolidated various capital allowance measurement that formerly had set. Deductions that available under Division 40 ITAA97 are ‘decline value’ of depreciating assets and some other capital expenses. UCA has a set of general rules that applies in both depreciating assets and other capital expenditure and moreover it has also introduced additional deductions for capital expenditure which previously did not eligible for deduction. (Commonwealth of Australia - Australian Taxation Office 2010)
According to S 40-10, the outline of the Division 40 is mainly divided into two topics/rules, which are ‘rules about depreciating assets’ and ‘rules about other capital expenditure’. Under the ‘depreciating assets rules topic’, it covers of core provision which regarding what is depreciating assets and how to work out for its effective life, decline in value, and holder; cost which regarding the various elements of cost associated with the depreciating asset; balancing adjustments, low-value and software development pools, and primary production depreciating assets. While under ‘capital expenditure rules’, it allows certain other capital expenditures to be deductible which is not otherwise deductible, it covers of capital expenditure of primary procedures and other landlords, capital expenditure that is immediate deductible, capital expenditure that is deductible over time such as project pools and business related costs, and capital expenditure for establishing trees in carbon sink forests (Commonwealth of Australia - ATO 2010).
2.0 OVERVIEW UNIFORM CAPITAL ALLOWNCE (UCA)
Uniform capital allowances system (UCA) provides a set of general rules that applies across a variety of depreciating assets and other capital expenditures (Commonwealth of Australia - ATO 2010). Introduced by the New Business Tax System Act 2001, they have compiled many of the former capital allowances regime which are complicated into one combined system with a list of reliable regulations that involves depreciating assets and other capital expenditures, which are contained in Div 40 ITAA97 and Div 43 ITAA97. (Australasian Legal Information Institute, 2010) Due to the penetration of this new system, a number of Divisions in ITAA97 had been cancelled from the first July 2001. These Divisions includes Div 42 which deals with the depreciation of plant, Div 373 deals with the capital allowances relating to intellectual property and Div 400 that deals with the capital allowances for environmental assessment and environmental protection expenditure (Woellner et al. 2006). The elimination of these provisions was perceived to be of benefit as it can smooth the progress of tax reform through the enhancement of reliability and structure of tax law and removal of tax-induced distortions in making decision for investment (Fisher 2002)
PROGRESS OF LEGISLATION
Under the taxation law, there are more than 37 separate capital allowance regimes which will result in inconsistency (CCH 2010). The Capital Allowances Bill intends to solve this problem by bringing in a uniform capital allowance (UCA) regime that can provide momentous simplification benefits and enhance neutrality (CCH 2010). The underlying principles of UCA system are (1)” a set of general rules to calculate the deduction for the notional decline in value of most depreciating assets”, (2) “a pooling mechanism under which some expenditures are pooled and given deductions for the decline in the pool” and “(3) deductions, immediate or over a period of time, for certain capital expenditure used in the primary production and the mining industries” (CCH 2010)
There are a few types of depreciating assets cannot be included in the UCA system (CCH 2010). Those assets are assets occupied for R&D activities, assets related to investments in Australian films, capital works under Division 43 of the ITAA 1997 and cars where the claimed value of the deduction on them are substantiated using some special methods (CCH 2010).
3.0 CAPITAL ALLOWANCES AND CAPITAL WORKS
Under the general deduction provision s 8 – 1 ITAA97, taxpayers are not allowed to have any deductions on their capital expenditure, except that the requirements of certain specific deduction provisions in the tax legislation have been fulfilled. (Australasian Legal Information Institute, 2010)
Div 40 ITAA97 contains laws and regulations for the uniform capital allowance system which are relevant to depreciating assets. The expenses of a depreciating asset act as a capital nature and thus, deductions are not allowable as it considers common business expense (Commonwealth of Australia - ATO 2003). However, under the provision of Div 40 ITAA97, it stated that the decline in value of depreciating assets for the purpose of income-generating is deductible based on its useful life. Additionally, in certain cases, special deductions (s 40 - 880) are given for depreciating assets of non-business assets which cost $300 or less are immediate deductible. Besides that, deductions are also available for the low-value pools regulations.
The main purpose of this provision, Div 41 ITAA97, first introduced in 2009 is to provide a supplementary deduction for certain new business investments, which matches the laws and regulations in Div 40 ITAA97. According to the Barkoczy (2010), it stated that, “this investment allowance is a temporary tax incentive designed to encourage economic activity during the global financial crisis.” There are few conditions, under the s 41 – 10 (a) to (d), are required to obey in order to entitled for deductions in the investments.
