Hello, dear friend, you can consult us at any time if you have any questions, add WeChat: zz-x2580
TABL 5551/TABL 5559
Term 1, 2024
Week 7: 27 March 2024
Announcements
• Assignment is due on Friday 5 April, 2024 on or before 6.00
pm (WEEK 8)
• Please ensure you are familiar with the Moodle Link for
submission of the assignment
Recap of previous week and plan for
today
• Last class, we continued looking at deductions, specifically:
– The treatment of travel, home office, clothing and self-
education expenses
– Those ‘before’ and ‘after’ expenses
– The revenue/capital distinction (the 1st negative limb)
• Today, we’ll mostly complete deductions, including the various
capital allowance regimes
• Then we’ll look at trading stock and tax accounting broadly
7.1 Capital allowance regimes
• Capital expenditure is not deductible under section 8-1 (it fails
the positive limbs, or falls in the 1st negative limb), however it
may be deductible under one of the capital allowance regimes
• These regimes may allow a taxpayer to claim a deduction for
the capital expenditure, or include it in CGT asset’s cost base
• Importantly, these capital allowance regimes require the
expenditure to be capital
• The expenditure generally can’t be deducted immediately – it is
deducted, or ‘depreciated’, over time
7.1 Capital allowance regimes
• If you can’t get a deduction under one of the capital allowance
regimes, think to CGT asset cost base inclusion
– This in turn reduces the taxpayer’s capital gain
• All the capital allowance regimes have an ‘assessable income-
producing’ requirement, similar to the section 8-1 positive limbs
– expenditure must be relevant to the income-producing activity
• Challenge: identifying the regime that applies to certain capital
expenditure
• We’ll deal with tangible assets first, then intangible assets
7.1 Capital allowance regimes
Trading stock (ss 6-5,
8-1 and Division 70)
Depreciating assets
(Division 40)
Capital works
(Division 43)
CGT regime and CGT
assets
• Cost of purchase =
deduction
• Sale proceeds =
assessable income
• Compare stock on
hand at beginning and
end of income year
• Increase in stock over
year = assessable
income
• Decrease in stock
over year = deduction
• Cost of depreciating
asset deductible over
effective life of asset
• Choice of prime cost
or diminishing value
method
• Sale of asset =
balancing adjustment
• Cost of capital works
deductible over 40
years (2.5% per year)
• Generally, no
balancing adjustment
on disposal
• Purchaser of capital
works obtains Division
43 deductions
• Asset satisfies both
Divisions 40 and 43 =
Division 43 applies
• Actual costs included
in cost base
• If amount deductible
under Division 43,
amount excluded from
cost base
• Capital gains/losses
on sale of depreciating
asset disregarded
under CGT regime if
Division 40 deductions
claimed
7.1 Capital allowance regimes
Depreciating assets – Division 40
• Deduction is under section 40-25 – the asset must be used for a
taxable purpose, e.g. producing assessable income
– Deduction is reduced to extent asset used for non-taxable
purpose
• Asset’s cost includes purchase cost and costs of getting asset
into its current condition or position
• Taxpayer has choice of using prime cost method of diminishing
value method to calculate the depreciation
7.1 Capital allowance regimes
• Prime cost (straight line) method:
Asset’s cost × (days held ÷ 365) × (100% ÷ asset’s effective life)
• Diminishing value method:
Base value × (days held ÷ 365) × (200% ÷ asset’s effective life)
• Days held: number of days asset held in the income year and
used, or installed ready for use, for any purpose
• Asset’s effective life: you can use the ATO’s determinations of
effective life, or self-assess the effective life yourself
7.1 Capital allowance regimes
• Sale of depreciating asset gives rise to balancing adjustment
event – requires comparison between asset’s termination value
(sale proceeds) and adjustable value (written down value)
• If asset’s termination value > adjustable value = difference is
included in taxpayer’s assessable income
• If asset’s termination value < adjustable value = taxpayer can
claim the difference as a deduction
• Recall that capital gains or capital losses made from CGT event
involving depreciating asset is disregarded: section 118-24
7.1 Capital allowance regimes
Capital works – Division 43
• Deduction is under section 43-10 – must be used to produce
assessable income
• Taxpayer calculates capital works deduction on straight-line day-
by-day basis over 25 years (4% rate) or 40 years (2.5% rate)
• Capital works usually form part of a larger CGT asset – this
means construction expenditure can form part of cost base
– Cost base or reduced cost base will exclude any capital
works deductions claimed: section 110-45(2)
7.1 Capital allowance regimes
• Generally, no balancing adjustment occurs when a taxpayer
disposes of Division 43 capital works
– Instead, the disposal will give rise to a CGT event
– Double counting of expenditure is avoided by reducing
cost base or reduced cost base by capital works deduction
• If taxpayer disposes of Division 43 capital works, the purchaser
is entitled to a capital works deduction for the un-deducted
construction expenditure (where purchaser’s use is to produce
assessable income)
