Division 40: preservation of accelerated depreciation

If a taxpayer can work out the decline in value of a depreciating asset using the prime cost formula in subsection 40-75(1) of the Income Tax Assessment Act 1997 (ITAA 1997) as modified by paragraph 40-10(3)(b) of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997), does the formula have to be adjusted if any of the events in subsection 40-75(2) of the ITAA 1997 occur?

No. The taxpayer continues to use the prime cost formula in subsection 40-75(1) of the ITAA 1997 as modified only by paragraph 40-10(3)(b) of the IT(TP)A 1997.

In certain circumstances, transitional rules apply to preserve in Division 40 of the ITAA 1997 the use of accelerated rates of depreciation that applied to certain plant acquired before 1 July 2001.

One of these transitional provisions is paragraph 40-10(3)(b) of the IT(TP)A 1997. It modifies the prime cost formula in subsection 40-75(1) of the ITAA 1997 by: • replacing the component in the formula that includes the plant's effective life with the rate that was being used; and • increasing the plant's cost under the repealed Division 42 of the ITAA 1997 by any amounts included in the second element of the plant's cost after 30 June 2001.

Accordingly, the modified prime cost formula becomes: (Cost of the plant under Division 42 plus any second element of cost after 30 June 2001) * [days held/365] * accelerated rate that was being used under Division 42

This modification has the effect of preserving accelerated rates of depreciation in the hands of a continuing holder of the asset.

Another transitional provision that makes the same modification to the prime cost formula is section 40-340 of the IT(TP)A 1997. It preserves accelerated rates of depreciation in the hands of a subsequent holder if the asset was rolled-over from a former holder who was using accelerated rates.

If an event under subsection 40-75(2) of the ITAA 1997 occurs, the prime cost formula must be adjusted as set out in subsection 40-75(3) of the ITAA 1997. These adjustments are: • replacing the asset's cost with 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 • replacing the asset's effective life with its remaining effective life.

However, because these components in the formula have already been replaced under paragraph 40-10(3)(b) of the IT(TP)A 1997, the adjustments required by subsection 40-75(3) of the ITAA 1997 will have no effect on the modified prime cost formula.