Div 43 ITAA 97 states that taxpayers are allowed a proportional of deductions for the construction expenditure on capital work, which are used for both residential accommodation and to be used for having the purpose of income-generating. Under this provision, the rate of the structure expenditures, excluded expenditure on plants, are normally not able for deductions. Therefore, only a proportional rate of the capital expenditure is able to be deducted depending on a mixture of reasons such as when is the date of the construction begun and the type or form of capital works occupied. The capital works that stated here includes the extensions, alterations and improvements on buildings and structural (Commonwealth of Australia - ATO 2004).
4.0 DEPRECIATING ASSET
A depreciating asset is an asset that does not have unlimited “effective life” and can rationally be foreseen to decline in value over the time that it is utilised under the s 40 – 30 ITAA 97. (Anthony, Master Tax Guide 2007) Intangible assets, such as land and objects of trading stocks are excluded in particular from the meaning of depreciating asset. There are few exceptional whereby an intangible asset can be considered as a depreciating asset. First, the item must not be relating to trading stock, and secondly, if it happened to fall within one of the categories, for example, mining, quarrying or prospecting rights and information, items of intellectual property, telecommunication sites access rights, spectrum and data-casting transmitter licenses (Woellner, Barkoczy, Murphy, Evans & Pinto 2010).
5.0 HOLDER OF DEPRECIATING ASSETS
Under s 40 – 25(1) ITAA97, taxpayers who are the holders of the assets, will be entitled for deductions for the depreciation expense of the depreciating assets during the income year. Logically, the assets are considered belong or held by the owner, or in other phrase called legal owners, who purchased or inquired the assets. However, there are cases when a depreciating asset is held jointly by two or more legal owners and economic owners in different circumstances, for instance, under a “hire purchase agreement”. When that happens, special rules will be applied under s 40 – 40 ITAA97 (Fisher 2002).
6.0 DECLINE IN VALUE
A depreciating asset’s value starts to decline from the “start time” (S 40-60(1) ITAA97) and the “start time” is the time which a taxpayer starts using the asset or it has been installed and is ready to be used (S40-60(2)) (Woellner et al. 2006). Another “start time” might arise where the taxpayer starts using an asset after a balancing adjustment event has occurred for the asset, which is when the taxpayer starts using it again (S40-60(3)) (Woellner et al. 2006).
Generally, a taxpayer has a choice of adopting the diminishing value method or prime cost method to compute the “decline in value” for a depreciating asset (S40-65). The choice is exercised before lodging the income tax return and it does not need to be made formally (Mendel, Ooi, Keong & Santiago 2009). Besides, the choice exercised is also based on an asset-by-asset and year-by-year basis (Mendel et al. 2009). Once the choice of method is made, it applies to all of the following income years (S40-130) (Woellner et al. 2006).
However, there are some exceptions towards S40-65 as there are two situations where a taxpayer could deduct the asset’s cost immediately (Woellner et al. 2006). Firstly, the asset which is use for exploration or prospecting for minerals, or quarry materials, obtainable by mining operations (S40-80(1)) and secondly, it is when the cost of the depreciating asset does not exceed $300 (S40-80(2)) (Woellner et al. 2006).
There is situation where a taxpayer is required to use a particular method. It occurs when a depreciating asset is obtained from an associate or from a former holder, the taxpayer must use the same depreciating method they use and if the taxpayer does not know the method the former holder use, a diminishing value method must then be exercised (S40-6(4)) (Fisher 2002). Furthermore, when the depreciating asset is in a low-value pool, the decline value is computed according to the special rules in Subdiv 40-E (Woellner et al. 2006). Lastly, if the asset was used for R&D and it was a deduction under S73BA, for the purpose of Div 40, the taxpayer must use the same method as used for the R&D deduction (S40-54(6)) (Mendel et al. 2009) .
The cost of an asset is determined accordingly with the rules in Subdiv40-C ITAA 97. Generally, the “first element” and “second element” make up the cost of an asset (S40-175) (Barkoczy 2009). The “first element” is the amount paid by the taxpayer under S40-185 to hold the asset such as cash paid and non-cash benefits. The “second element” is the amount the entity has paid for economic benefit to bring the asset to its current condition (S40-190(2)) (Barkoczy 2009). Under S40-185(1), the amount paid could be a cash benefit where the amount is included into “second element”, beside, it might be a non-cash benefit, if so, market value of the non-cash benefit would be taken into account (Barkoczy 2009). Days held means the period of time the taxpayer held the asset after it is readily to be used (Barkoczy 2009).
