Commonwealth: New Business Tax System (Capital Allowances) Act 2001 (Cth)

New Business Tax System (Capital Allowances) Act 2001 No. 76, 2001 New Business Tax System (Capital Allowances) Act 2001 No. 76, 2001 An Act to implement the New Business Tax System by amending the law relating to taxation, and for related purposes Contents 1 Short title................................... 2 Commencement............................... 3 Schedule(s).................................. Schedule 1—Capital Allowances Income Tax Assessment Act 1997 Schedule 2—Effective life and low‑cost plant Income Tax Assessment Act 1997 Schedule 3—Second‑hand plant Income Tax Assessment Act 1997 New Business Tax System (Capital Allowances) Act 2001 No. 76, 2001 An Act to implement the New Business Tax System by amending the law relating to taxation, and for related purposes [Assented to 30 June 2001] The Parliament of Australia enacts: 1 Short title This Act may be cited as the New Business Tax System (Capital Allowances) Act 2001. 2 Commencement (1) Subject to this section, this Act commences on the day on which it receives the Royal Assent. (2) Schedule 2 is taken to have commenced on 1 July 2000. (3) Schedule 3 is taken to have commenced on 9 May 2001. 3 Schedule(s) Subject to section 2, each Act that is specified in a Schedule to this Act is amended or repealed as set out in the applicable items in the Schedule concerned, and any other item in a Schedule to this Act has effect according to its terms. Schedule 1—Capital Allowances Income Tax Assessment Act 1997 1 Divisions 40, 41 and 42 Repeal the Divisions, substitute: Division 40—Capital allowances Table of Subdivisions Guide to Division 40 40‑A Objects of Division 40‑B Core provisions 40‑C Cost 40‑D Balancing adjustments 40‑E Low‑value and software development pools 40‑F Primary production depreciating assets 40‑G Capital expenditure of primary producers and other landholders 40‑H Capital expenditure that is immediately deductible 40‑I Capital expenditure that is deductible over time Guide to Division 40 40‑1 What this Division is about You can deduct an amount equal to the decline in value of a depreciating asset (an asset that has a limited effective life and that is reasonably expected to decline in value over the time it is used) that you hold. That decline is generally measured by reference to the effective life of the asset. You can also deduct amounts for certain other capital expenditure. 40‑10 Simplified outline of this Division The key concepts about depreciating assets and certain other capital expenditure are outlined below (in bold italics). Simplified outline of this Division Item Major topic Provisions Subordinate topics Rules 1 Rules about depreciating assets 1.1 Core provisions Subdivision 40‑B Depreciating assets are assets with a limited effective life that are reasonably expected to decline in value. Broadly, the effective life of a depreciating asset is the period it can be used to produce income. The decline in value is based on the cost and effective life of the depreciating asset, not its actual change in value. It begins at start time, when you begin to use the asset (or when you have it installed ready for use). It continues while you use the asset (or have it installed). Usually, the owner of a depreciating asset holds the asset and can therefore claim deductions for its decline in value. Sometimes the economic owner will be different to the legal owner and the economic owner will be the holder. 1.2 Cost Subdivision 40‑C The cost of a depreciating asset includes both: * expenses you incur to start holding the asset; and * additional expenses that contribute to its present condition and location (e.g. improvements). 1.3 Balancing adjustments Subdivision 40‑D When you stop holding a depreciating asset you may have to include an amount in your assessable income, or deduct an amount under a balancing adjustment. The adjustment reconciles the decline with the actual change in value. 1.4 Low‑value and software development pools Subdivision 40‑E Low‑cost assets and assets depreciated to a low value may be placed in a low value pool, which is treated as a single depreciating asset. You can also pool in‑house software expenditure in a software development pool. 1.5 Primary production depreciating assets Subdivision 40‑F You can deduct amounts for capital expenditure on: * water facilities over 3 income years; or * horticultural plants over a period that relates to the effective life of the plant; or * grapevines over usually 4 years. 2 Rules about other capital expenditure 2.1 Capital expenditure of primary producers and other landholders Subdivision 40‑G You can deduct amounts for capital expenditure on: * landcare operations immediately; or * electricity and telephone lines over 10 income years. 2.2 Capital expenditure that is immediately deductible Subdivision 40‑H You can get an immediate deduction for certain capital expenditure on: * exploration or prospecting; and * rehabilitation of mine and quarry sites; and * paying petroleum taxes; and * environmental protection activities. 2.3 Capital expenditure that is deductible over time Subdivision 40‑I You can deduct amounts for certain capital expenditure associated with projects you carry on. You deduct the amount over the life of the project using a project pool. You can also deduct amounts for certain business related costs over 5 years. Subdivision 40‑A—Objects of Division Table of sections 40‑15 Objects of Division 40‑15 Objects of Division The objects of this Division are: (a) to allow you to deduct the *cost of a *depreciating asset; and (b) to spread the deduction over a period that reflects the time for which the asset can be used to obtain benefits; and (c) to provide deductions for certain other capital expenditure that is not otherwise deductible. Note: This Division does not apply to some depreciating assets: see section 40‑45. Subdivision 40‑B—Core provisions Guide to Subdivision 40‑B 40‑20 What this Subdivision is about The rules that apply to most depreciating assets are in this Subdivision. It explains: • what a depreciating asset is; and • when you start deducting amounts for depreciating assets; and • how to work out your deductions. It also contains rules for splitting and merging depreciating assets. Table of sections Operative provisions 40‑25 Deducting amounts for depreciating assets 40‑30 What a depreciating asset is 40‑35 Jointly held depreciating assets 40‑40 Meaning of hold a depreciating asset 40‑45 Assets to which this Division does not apply 40‑50 Assets for which you deduct under another