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Lecture 5
Specific Deductions Text Chapter 13
Capital Allowances Text Chapter 14
Specific Deductions
ITAA97 s12-5 provides a comprehensive list of
all specific deductions.
Repairs: Capital
Capital expenditure
on repairs
Initial repairs
Improvements
Replacements
Repairs
ITAA97 s25-10 provides that;
1)
You can deduct expenditure you incur for repairs
to premises (or part of premises), or a depreciating
asset that you held or used solely for the purpose
of producing assessable income.
2)
If you held the property partly for that purpose, you
can deduct so much of the expenditure as is
reasonable in the circumstances.
3)
You cannot deduct capital expenditure under this
section.
Initial Repairs
In Law Shipping Co Ltd v IRC (1923) 12 TC
621 repairs undertaken to remedy defects
which exist at the time property is acquired
are not deductible as they are capital
expenses.
This is because the taxpayer would have
received a deduction in the purchase price of
the asset and so it is appropriate to treat the
expenditure as part of the cost of acquisition.
Improvements
FCT v Western Suburbs Cinema Ltd (1952) 86
CLR 102
Replacements
Where repair to property involves a
replacement it is necessary to distinguish
between;
1. The replacement of part of an asset
treated as a repair and deductible, or
2. The replacement of the whole of an asset
treated as a replacement and not deductible
as capital.
Replacements
Replacements
Samuel Jones & Co (Devondale) Ltd v IRC
(1951)
The Court held that the replacement of a
chimney in need of repair with a new chimney
was a repair as the chimney was an
inseparable part of the entire asset being the
factory.
Notional Repairs
Payments to Associations
ITAA97 s25-55 allows a deduction to a
maximum of $42 for payments made for
membership of a trade, business or
professional association.
If there is a nexus between the payment and
the earning of income then a deduction can
be claimed under s8-1 which is not limited to
$42.
Gifts
ITAA97 division 30 provides taxpayers with a
deduction for gifts to deductible gift recipients.
Gifts can be of money or property.
In T/R 2005/13 to be deductible a gift must be;
1.
Voluntary,
2.
Transfer the beneficial interest in the property
to the recipient and
3.
Made without expectation of material
advantage in return.
Sample Calculation
For the year ended 30 June 2012 Joe has
assessable income of $100,000 and exempt
income of $15,000. Allowable deductions of
$110,000 and outgoings that relate to the
exempt income of $10,000.
Limitations on Losses
Prior year losses can be carried forward
indefinitely. However entitlement to use
losses may be restricted by;
1. Companies the continuity of ownership
and the same business test rules (ITAA97
Div 165)
2. Individuals non-commercial loss rules
(ITAA97 Div 35)
Introduction
Types of deductible
capital expenditure
Depreciation
deductions
Capital works
deductions
Black hole
expenses
Capital Allowances
ITAA97 Division 40 Capital Allowances
This division allows you to claim as a deduction
an amount equal to the decline in value of a
depreciating asset over the term of its
effective life where that asset is held, used, or
installed ready for use by the taxpayer for a
taxable purpose.
Depreciating Asset
Depreciating assets s40-30(1) are assets that
have a limited effective life and can be
reasonably be expected to decline in value
over the time it is used.
Claiming a deduction
S40-25 (1)
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.
Reduction of Deduction
S40-25 (2)
You must reduce your deduction by the part of
the assets decline in value that is attributable
to your use of the asset, or your having it
installed ready for use, for a purpose other
than a taxable purpose.
Immediate Deduction
Assets costing less than $300 used
predominantly in earning assessable income,
that is not income from business, is
immediately deductible under s40-80(2)
Choice of Method
Generally, a taxpayer has a choice of two
methods to work out the decline in the value
of a depreciating asset.
Diminishing Value
Diminishing value method asset held pre 10 May 2006
Base value x
Days Held x
365
150%
assets effective life
Days Held x
365
200%
assets effective life
100%
assets effective life
Claiming a deduction:
2. Decline in value
Year 2:
Year 3:
Claiming a deduction:
2. Decline in value
Year 2:
Year 3:
Balancing adjustments
Adjustment:
Termination
Value
Adjustable
Value
Difference is
included in
assessable
income
Termination
Value
Adjustable
Value
Difference is
included in
deductions
Balancing adjustments
Elements
Term
Explanation
Termination
Value
Adjustable
Value
Termination
Value: $2,500
Adjustable
Value: $2,000
($3,000 - $1,000)
Difference:
$500 included
in assessable
income
PoTL 2015 paragraph [14.110]
Pooling of Assets
Pooling of assets is allowed under certain
circumstances.
1. Low value pool
2. Software pool
3. SBE pool (Div 328)
Capital Works
Division 43 provides deductions for expenditure
on income-producing buildings and other
capital works. The division allows taxpayers
to write off the capital costs incurred in the
construction, extension, alteration or
improvement of a relevant item at the rate of
either 4% or 2.5%, that is, over either 24 or
40 years.
Blackhole Expenditure
Business expenses that are not deductible
because they are capital in nature may be
deductible in equal proportions over 5 years
s40-880
Homework
Homework this week text questions, 13.1, 13.2,
14.1 and 14.3.