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Is the cost, under section 40-185 of the Income Tax Assessment Act 1997 (ITAA 1997), of a computer received by an employee from an employer under an effective salary sacrifice arrangement the amount paid by the employer?

Yes. Under section 40-185 of the ITAA 1997, the cost of a computer received by an employee under an effective salary sacrifice arrangement is its market value, in this case represented by the price paid by the employer.

An employer acquired a desktop computer and provided it to an employee pursuant to an effective salary sacrifice agreement as a property fringe benefit. The employee did not contribute an amount for the computer. There is no restriction on the extent of private use or requirement that the computer be used for work purposes. The employer acquired the computer through an arm's length transaction.

By entering into an effective salary sacrifice arrangement, as defined in paragraphs 19 and 20 of Taxation Ruling TR 2001/10, the employee has elected to forgo an amount of cash remuneration for their labour which is to be provided in return for the employer providing a depreciating asset.

Where an employee receives a depreciating asset as a property benefit through a salary sacrifice arrangement, they become the legal owner of the asset, and therefore its holder, under item 10 of the table in section 40-40 of the ITAA 1997. They will therefore be entitled to deduct an amount for the decline in value of that asset based on its cost under section 40-25 of the ITAA 1997, to the extent it is used for a taxable purpose.

The cost of a depreciating asset consists of two elements, worked out under Subdivision 40-C of the ITAA 1997. The first element of cost is worked out as at the time when the asset starts to be held while the second element is worked out after that time.

The first element of cost is, in certain circumstances, an amount specified in the table in section 40-180 of the ITAA 1997 or, more generally, the amount taken to have been paid under section 40-185 of the ITAA 1997.

As no item in the table in subsection 40-180(2) of the ITAA 1997 applies, the cost is worked out under section 40-185 of the ITAA 1997. Under paragraph 40-185(1)(b) of the ITAA 1997 the first element of cost of a depreciating asset is the sum of the amounts set out in the table that the taxpayer is taken to have paid to hold the depreciating asset.

Items 4 and 5 of the table in section 40-185 of the ITAA 1997 include an amount in cost where a non-cash benefit is provided or a liability to provide such a benefit is incurred or increased. The employee is providing services, which constitute a non-cash benefit, in exchange for the depreciating asset. According to section 40-185 of the ITAA 1997, the amount included in the cost of such an item is the market value of the non-cash benefit when it is provided.

The employee is providing their services to their employer in return for the provision of a cash salary and a depreciating asset.

If an amount is paid (or non-cash benefit provided) for two or more things that include at least one depreciating asset, the cost of the depreciating asset must take into account that part of the amount paid that is reasonably attributable to the depreciating asset (section 40-195 of the ITAA 1997). This means that the taxpayer must reasonably attribute an amount of services provided to the employer that related to the acquisition of the depreciating asset. The taxpayer can only include in the cost of the asset the market value of the proportion of services provided that is reasonably attributable to the depreciating asset.

The approach adopted in Goods and Services Tax Ruling GSTR 2001/6 provides assistance in determining what the reasonable attribution of services provided by employee provided for asset is. In paragraph 19 of GSTR 2001/6 the view is expressed that where parties are dealing at arm's length, the goods, services or other things exchanged are usually of equal GST inclusive market value.

Consistent with that principle, we accept that, when the depreciating asset has been acquired through an arm's length transaction and is provided to the employee at the same time; the price paid for the depreciating asset by the employer is a fair indicator of the market value of the employee services provided. In such circumstances the employer's purchase price can be used for the purposes of establishing the market value of the employee's services and therefore the cost of the asset under items 4 and 5 in the table in section 40-185 of the ITAA 1997.

The employee will be required to reduce their deduction for the decline in value of the asset under subsection 40-25(2) of the ITAA 1997 to the extent the asset is not used for a taxable purpose.