Subdivision 40‑55 Use of certain car methods 40‑60 When a depreciating asset starts to decline in value 40‑65 Choice of methods to work out the decline in value 40‑70 Diminishing value method 40‑75 Prime cost method 40‑80 When you can deduct the asset's cost 40‑85 Meaning of adjustable value and opening adjustable value of a depreciating asset 40‑90 Debt forgiveness 40‑95 Choice of determining effective life 40‑100 Commissioner's determination of effective life 40‑105 Self‑assessing effective life 40‑110 Recalculating effective life 40‑115 Splitting a depreciating asset 40‑120 Replacement spectrum licences 40‑125 Merging depreciating assets 40‑130 Choices 40‑135 Certain anti‑avoidance provisions 40‑140 Getting tax information from associates 40‑145 Application of Criminal Code [This is the end of the Guide.] Operative provisions 40‑25 Deducting amounts for depreciating assets You deduct the decline in value (1) You can deduct an amount equal to the decline in value for an income year (as worked out under this Division) of a *depreciating asset that you *held for any time during the year. Note 1: Sections 40‑70 and 40‑75 show you how to work out the decline for most depreciating assets. There is a limit on the decline: see subsections 40‑70(3) and 40‑75(7). Note 2: STS taxpayers work out the amount they can deduct under Division 328. Note 3: Generally, only one taxpayer can deduct amounts for a depreciating asset. However, if you and another taxpayer jointly hold the asset, each of you deduct amounts for it: see section 40‑35. Reduction of deduction (2) You must reduce your deduction by the part of the asset's 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. Example: Ben holds a depreciating asset that he uses for private purposes for 30% of his total use in the income year. If the asset declines by $1,000 for the year, Ben would have to reduce his deduction by $300 (30% of $1,000). Further reduction: leisure facilities and boats (3) You may have to make a further reduction for a *depreciating asset that is a *leisure facility or a boat attributable to your use of it, or your having it *installed ready for use, for a *taxable purpose. (4) That reduction is the part of the asset's decline in value that is attributable to your use of the asset, or your having it *installed ready for use, at a time when: (a) its use did not constitute a *fringe benefit; or (b) for a *leisure facility—you did not use it or hold it for use as mentioned in paragraph 26‑50(3)(b) (about using it in the course of your business or for your employees); or (c) for a boat—you did not use it or hold it for use as mentioned in paragraph 26‑50(5)(b), (c) or (d) (about using it mainly for letting on hire, mainly for transporting the public or goods for payment or for a purpose that is essential to the efficient conduct of your business). Exception: low‑value pools (5) Subsections (2), (3) and (4) do not apply to *depreciating assets allocated to a low‑value pool. Note: See Subdivision 40‑E for low‑value pools. Exception: Use of 1/3 of actual expenses method for a car (6) Subsections (2), (3) and (4) do not apply to a *car for an income year for which you use the "one‑third of actual expenses" method. Instead, you reduce your deduction by 2/3 of the car's decline in value. Note: See Division 28 for that method. Meaning of taxable purpose (7) A taxable purpose is: (a) the *purpose of producing assessable income; or (b) the purpose of *exploration or prospecting; or (c) the purpose of *mining site rehabilitation; or (d) *environmental protection activities. Note: Where you have had a deduction under this Division an amount may be included in your assessable income if the expenditure was financed by limited recourse debt that has terminated: see Division 243. 40‑30 What a depreciating asset is (1) A depreciating asset is an asset that has a limited *effective life and can reasonably be expected to decline in value over the time it is used, except: (a) land; or (b) an item of *trading stock; or (c) an intangible asset, unless it is mentioned in subsection (2). (2) These intangible assets are depreciating assets if they are not *trading stock: (a) *mining, quarrying or prospecting rights; (b) *mining, quarrying or prospecting information; (c) items of *intellectual property; (d) *in‑house software; (e) *IRUs; (f) *spectrum licences; (g) *datacasting transmitter licences. (3) This Division applies to an improvement to land, or a fixture on land, whether the improvement or fixture is removable or not, as if it were an asset separate from the land. Note 1: Whether such an asset is a depreciating asset depends on whether it falls within the definition in subsection (1). Note 2: This Division does not apply to capital works for which you can deduct amounts under Division 43: see subsection 40‑45(2). (4) Whether a particular composite item is itself a depreciating asset or whether its components are separate depreciating assets is a question of fact and degree which can only be determined in the light of all the circumstances of the particular case. Example 1: A car is made up of many separate components, but usually the car is a depreciating asset rather than each component. Example 2: A floating restaurant consists of many separate components (like the ship itself, stoves, fridges, furniture, crockery and cutlery), but usually these components are treated as separate depreciating assets. (5) This Division applies to a renewal or extension of a *depreciating asset that is a right as if the renewal or extension were a continuation of the original right. 40‑35 Jointly held depreciating assets (1) This Division and Division 328 apply to a *depreciating asset (the underlying asset) that you *hold, and that is also held by one or more other entities, as if your interest in the underlying asset were itself the underlying asset. Note: Partners do not hold partnership assets: see section 40‑40. (2) As a result, the decline in value of the underlying asset is not itself taken into account. Example: Buford Corp owns an office block that it leases to 2 companies, Smokey Pty Ltd and Bandit Pty Ltd. Smokey and Bandit decide to install a fountain in front of the building. They discuss it with Buford who agrees to pay half the cost (because the fountain won't be removable at the end of the lease). Smokey and Bandit split the rest of the cost between them. Smokey and Bandit would each hold the asset under item 3 of the table in section 40‑40 and Buford would hold it under item 10. They would be joint holders, so each would write‑off its interest in the fountain. 