According to S40-95 ITAA97, taxpayers have a choice to use the effective life of an asset determined by the Commissioner under S40-100 or self-assess under S40-105. The choice must be made when the asset’s start time occurs (S40-95(3)) (Commonwealth of Australia –ATO 2010). When the Commissioner estimates the effective life of an asset, it assumes that the asset is subjected to a reasonable rate, nicely maintained and will be sold for not more than scrap value (Commonwealth of Australia –ATO 2010). Taxpayers could refer to TR 2010/2 which discusses the methodology used and effective life of assets determined by the Commissioner under S40-100 ITAA1977 (Commonwealth of Australia –ATO 2010). If the effective life of an asset has changed as determined by the Commissioner due to circumstances such as the asset is used more than expected, assets redundant due to technology improvement or legislative changes or downturn demand of goods the asset produced, the effective life may be recalculate by the taxpayer (S40-110(1)) (Commonwealth of Australia –ATO 2010). However, the effective life must be recalculated if the cost of the asset has increase by at least 10% during the year (S40-110(2)) (Commonwealth of Australia –ATO 2010). Accordingly, self-assessment of effective life is also regarded to reasonably use and assumed to maintain in good condition and if the taxpayer realise that the asset needs to be scraped before the end of its effective life, then it is deemed to end at an earlier time (S40-105(2)) (Commonwealth of Australia –ATO 2010). There is some cases where the general rule of effective life is override such as, the asset acquired from a third party must be based on the effective life that the previous holder sets (S40-95(4), (5)), if the taxpayer has no idea about the effective used by the previous holder, it must use an effective life set up by the Commissioner (S40-95(6)) (Commonwealth of Australia –ATO 2010). Where an asset is used for R&D activities, the effective life may be modified under S73BG ITAA 36(Commonwealth of Australia –ATO 2010).
Base value is the amount of “opening adjustable value” including any “second element” of its cost for the year (S40-70(1)) (Woellner et al. 2006). In short, “opening adjustable value” of year 2 equals to the “adjustable value” of end of year 1, it is the amount in which the cost deducts the previous accumulated depreciation (S40-85) (Woellner et al. 2006). Pro-rating rules will be applied to decrease the decline in value when the asset is only used for part of the year or does not substantially used in producing accessible income (Mendel et al. 2009).
7.0 BALANCING ADJUSTMENT
Balancing adjustment is appear in Subdivision 40-D in the ITAA97. According to R Fisher in his journal capital allowance: The New Uniform Regime, Australian taxation ,2002, a balancing adjustment occur when there are an events such as when the taxpayer is no longer holding the depreciating assets, no intention to use it in the future and the entity is change the interest of holding the assets. Balancing adjustment rules will not be affected by pooled asset and primary producers asset (Mendel et al. 2009).The amount of government payment to industry (GPI) as well has no balancing adjustment effect unless the amount of money received from government is for the purpose of selling the asset (Commonwealth of Australia – Australian Taxation Office 2010). Merging and splitting assets also will not be consider as a balancing adjustment events although the entity stops holding the previous assets, unless the there are some part of the asset is still used by the entity. Thus (2009, Australian Master Tax Guide, CCH )
The most important matter that we should know about balancing adjustment is the difference between the termination value (amount of money and non-cash benefit received on disposal )of an asset and its adjustable value(initial cost minus any decline in value of the asset).( 2005,Australian Taxation Law,CCH Australia Limited,).Termination value can be figure out in two ways which is based on the specified amount in the legislation or the actual amount that received or to be received on disposal (Fisher 2002).Termination value, whether it is amount to be received, market value or specified amount in the legislation must be must be GST-free (Mendel et al. 2009). If the termination value is greater than the adjustable value, the difference amount will be treated as assessable income but on the other hand, if the adjustable value is higher than termination value, the difference will be included in deduction of the taxpayer (Barkoczy 2010).
