Guide to depreciating assets 2013 - Australian Taxation Office

If you do not meet these requirements you can elect to havethe TOFA rules apply to you.TOFA rules and UCAThe TOFA rules contain interaction provisions which maymodify the cost and termination value of a depreciating assetacquired by an entity to which the TOFA rules apply. This willbe the case where payment (or a substantial proportion of thepayment) is deferred for more than 12 months after delivery ofthe depreciating asset.For more information seen TOFA and the cost of a depreciating asset (on page 17)n TOFA and the termination value of a depreciating asset(on page 19), orn Guide to the taxation of financial arrangements (TOFA)rules at ato.gov.au/tofaTHE COST OF A DEPRECIATING ASSETTo work out the decline in value of a depreciating asset,you need to know its cost.Under the UCA, the cost of a depreciating asset hastwo elements.The first element of cost is, generally, amounts you are takento have paid to hold the asset, such as the purchase price.It also includes amounts incurred after 30 June 2005 thatyou are taken to have paid for starting to hold the asset. Theamounts must be directly connected with holding the asset.The first element of cost is worked out as at the time youbegin to hold the asset.The second element of cost is, generally, amounts youare taken to have paid after that time to bring the assetto its present condition and location, such as a cost ofimproving the asset. It also includes expenses incurred after30 June 2005 for a balancing adjustment event occurring forthe asset (that is, costs incurred to stop holding or using theasset). See What happens if you no longer hold or use adepreciating asset? on page 17 for information on balancingadjustment events. Such expenses may include advertising orcommission expenses or the cost of demolishing the asset.The first element of a depreciating asset’s cost cannot includean amount that forms part of the second element of cost ofanother depreciating asset. For example, if a depreciatingasset is demolished so another depreciating asset can beinstalled on the same site, the demolition costs will form partof the second element of cost of the asset demolished. Theamount is not also included in the first element of cost of thenew asset.In this guide, when the words ‘ignoring any GST impact’ areused it should be noted that if you are not entitled to claim aninput tax credit for GST for a depreciating asset that you hold,the cost of the depreciating asset includes any GST paid.EXAMPLE: First and second elements of cost,ignoring any GST impactTerry wants to buy a vehicle for his business and the vehicleis not available in Australia. He locates a company in theUnited States from which he would be able to purchase thevehicle. He travels to the United States for the sole purposeof buying the vehicle and incurs travel costs of $5,000.Terry purchases the vehicle for $45,000.The first element of cost is $50,000. This amount includesthe purchase cost of the vehicle and the travel costs. Thetravel costs would be included in the first element of cost ofthe vehicle because they are directly connected with Terrystarting to hold the vehicle. If Terry installs an alarm in thevehicle two months later at a cost of $1,500, that amountwill be included in the second element of cost of the vehicleas the cost was incurred after he began to hold the vehicle.For both first and second elements of cost of a depreciatingasset, amounts you are taken to have paid include:n an amount you payn the market value of a non-cash benefit you providen if you incur or increase a liability to pay an amount,the amount of the liability or increasen if you incur or increase a liability to provide a non-cashbenefit, the market value of the non-cash benefit or theincreasen if all or part of another’s liability to pay you an amount isterminated, the amount of the liability or part terminatedn if all or part of another’s liability to provide a non-cash benefit(except the depreciating asset) to you is terminated, themarket value of the non-cash benefit or part terminated.The cost of a depreciating asset does not include:n amounts of input tax credits to which you are or becomeentitled; see GST input tax credits on the next pagen expenditure not of a capital nature, orn any amount that you can deduct or that is taken intoaccount in working out a deductible amount underprovisions outside the UCA.EXAMPLE: Expenditure not of a capital natureand deductible outside the UCACarolyn uses a motor vehicle for her business. As a result ofCarolyn’s use of the vehicle, she needs to replace the tyres.The cost of replacing the tyres is not included in the secondelement of the vehicle’s cost because it would ordinarily bedeductible under the repair provisions.There are special rules to work out the cost of depreciatingassets in certain circumstances. Some of the commoncases are covered below. If you are not sure of the costof a depreciating asset, contact us or your recognisedtax adviser.14 ato.gov.au GUIDE TO DEPRECIATING ASSETS 2013