40‑40 Meaning of hold a depreciating asset Use this table to work out who holds a *depreciating asset. An entity identified in column 3 of an item in the table as not holding a depreciating asset cannot hold the asset under another item. Identifying the holder of a depreciating asset Item This kind of depreciating asset: Is held by this entity: 1 A *luxury car in respect of which a lease has been granted The lessee (while the lessee has the right to use the car) and not the lessor 2 A *depreciating asset that is fixed to land subject to a *quasi‑ownership right (including any extension or renewal of such a right) where the owner of the right has a right to remove the asset The owner of the quasi‑ownership right (while the right to remove exists) 3 An improvement to land (whether a fixture or not) subject to a *quasi‑ownership right (including any extension or renewal of such a right) made, or itself improved, by any owner of the right for the owner's own use where the owner of the right has no right to remove the asset The owner of the quasi‑ownership right (while it exists) 4 A *depreciating asset that is subject to a lease where the asset is fixed to land and the lessor has the right to recover the asset The lessor (while the right to recover exists) 5 A right that an entity legally owns but which another entity (the economic owner) exercises or has a right to exercise immediately, where the economic owner has a right to become its legal owner and it is reasonable to expect that: The economic owner and not the legal owner (a) the economic owner will become its legal owner; or (b) it will be disposed of at the direction and for the benefit of the economic owner 6 A *depreciating asset that an entity (the former holder) would, apart from this item, hold under this table (including by another application of this item) where a second entity (also the economic owner): The economic owner and not the former holder (a) possesses the asset, or has a right as against the former holder to possess the asset immediately; and (b) has a right as against the former holder the exercise of which would make the economic owner the holder under any item of this table; and it is reasonable to expect that the economic owner will become its holder by exercising the right, or that the asset will be disposed of at the direction and for the benefit of the economic owner 7 A *depreciating asset that is a partnership asset The partnership and not any particular partner 8 *Mining, quarrying or prospecting information that an entity has and that is relevant to: The entity (a) *mining operations carried on, or proposed to be carried on by the entity; or (b) a *business carried on by the entity that includes *exploration or prospecting for *minerals or quarry materials obtainable by such operations; whether or not it is generally available 9 Other *mining quarrying or prospecting information that an entity has and that is not generally available The entity 10 Any *depreciating asset The owner, or the legal owner if there is both a legal and equitable owner Example 1: Power Finance leases a luxury car to Kris who subleases it to Rachael. As lessee, item 1 makes Rachael the holder of the car. Power, as the legal owner, would normally hold the car under item 10. However, item 1 makes it clear that Power, as lessor, does not hold the car. As the lessee, item 1 would normally mean that Kris held the car but, again, she is also a lessor and so is not the holder (she also doesn't have the right to use the car during the sublease). Example 2: Sandra sells a packing machine to Jenny under a hire purchase agreement. Jenny holds the machine under item 6 because, although she is not the legal owner until she exercises her option to purchase, she possesses the machine now and can exercise an option to become its legal owner. Jenny is reasonably expected to exercise that option because the final payment will be well below the expected market value of the machine at the end of the agreement. Sandra, as the machine's legal owner, would normally be its holder under item 10 but item 6 makes it clear that the legal owner is not the holder. Note 1: Some assets may have holders under more than one item in the table. Note 2: As well as hire purchase agreements, items 5 and 6 cover cases like assets subject to chattel mortgages, sales subject to retention of title clauses and assets subject to bare trusts. 40‑45 Assets to which this Division does not apply Research and development (1) This Division does not apply to *plant that you have used or had *installed ready for use exclusively for the purpose of carrying on *research and development activities unless you have elected under subsection 73B(18) of the Income Tax Assessment Act 1936 that the research and development provisions do not apply to it. Capital works (2) This Division does not apply to capital works for which you can deduct amounts under Division 43, or for which you could deduct amounts under that Division but for expenditure being incurred, or capital works being started, before a particular day. Note: Section 43‑20 lists the capital works to which that Division applies. IRUs (3) This Division does not apply to an *IRU to the extent to which expenditure on the IRU was incurred at or before 11.45 am, by legal time in the Australian Capital Territory, on 21 September 1999 (the IRU time). (4) This Division does not apply to an *IRU over an international telecommunications submarine cable system if the system had been used for telecommunications purposes at or before the IRU time. Films (5) This Division does not apply to a *depreciating asset if you or another taxpayer has deducted or can deduct amounts for it under: (a) Division 10BA of Part III of the Income Tax Assessment Act 1936 (about Australian films); or (b) Division 10B of Part III of that Act if the depreciating asset relates to a copyright in an Australian film within the meaning of that Division. 40‑50 Assets for which you deduct under another Subdivision (1) You cannot deduct an amount for a *depreciating asset under this Subdivision if you or another taxpayer has deducted or can deduct amounts for it under Subdivision 40‑F (about primary production depreciating assets) or 40‑G (about capital expenditure of primary producers and other landholders). (2) You cannot deduct an amount for *in‑house software under this Subdivision if you have allocated expenditure on the software to a software development pool under Subdivision 40‑E. 40‑55 Use of certain car methods You cannot deduct any amount for the decline in value of a *car for an income year if you use the "cents per kilometre" method, or the "12% of original value" method, for the car for that year. Note: See Division 28 for those methods. 