Where a taxpayer receives an amount for two or more things that include a balancing adjustment event in relation to a depreciating asset, the amount received is reasonably apportioned between the depreciating asset and those other things for the purposes of calculating the balancing adjustment (Ireland, Ch’ng 2002). In section 40-290 of the ITAA97, stated that where only part of the asset is used for the business purpose, the proportion should be make to the extent of the actual usage of the asset that meet the criteria of business purposes. A balancing adjustment for car section 40-370 is special than the other adjustment that stated in section 40-285 (Commonwealth of Australia – Australian Taxation Office 2006).As for car balancing adjustment method such as cents per kilometre or 12 percent method and logbook or one-third method must be using to determine the balance (Mendel et al. 2009).The combination of either one couple of the methods should be used as using only one of the method will lead to lack of information to determine the balance amount (Mendel et al. 2009). Balancing adjustments for GCT events is occur depend on the usage of the asset whether it is wholly or partially used for non-taxable income (Woellner, Barkoczky, Murphy, Evans 2009). In the CGT events K7, which is only apply for disposal of asset after 1st July 2001, if the depreciating asset is fully used for taxable income, there will be no CGT effect on the balancing adjustment (Woellner et al. 2009). On the other hand if the asset is partly used for taxable purpose , it will leads to capital gain or losses that will be treated as assessable or deduction under balancing adjustment rules (Woellner et al. 2009).
Balancing adjustment that arises due to the change of the ownership of the depreciating assets may cause by two different circumstances, the automatic and the optional roll over (Mendel et al. 2009). Balancing adjustment rollover relief will not occur if the balancing adjustment event results in a capital or revenue loss which is only be discussed under Subdivision 170-D as those matter deals with the transfer of loss assets to members of a linked group (Ireland et al. 2002). Automatic roll over is due to disposal to wholly own company, marriage breakdown, disposal by partnership to wholly owned company and disposal to another member to wholly owned company (Ireland et al. 2002).Optional roll over on the other hand is happen when there is joint election made by the transferee and the transferor over the change of ownership and must be in writing form (Mendel et al.2009).
The consequences of roll over relief are the transferor is no longer needed to make any further adjustment on the asset and it is the transferee responsibility for further adjustment based on the original method and useful life that used by the previous owner (Woellner et al. 2009).
There are certain ways to offset the balancing adjustment (assessable income) so that the amount can be applied to reduce the cost of replacement asset,( 2005,Australian Taxation Law, CCH) ,such as when the depreciable assets is lost or destroyed, the asset is acquired by Australian Government or it disposed to Australian Government Agent compulsorily (Fisher 2002) (Commonwealth Consolidated Act 1997).There are also two other circumstances that allow offset which is where a private acquirer compulsorily buys an asset through statutory power other than that stated under company law and where the landowner land is solely for mining lease (Mendel et al. 2009).
9.0 SPECIAL RULE
9.1 Immediate Deduction Where Cost Does Not Exceed $300: Under s40-80(2), an asset which has a cost of $300 or less and that is utilized mainly for the aim of generating assessable income which is not revenue from operating a business and is considered to have a decline in value same as its cost (Woellner et al. 2006). Thus, an immediate full deduction will be available for some kinds of asset which do not cost the taxpayer for more than $300 (Woellner et al. 2006). The immediate deduction will apply to an asset as long as it is not a unit of a combination of assets costing more than $300 in total which the taxpayer begins to occupy in the income year or the aggregate cost of the asset or similar asset which the taxpayer begins to occupy does not go beyond $300 in the income year (Woellner et al. 2006). Some depreciating assets that can be used in searching or discovery for minerals or quarry materials are eligible for immediate deduction if all the requirements stated in ITAA97 s 40-80(1) are fulfilled (Woellner et al. 2006). Nevertheless, it is necessary to apportion the expenditure if the asset is not substantially used for income earning activities (Mendel et al. 2009).