40‑60 When a depreciating asset starts to decline in value (1) A *depreciating asset you *hold starts to decline in value from when its *start time occurs. (2) The start time of a *depreciating asset is when you first use it, or have it *installed ready for use, for any purpose. Note: Previous use by a transition entity is ignored: see section 58‑70. (3) However, there is another start time for a *depreciating asset you *hold if a *balancing adjustment event referred to in paragraph 40‑295(1)(b) occurs for the asset and you start to use the asset again. Its second start time is when you start using it again. 40‑65 Choice of methods to work out the decline in value (1) You have a choice of 2 methods to work out the decline in value of a *depreciating asset. You must choose to use either the *diminishing value method or the *prime cost method. Note 1: Once you make the choice for an asset, you cannot change it: see section 40‑130. Note 2: For the diminishing value method, see section 40‑70. For the prime cost method, see section 40‑75. Note 3: In some cases you do not have to make the choice because you can deduct the asset's cost: see section 40‑80. Exception: asset acquired from associate (2) For a *depreciating asset that you acquire from an *associate of yours where the associate has deducted or can deduct an amount for the asset under this Division, you must use the same method that the associate was using. Note: You can require the associate to tell you which method the associate was using: see section 40‑140. Exception: holder changes but user same or associate of former user (3) For a *depreciating asset that you acquire from a former *holder of the asset, you must use the same method that the former holder was using for the asset if: (a) the former holder or another entity (each of which is the former user) was using the asset at a time before you became the holder; and (b) while you hold the asset, the former user or an *associate of the former user uses the asset. (4) However, you must use the *diminishing value method if: (a) you do not know, and cannot readily find out, which method the former holder was using; or (b) the former holder did not use a method. Exception: low‑value pools (5) You work out the decline in value of a *depreciating asset in a low‑value pool under Subdivision 40‑E rather than under this Subdivision. 40‑70 Diminishing value method (1) You work out the decline in value of a *depreciating asset for an income year using the diminishing value method in this way: where: base value is: (a) for the income year in which the asset's *start time occurs—its *cost; or (b) for a later year—the sum of its *opening adjustable value for that year and any amount included in the second element of its cost for that year. days held is the number of days you *held the asset in the income year from its *start time, ignoring any days in that year when you did not use the asset, or have it *installed ready for use, for any purpose. Note: If you recalculate the effective life of a depreciating asset, you use that recalculated life in working out your deduction. You can choose to recalculate effective life because of changed circumstances: see section 40‑110. That section also requires you to recalculate effective life in some cases. Exception: intangibles (2) You cannot use the *diminishing value method to work out the decline in value of: (a) *in‑house software; or (b) an item of *intellectual property; or (c) a *spectrum licence; or (d) a *datacasting transmitter licence. Limit on decline (3) The decline in value of a *depreciating asset under this section for an income year cannot be more than the amount that is the asset's base value in the formula in subsection (1) for that income year. 40‑75 Prime cost method (1) You work out the decline in value of a *depreciating asset for an income year using the prime cost method in this way: where: where: days held has the same meaning as in subsection 40‑70(1). Example: Greg acquires an asset for $3,500 and first uses it on the 26th day of the income year. If the effective life of the asset is 31/3 years, the asset would decline in value in that year by: The asset's adjustable value at the end of the income year is: (2) However, you must adjust the formula in subsection (1) for an income year (the change year): (a) for which you recalculate the *depreciating asset's *effective life; or (b) after the year in which the asset's start time occurs and in which an amount is included in the second element of the asset's *cost; or (c) for which the asset's cost or *adjustable value is reduced under section 40‑90 (about debt forgiveness); or (d) for which there is roll‑over relief under section 40‑340 where the transferor referred to in that section was using the *prime cost method; or (e) for which there is a reduction to the asset's adjustable value under paragraph 40‑365(5)(b) (about involuntary disposals) where you are using the prime cost method; or (f) for which the *opening adjustable value of the asset is modified under subsection 27‑80(4), 27‑85(3) or 27‑90(3). The adjustments apply for the change year and later years. Note: For recalculating a depreciating asset's effective life: see section 40‑110. (3) The adjustments are: (a) instead of the asset's *cost, you use its *opening adjustable value for the change year plus the amounts (if any) included in the second element of its cost for that year; and (b) instead of the asset's *effective life, you use its *remaining effective life. (4) The remaining effective life of a *depreciating asset is any period of its *effective life that is yet to elapse as at the start of the change year. Note: Effective life is worked out in years and fractions of years. (5) You must also adjust the formula in subsection (1) for an intangible *depreciating asset that: (a) is mentioned in an item in the table in subsection 40‑95(7) (except item 5, 7 or 8); and (b) you acquire from a former *holder of the asset. The adjustment applies for the income year in which you acquire the asset and later income years. (6) Instead of the asset's *effective life under the table in subsection 40‑95(7), you use the number of years remaining in that effective life as at the start of the income year in which you acquire the asset. Limit on decline (7) The decline in value of a *depreciating asset under this section for an income year cannot be more than: (a) for the income year in which the asset's *start time occurs—its *cost; or (b) for a later year—the sum of its *opening adjustable value for that year and any amount included in the second element of its cost for that year. 40‑80 When you can deduct the asset's cost Exploration or prospecting (1) The decline in value of a *depreciating asset you *hold is the asset's *cost if: (a) you first use the asset for *exploration or prospecting for *minerals, or quarry materials, obtainable by *mining operations; and (b) you do not use it for: (i) development drilling for *petroleum; or (ii) operations in the course of working a mining property, quarrying property or petroleum field; and (c) you satisfy one or more of these subparagraphs at the asset's *start time: (i) you carry on *mining operations; (ii) it would be reasonable to conclude you proposed to carry on such operations; (iii) you carry on a *business of, or a business that included, exploration or prospecting for minerals or quarry materials obtainable by such operations, and expenditure on the asset was necessarily incurred in carrying on that business. Depreciating assets used for certain purposes (2) The decline in value of a *depreciating asset you start to *hold in an income year is the asset's *cost if: (a) that cost does not exceed $300; and (b) you use the asset predominantly for the *purpose of producing assessable income that is not income from carrying on a *business; and (c) the asset is not one that is part of a set of assets that you started to hold in that income year where the total cost of the set of assets exceeds $300; and (d) the total cost of the asset and any other identical, or substantially identical, asset that you start to hold in that income year does not exceed $300. 40‑85 Meaning of adjustable value and opening adjustable value of a depreciating asset (1) The adjustable value of a *depreciating asset at a particular time is: (a) if you have not yet used it or had it *installed ready for use for any purpose—its *cost; or (b) for a time in the income year in which you first use it, or have it installed ready for use, for any purpose—its cost less its decline in value up to that time; or (c) for a time in a later income year—the sum of its *opening adjustable value for that year and any amount included in the second element of its cost for that year up to that time, less its decline in value for that year up to that time. (2) The opening adjustable value of a *depreciating asset for an income year is its *adjustable value to you at the end of the previous income year. Note 1: The opening adjustable value of a depreciating asset is reduced by an amount applied in reduction of deductible expenditure under the debt forgiveness provisions: see section 40‑90. Note 2: The opening adjustable value of a depreciating asset for which a balancing adjustment event occurs because you still hold the asset and you expect not to use it is affected by subsection 40‑285(4). 40‑90 Debt forgiveness (1) This section applies if an amount (the debt forgiveness amount) is applied in reduction of deductible expenditure for a *depreciating asset in an income year (within the meaning of Division 245 of Schedule 2C to the Income Tax Assessment Act 1936) under section 245‑155 of that Schedule. (2) The asset's *cost is reduced for that income year by the debt forgiveness amount. (3) The asset's *opening adjustable value for that income year is reduced by the debt forgiveness amount if that income year is later than the one in which its *start time occurs. 40‑95 Choice of determining effective life (1) You must choose either: (a) to use an *effective life determined by the Commissioner for a *depreciating asset under section 40‑100; or (b) to work out the effective life of the asset yourself under section 40‑105. (2) Your choice of an *effective life determined by the Commissioner for a *depreciating asset is limited to one in force as at: (a) the time when you entered into a contract to acquire the asset, you otherwise acquired it or you started to construct it if its *start time occurs within 5 years of that time; or (b) for *plant that you entered into a contract to acquire, you otherwise acquired or you started to construct before 11.45 am, by legal time in the Australian Capital Territory, on 21 September 1999—the time when you entered into the contract to acquire it, otherwise acquired it or started to construct it; or (c) otherwise—its *start time. (3) You must make the choice for the income year in which the asset's *start time occurs. Note: For rules about choices: see section 40‑130. Exception: asset acquired from associate (4) For a *depreciating asset that you start to *hold where the former holder is an *associate of yours and the associate has deducted or can deduct an amount for the asset under this Division, you must use: (a) if the associate was using the *diminishing value method for the asset—the same *effective life that the associate was using; or (b) if the associate was using the *prime cost method—an effective life equal to any period of the asset's effective life the associate was using that is yet to elapse at the time you started to hold it. Note: You can require the associate to tell you which effective life the associate was using: see section 40‑140. Exception: holder changes but user same or associate of former user (5) For a *depreciating asset that you start to *hold where: (a) the former holder or another entity (each of which is the former user) was using the asset at a time before you became the holder; and (b) while you hold the asset, the former user or an *associate of the former user uses the asset; you must use: (c) if the former holder was using the *diminishing value method for the asset—the same *effective life that the former holder was using; or (d) if the former holder was using the *prime cost method—an effective life equal to any period of the asset's effective life the former holder was using that is yet to elapse at the time you started to hold it. (6) However, you must use an *effective life determined by the Commissioner if: (a) you do not know, and cannot readily find out, which effective life the former holder was using; or (b) the former holder did not use an effective life. Exception: intangible depreciating assets (7) The effective life of an intangible *depreciating asset mentioned in this table is the period applicable to that asset under the table. Effective life of certain intangible depreciating assets Item For this asset: The effective life is: 1 Standard patent 20 years 2 Innovation patent 8 years 3 Petty patent 6 years 4 Registered design 15 years 5 Copyright The shorter of: (a) 25 years from when you acquire the copyright; or (b) the period until the copyright ends 6 A licence (except one relating to a copyright or *in‑house software) The term of the licence 7 A licence relating to a copyright The shorter of: (a) 25 years from when you become the licensee; or (b) the period until the licence ends 8 *In‑house software 21/2 years 9 *Spectrum licence The term of the licence 10 *Datacasting transmitter licence 15 years (8) The effective life of an intangible *depreciating asset that is not mentioned in the table in subsection (7) and is not an *IRU (for example, a *mining, quarrying or prospecting right) cannot be longer than the term of the asset as extended by any reasonably assured extension or renewal of that term. (9) The effective life of an *IRU is the *effective life of the international telecommunications submarine cable over which the IRU is granted. 