9.2 Software Development Pools: Generally, taxpayer is entitled to allocate expenses incurred on developing in-house software or having another party to develop computer software that is designed to use solely for the income producing purposes to the software development pool (Woellner et al. 2006). In-house software has to be used primarily for carrying out the functions for which it was developed. In order to claim deduction for in-house software expenses, the company must ensure that it is unable to claim deduction for such expenses under any provision other than Div 40 and 328 ITAA97 (Woellner et al. 2006). It is essential that all in-house software expenses have to be assigned to the software development pool immediately after the pool has been formed according to s 40-450(2) and this indicated that the decision to pool expenditure on in-house software development cannot be revoked after the taxpayer has decided to do so (Woellner et al. 2006). As stated in s40-450(4), it is necessary to keep up different software development pool for different years in which in-house software expenses is incurred (Woellner et al. 2006). Expenditure on in-house software can be written off using the prime cost method at the rate of 40% for year 2 and year 3 and 20% for year 4. Taxpayer will not usually be allowed to claim deduction for expenditure incurred in the particular year (first year) the software is developed (Woellner et al. 2006). Software expenditure may start depreciating in the first year over 2.5 years only when either the taxpayer starts to use the software or the software have been properly installed and prepared for use to earn taxable income (Woellner et al. 2006). Taxpayer will still be allowed for deduction although the software is used or installed after some time the expenditure is incurred (Mendel et al. 2009).
9.3 Car Depreciation Limitation: There is a limitation on the first element of the cost when computing the deductible amount for the decline in value of a car where the first element of the cost is usually referred to the actual amount of money paid by the taxpayer to purchase a car (Woellner et al. 2009). The limit for cars first held in the 2009-10 income year is $57,180 based on TD 2009/13. However, car used mainly for carrying disabled people in wheelchairs for generating revenue is not subject to this limitation (Woellner et al. 2006).
9.4 Commercial Website Development Expenditure: Taxation Ruling TR 2001/D6 sketches out the costs incurred regarding to establishment, construction, acquisition and maintenance of business websites which might be deductible (Commonwealth of Australia - Australian Taxation Office 2000). Expenses incurred on website are deemed to be capital in nature when the taxpayer intends to start running a purely online business through the website or the website is build by the taxpayer who owns an existing physical business with the aim of drastically extending its business structure (Mendel et al. 2009). Thus, when expenses on creating a website will be 'expenditure on software' and can be depreciated over a period of two and a half year if the website is used as part of business with the intention of gaining taxable income (Commonwealth of Australia - ATO 2000).
9.5 Low Value Pools: Under the uniform capital allowance regime, taxpayer can choose to transfer low-value and low-cost assets to a low-value pool (Barkoczy 2009). When a taxpayer first selects to assign a depreciating asset to the pool, a low-value pool will be formed (Mendel et al. 2009). A low cost asset refers to a depreciating asset which has a cost of not more than $1000 after adding up the first element and second element of cost at the end of the financial year in which it is used for the first time in gaining assessable income (s 40-252(2)) (Mendel et al. 2009). A low-value asset is a depreciating asset which does not belong to the class of low cost asses for which the diminishing value method is used by taxpayer to calculate any deductions for decline in value in previous income year and that has a net book value of not more than $1000 in the current income year (s 40-252(5)) (Mendel et al. 2009). Nevertheless, assets which deal with research and development or horticulture plants, grapevines or assets costing less than $300 that are subject to immediate deduction are not allowed to be allocated to the pool (Mendel et al. 2009).
Once a taxpayer begins to use the low-value pool, any asset costing less than $1000 ought to be pooled (s 40-430(3) ). In contrast, it is optional for taxpayer to decide whether to move low-value assets to the pool (Woellner et al. 2006). An asset must stay in the low value pool after it has been transferred to the pool (Fisher 2002). A taxable purpose proportion of an asset is required before allocating an asset to the pool and this can be done through estimating the asset’s business and private use percentage over its effective life (Fisher 2002). Newly pooled assets are to be depreciated at a diminishing rate of 18.75% in the first year and from the second year onwards, the law value pool will be depreciated at 37.5% per year (Woellner et al. 2006).
9.6 Intellectual Property: ITAA97 s40-70(2) indicated a taxpayer must use the prime cost method to calculate the annual applicable deduction for intangibles or intellectual property (IP) except for film copyright (CCH 2010). The ITAA97 s40-95(7) lays down the effective life for various IP (Commonwealth Consolidated Acts 1997). The effective life for common IP like copyright is 25 years (except for film copyright), standard patent is 20 years and innovation patent is 8 years (Commonwealth Consolidated Acts 1997). Thus, IP must be depreciated properly according to their prescribed effective life using prime cost method (Mendel et al. 2009).