40‑100 Commissioner's determination of effective life (1) The Commissioner may make a written determination specifying the effective life of *depreciating assets. The determination may specify conditions for particular depreciating assets. (2) A determination may specify a day from which it takes effect for *depreciating assets specified in the determination. (3) A determination may operate retrospectively to a day specified in the determination if: (a) there was no applicable determination at that day for the *depreciating asset covered by the determination; or (b) the determination specifies a shorter *effective life for the depreciating asset covered by the determination than was previously applicable. (4) The Commissioner is to make a determination of the effective life of a *depreciating asset by estimating the period (in years, including fractions of years) it can be used by any entity for a *taxable purpose or for the purpose of producing *exempt income: (a) assuming it will be subject to wear and tear at a rate that is reasonable for the Commissioner to assume; and (b) assuming it will be maintained in reasonably good order and condition; and (c) having regard to the period within which it is likely to be scrapped, sold for no more than scrap value or abandoned. 40‑105 Self‑assessing effective life (1) You work out the effective life of a *depreciating asset yourself by estimating the period (in years, including fractions of years) it can be used by any entity for a *taxable purpose or for the purpose of producing *exempt income: (a) having regard to the wear and tear you reasonably expect from your expected circumstances of use; and (b) assuming that it will be maintained in reasonably good order and condition. (2) If, in working out that period, you conclude that the asset would be likely to be scrapped, sold for no more than scrap value or abandoned before the end of that period, its effective life ends at the earlier time. (3) You work out the period in subsection (1) or (2) as from the *start time of the *depreciating asset. Exception: intangibles (4) This section does not apply to an intangible *depreciating asset mentioned in the table in subsection 40‑95(7). 40‑110 Recalculating effective life (1) You may choose to recalculate the *effective life of a *depreciating asset from a later income year if the effective life you have been using is no longer accurate because of changed circumstances relating to the nature of the use of the asset. Example: Some examples of changes in circumstances that may result in your recalculating the effective life of a depreciating asset are: * your use of the asset turns out to be more or less rigorous than you expected (or was anticipated by the Commissioner's determination); * there is a downturn in demand for the goods or services the asset is used to produce that will result in the asset being scrapped; * legislation prevents the asset's continued use; * changes in technology make the asset redundant. (2) You must recalculate a *depreciating asset's *effective life from a later income year if: (a) you: (i) self‑assessed its effective life; or (ii) are using an effective life worked out under section 40‑100 (about the Commissioner's determination) and the *prime cost method; or (iii) are using an effective life because of subsection 40‑95(4) or (5); and (b) its *cost is increased in that year by at least 10%. Note 1: You may conclude that the effective life is the same. Note 2: For the elements of the cost of a depreciating asset, see Subdivision 40‑C. Example 1: Paul purchases a photocopier and self‑assesses its effective life at 6 years. In a later year he incurs expenditure to increase the quality of the reproductions it makes. He recalculates its effective life, but concludes that it remains the same. Example 2: Fiona also purchases a photocopier and self‑assesses its effective life at 6 years. In a later year she incurs expenditure to incorporate a more robust paper handling system. She recalculates its effective life, and concludes that it is increased to 7 years. (3) You must recalculate a *depreciating asset's *effective life for the income year in which you started to *hold it if: (a) you are using an effective life because of subsection 40‑95(4) or (5); and (b) the asset's *cost is increased after you started to hold it in that year by at least 10%. (4) A recalculation under this section must be done using section 40‑105 (about self‑assessing effective life). Exception: intangibles (5) This section does not apply to an intangible *depreciating asset mentioned in the table in subsection 40‑95(7). 40‑115 Splitting a depreciating asset (1) If a *depreciating asset you *hold is split into 2 or more assets, this Division applies as if you had stopped holding the original asset and started holding the assets into which it is split. Note 1: For the cost of the split assets, see section 40‑205. Note 2: A balancing adjustment event does not occur just because you split a depreciating asset: see section 40‑295. (2) If you stop *holding part of a *depreciating asset, this Division applies as if, just before you stopped holding that part, you had split the original asset into the part you stopped holding and the rest of the original asset. (The rest of the original asset is then taken to be a different asset from the original asset.) Example: Bronwyn sells Tim a part interest in a depreciating asset she owns. They become joint holders under section 40‑35. She is taken to have split the underlying asset into the interest she retains and the interest Tim buys. She now holds an interest (a new depreciating asset) in the underlying asset and is taken