10.0 BUSINESS-RELATED COST – ‘BLACK HOLE’ CAPITAL EXPENDITURE
‘Black hole’ capital expenditure is means that the expenditure was neither deductible immediately nor deductible over time during the past before the introduced of specific deduction provision S 40-880 (Joseph 2006). S 40-880 ITAA97 is specially designed for ‘black hole’ capital expenditure, which make the ‘black hole’ capital expenditure become deductible (Woellner et al. 2010). Before this special provision was introduced, the business-related ‘black hole’ capital expenditure was not allowed for deduction under general deduction provision S 8-1 ITAA97 (Barkoczy 2010). The calculation treatment for the ‘black hole’ expenditure is deduct in equal proportions over 5 income years, in other words, 20% for each year starting in the year in which the capital expenditure incurred (Commonwealth of Australia – ATO). The difference between the former S 40-880 and current S 40-880 is discussed below.
In former S 40-800, there had only seven specific types capital expenditures which are attracted for deduction to the extent that the capital expenditure incurred after 30 June 2001 and incurred of taxable purpose (Commonwealth of Australia – ATO) (Woellner et al. 2009). The seven specific types of capital expenditures are such as in establishing the business structure, like cost of incorporating a company, forming a partnership, or creating a trust, structure costs such as expenditure that convert the business structure to another different structure are also deductible. Moreover, conversion expenditures include the cost of transferring the business assets to the new structure, and the cost of preparing contracts associated with the business structure conversion. Besides, expenditures of raising equity capital either at initial or subsequent period are also deductible, but is only limited to a company and a fixed unit trust. Furthermore, expenditure of defending against a takeover such as legal and accounting costs are also included, but, it is restricted for defending purposes, means that if expenditure incurred in offending against a takeover then it would not deductible. Other than that, costs of unsuccessfully attempting a takeover, costs to liquidate a company that carried on a business, and the costs to cease on the taxpayer’s business are deductible as well (Woellner et al.2006). Whereas, in current S 40-880, the ATO had established a broader treatment for ‘black hole’ capital expenditure, which mean that the restriction is no longer limited to seven specific types of capital expenditures that had been previously established (Commonwealth of Australia - ATO). Capital expenditures that incurred after 30 June 2005 are deductible as long as the expenditure is not otherwise been taken into account and moreover the deduction is not denied by any other specific provision of the income tax law, and it is incurred in relation with the taxpayer’s business, or relate to the business that used to be carried on, or in relation to a business that proposed to be carried on (Woellner et al. 2009). Other than that, according to s 40-880(2), expenditures that relate to liquidation, or deregistration, or winding up also entitled to deduction if the taxpayers was a shareholders, partners, or beneficiary respectively. (Woellner et al. 2006)
According to Zweck (2008), costs related of businesses that propose to carry are include the cost of designing a business plan, cost of doing research, establishment business premises, capital investment in assets of the business and etc. According to the ATO, the taxable purpose is defined in S 40-25(7), as the purpose of producing assessable income, or the purpose of exploration or prospecting, or the purpose of mining site rehabilitation, or environment protection activities. With regards to calculation treatment, the capital expenditure of exploration or prospecting is recommended and agreed to deduct immediately instead of deduct over time, because in Ralph Review, the value of exploration or prospecting results would be uncertain, thus it is recommended immediate deduction (D’Ascenzo 2002). Besides, regarding the mining and resource industry, it is suggested that instead of deduct over time, some mining capital expenditure related to this particular industry should implemented effective life write-off method (D’Ascenzo 2002)
However, there are limitations that exclude capital expenditure from the scope of ‘black hole’ capital expenditure, meaning to say, although it could be considered as business-related capital expenditure for taxable purpose, it is excluded from deduction as well (Commonwealth of Australia – ATO). The exclusions/limitations are contained in S 40-880(5) discussed as follow. Expenditure that forms part of the cost of a depreciating assets that the taxpayer holds, formerly held or will hold; It is deductible under another provision of the Act and thus no double deduction available; It forms part of the cost of land; The expenditure of lease or other legal or equitable right and its associated costs, in S 40-880(6), the legal expenditure is however deductible if it is in the circumstance that the taxpayer is in the purpose in preserving the value of the goodwill; The capital expenditure incurred which was not capital in nature at initial and would be specifically not deductible under income tax laws other than this provision; It is also not deductible for the expenditure that used to calculate assessable profit or deductible loss, or in working out a capital gain or capital loss from CGT event; Expenditure that fall under specific non-deduction provision such as fines and penalties under S 26-5; The expenditure is either in private or domestic nature; the cost incurred in the process or relate to producing exempt income or non-assessable non-exempt income. Under S 40-880(7), it limits the rule of S 40-880(2)(c), where, the capital expenditures incurred in relation to a business that proposed to be carried on is deductible only if it is proposed to be carried on in a reasonable time (Commonwealth of Australia – ATO) (Mendel et al. 2009).