to have stopped holding the interest sold. (3) If you grant or assign an interest in an item of *intellectual property, subsection (2) applies to you as if you had stopped *holding part of the item. 40‑120 Replacement spectrum licences (1) If: (a) some (but not all) of a *spectrum licence you *hold is assigned or resumed; and (b) your original licence is replaced by one or more other spectrum licences (possibly including a modified version of your original licence); and (c) the replacement licences together cover exactly the same rights as were covered by your original licence just after the assignment or resumption; this Division applies as if your original licence (as it existed just after the assignment or resumption) had been split into the replacement licences. Example: MGP Communications Ltd buys a spectrum licence on 1 July 2003 for $5 million. The licence specifies areas A, B, C and D. The company assigns the spectrum relating to area C. Area C represents 20% of the market value of the overall licence. $1m of the adjustable value is allocated to it and $4m is allocated to the remaining licence. The Australian Communication Authority adjusts the licence to specify only areas A and B, and issues a new licence specifying area D. Area D represents 25% of the market value of the spectrum remaining in the licence. The adjustable value of the new licence is therefore $1m and the adjustable value of the original (modified) licence is $3m. (2) If a *spectrum licence you *hold is replaced by 2 or more spectrum licences (possibly including a modified version of your original licence) that together cover exactly the same rights as your original licence, this Division applies as if the original licence had been split into the replacement licences. 40‑125 Merging depreciating assets If a *depreciating asset or assets that you *hold is or are merged into another depreciating asset, this Division applies as if you had stopped holding the original asset or assets and started holding the merged asset. Note 1: For the cost of the merged asset, see section 40‑210. Note 2: A balancing adjustment event does not occur just because you merge depreciating assets: see section 40‑295. 40‑130 Choices (1) A choice you can make under this Division about a *depreciating asset must be made: (a) by the day you lodge your *income tax return for the income year to which the choice relates; or (b) within a further time allowed by the Commissioner. (2) Your choice, once made, applies to that income year and all later income years. Exception: recalculating effective life (3) However, subsection (2) does not apply to a choice to recalculate the *effective life of a *depreciating asset under section 40‑110. 40‑135 Certain anti‑avoidance provisions These anti‑avoidance provisions: (a) section 51AD (Deductions not allowable in respect of property under certain leveraged arrangements) of the Income Tax Assessment Act 1936; (b) Division 16D (Certain arrangements relating to the use of property) of Part III of that Act; apply to your deductions under this Division for a *depreciating asset you *hold as if you were the owner of the asset instead of any other person. 40‑140 Getting tax information from associates (1) If you acquire a *depreciating asset from an *associate of yours where the associate has deducted or can deduct an amount for the asset under this Division, you may give the associate a written notice requiring the associate to tell you: (a) the method the associate was using to work out the decline in value of the asset; and (b) the *effective life the associate was using. (2) The notice must: (a) be given within 60 days of your acquiring the asset; and (b) specify a period of at least 60 days within which the information must be given; and (c) set out the effect of subsection (3). Note: Subsections (4) and (5) explain how this subsection operates if the associate is a partnership. Requirement to comply with notice (3) The *associate must not intentionally refuse or fail to comply with the notice. Penalty: 10 penalty units. Giving the notice to a partnership (4) If the *associate is a partnership: (a) you may give it to the partnership by giving it to any of the partners (this does not limit how else you can give it); and (b) the obligation to comply with the notice is imposed on each of the partners (not on the partnership), but may be discharged by any of them. (5) A partner must not intentionally refuse or fail to comply with that obligation, unless another partner has already complied with it. Penalty: 10 penalty units. Limits on giving a notice (6) Only one notice can be given in relation to the same *depreciating asset. 40‑145 Application of Criminal Code The Criminal Code applies to all offences in this Division. Subdivision 40‑C—Cost Guide to Subdivision 40‑C 40‑170 What this Subdivision is about Your cost of a depreciating asset is a component in working out the amounts you can deduct for it. There are 2 elements of the cost of a depreciating asset. This Subdivision shows you how to work out those elements. Table of sections Operative provisions 40‑175 Cost 40‑180 First element of cost 40‑185 Amount you are taken to have paid to hold a depreciating asset or to receive a benefit 40‑190 Second element of cost 40‑195 Apportionment of cost 40‑200 Exclusion from cost 40‑205 Cost of a split depreciating asset 40‑210 Cost of merged depreciating assets 40‑215 Adjustment: double deduction 40‑220 Cost reduced by amounts not of a capital nature 40‑225 Adjustment: acquiring a car at a discount 40‑230 Adjustment: car limit [This is the end of the Guide.] Operative provisions 40‑175 Cost The cost of a *depreciating asset you *hold consists of 2 elements. 