Furthermore, under S 40-880(9), the taxpayer that carrying on the business cannot claim for deduction to the extent that the expenditure is return of or on equity interest or return of or on debt interest. In other words, the obligation to pay for the money that previously received such as shares and loan is not deductible (Commonwealth of Australia – ATO).
Specific Reference to the Mining Industry
The Australian Government had explicit intention relating to the mining and resources industry, which is to say that the previous unique rules for that particular industry be incorporated into the general capital allowances regimes (D’Ascenzo 2002). This indicated there will be a closer alignment of method for handling mining outlays for tax purposes with that of other type of businesses (D’Ascenzo 2002). Depreciation expense of depreciating assets over their effective life and recognition of certain black hole expenditure are now subjected to deduction in the mining and resources industry (D’Ascenzo 2002). The capital allowances regime has provided a way for taxpayer to manage the “black hole” regarding to the depreciating assets (D’Ascenzo 2002).
Due to the introduction of UCA system, taxpayers are able to work out the decline in value of depreciating assets hold by them based on a set of consistent rule (Barkoczy 2000). However, this new system does not substitute the whole set of rules which include more than 30 independent capital allowance regimes. For instance, the new system does not apply to R&D plant, capital works which is included under the present Div 43 of the ITAA97 and assets related to films of Australian (Barkoczy 2000). Barkoczy (2000) stated that, a significant attribute of the new system is that instead of the legal owner of an asset, the "economic owner" will be the one who is entitled to claim depreciation deduction.
An asset starts to decline in value when the taxpayer starts using it or when it is ready to be use. The taxpayer could choose to use the prime cost method or a diminishing value method to work out the declining value of an asset. However, there are also some situations when the taxpayer could not choose which method to use. Balancing Adjustment is an event that considering the market value of a depreciating asset in term of deriving the real current value of the particular asset so that it is reliable for tax purposes. It also taking into consideration of two of most important element in Taxation principle which is the assessable income and deduction .This is can clearly be concluded as balancing adjustment purpose is to determine whether the final value of an asset after disposing them would be an assessable income or deduction. CITATION
A standardized treatment of decline in value for capital assets under the UCA system has resulted in a decrease in record keeping and administration expenditure (CCH 2001). The UCA regime also provides benefit to taxpayers who are using low-value pool as they will not have to calculate the decline in value for every pooled depreciating asset based on their effective life as the decline in value of assets is computed based on pooled basis (Woellner et al. 2009).
S 40-880 has made business-related expenditure allowable for deductions which initially not deductible under general provision S 8-1 as long as the capital expenditure is relates to the taxpayer’s business, or the business that used to be carried on, or proposed to be carried on, and in the same time it does not fall into the specific exclusions under S 40-880(5) as well. CITATION
In conclusion, the UCA system can offer a better and more neutral tax treatment for expenditure that is capital in nature and therefore it will further enhance the quality of investment and financial efficiency (D'Ascenzo 2002). Nevertheless, due to the rapid change in tax rules and legislative overload, it is very difficult for taxpayers and their consultants to conduct their duties and responsibilities in compliance with the Act which will result in the cost of tax reform to outweigh the benefits (Nethercott 1999).
12.0 REFERENCES LIST
ATO ID 2003/754: Capital allowances: Division 40 - use of effective life former holder was using where 'same user' rule applies 2003, Commonwealth of Australia – Australian Taxation Office, viewed 10th November 2010. http://law.ato.gov.au/atolaw/view.htm?docid=AID/AID2003754/00001
ATO Interpretative Decision: ATO ID 2003/490: Income tax capital allowances: deduction for capital works 2003, Commonwealth of Australia – Australian Taxation Office, viewed 9th November 2010. http://law.ato.gov.au/atolaw/view.htm?docid=AID/AID2003490/00001
Australasian Legal Information Institute, 2010. Commonwealth of Australia Explanatory Memoranda: New Business Tax System (capital allowances) bill 2001, viewed 12th November 2010. http://www.austlii.edu.au/au/legis/cth/bill_em/nbtsab2001457/memo1.html
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