40‑180 First element of cost (1) The first element is worked out as at the time when you began to *hold the *depreciating asset (except for a case to which item 3 or 4 of the table in subsection (2) applies). It is: (a) if an item in that table applies—the amount specified in that item; or (b) otherwise—the amount you are taken to have paid to hold the asset under section 40‑185. Note: The first element of the cost may be modified by a later provision in this Subdivision. (2) If more than one item in this table covers the asset, apply the last item that covers it. First element of the cost of a depreciating asset Item In this case: The cost is: 1 A *depreciating asset you *hold is split into 2 or more assets For each of the assets into which it is split, the amount worked out under section 40‑205 2 A *depreciating asset or assets that you *hold is or are merged into another depreciating asset For the other asset, the amount worked out under section 40‑210 3 A *balancing adjustment event happens to a *depreciating asset you *hold because you stop using it for any purpose expecting never to use it again, and you continue to hold it The *termination value of the asset at the time of the event 4 A *balancing adjustment event happens to a *depreciating asset you *hold but have not used because you expect never to use it, and you continue to hold it The *termination value of the asset at the time of the event 5 There is roll‑over relief under section 40‑340 for a *balancing adjustment event happening to a *depreciating asset The *adjustable value of the asset to the transferor just before the balancing adjustment event occurred 6 A partnership asset that was *held, just before it became a partnership asset, by one or more partners (whether or not any other entity was a joint holder) or a partnership asset to which subsection 40‑295(2) applies The *market value of the asset when the partnership started to hold it or when the change referred to in subsection 40‑295(2) occurred 7 You are the legal owner of a *depreciating asset that is hired under a *hire purchase agreement and you start *holding it because the entity to whom it is hired does not become the legal owner The *market value of the asset when you started to hold it 8 You started to *hold the asset under an *arrangement and: The market value of the asset when you started to hold it (a) there is at least one other party to the arrangement with whom you did not deal at *arm's length; and (b) apart from this item, the first element of the asset's cost would exceed its *market value 9 You started to *hold the asset under an *arrangement that was private or domestic in nature to you (for example, a gift) The *market value of the asset when you started to hold it 10 The Minister for Finance has determined a cost for you under section 49A, 49B, 50A, 50B, 51A or 51B of the Airports (Transitional) Act 1996 The cost so determined 11 To which Division 58 (which deals with assets previously owned by an *exempt entity) applies The amount applicable under subsections 58‑70(3) and (5) 12 A *balancing adjustment event happens to a *depreciating asset because a person dies and the asset devolves to you as the person's *legal personal representative The asset's *adjustable value at the time of death 13 You started to *hold a *depreciating asset because it *passed to you as the beneficiary or a joint tenant The *market value of the asset when you started to hold it reduced by any *capital gain that was disregarded under section 128‑10 or subsection 128‑15(3), whether by the deceased or by the *legal personal representative 40‑185 Amount you are taken to have paid to hold a depreciating asset or to receive a benefit (1) This Division applies to you as if you had paid, to *hold a *depreciating asset or for an economic benefit for such an asset, the greater of these amounts: (a) the sum of the amounts that would have been included in your assessable income because you started to hold the asset or received the benefit, or because you gave something to start holding the asset or receive the benefit, if you ignored the value of anything you gave that reduced the amount actually included; or (b) the sum of the applicable amounts set out in this table for holding the asset or receiving the benefit. Example: Gold Medals Ltd manufactures some medals for a local sporting association's annual meeting in return for a die cut stamping machine. The medals have a market value of $20,000. The machine has an arm's length value of $100,000 but Gold Medals has to contribute $75,000 towards acquiring it from the association. Gold Medals will have to include: in its assessable income because of section 21A of the Income Tax Assessment Act 1936. The first element of the machine's cost will be the greater of: * the amount it paid ($75,000) plus the market value of the non‑cash benefits it provided ($20,000), which comes to $95,000; and * the amount that was assessable income from receiving the machine ($25,000) plus the amount by which that assessable income was reduced because of the payment Gold Medals made ($75,000), which comes to $100,000. So, in this case, the first element of the machine's cost to Gold Medals is $100,000. Amount you are taken to have paid to hold a depreciating asset or to receive a benefit Item In this case: The amount is: 1 You pay an amount The amount 2 You incur or increase a liability to pay an amount The amount of the liability or increase when you incurred or increased it 3 All or part of a liability to pay an amount owed to you by another entity is terminated The amount of the liability or part when it is terminated 4 You provide a *non‑cash benefit The *market value of the non‑cash benefit when it is provided 5 You incur or increase a liability to provide a *non‑cash benefit The *market value of the non‑cash benefit or the increase when you incurred or increased the liability 6 All or part of a liability to provide a *non‑cash benefit (except the *depreciating asset) owed to you by another entity is terminated The *market value of the non‑cash benefit when the liability is terminated Note: Item 1 includes not only amounts actually paid but also amounts taken to have been paid. Examples include the price of the notional purchase made when trading stock is converted to a depreciating asset under section 70‑110, the cost of an asset held under a hire purchase arrangement under section 240‑25 and a lessor's deemed purchase price when a luxury car lease is terminated under subsection 42A‑105(3) of Schedule 2E to the Income Tax Assessment Act 1936. (2) In applying the table in subsection (1) to a liability of yours to pay an amount or provide a *non‑cash benefit, don't count any part of the liability you have already satisfied. 40‑190 Second element of cost (1) The second element is worked out after you start to *hold the *depreciating asset. (2) The second element is the amount you are taken to have paid under section 40‑185 for each economic benefit that has contributed to bringing the asset to its present condition and location from time to time since you started to *hold the asset. Example: Andrew adds a new tray and canopy to his ute. The materials and labour that go into the addition are economic benefits that Andrew received and that contribute to the ute's present condition. The payments he makes for those economic benefits are included in the second element of the ute's cost. Note: The second element of the cost may be modified by a later provision in t