Issue
Is the cost or opening adjustable value of a depreciating asset reduced under section 27-85 of the Income Tax Assessment Act (ITAA 1997) if a decreasing adjustment arises under the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) other than under Divisions 129 or 132 of the GST Act?
Decision
Yes. A depreciating asset's cost or opening adjustable value is reduced under section 27-85 of the ITAA 1997 by the amount of any decreasing adjustments arising under the GST Act (other than adjustments arising under Divisions 129 or 132 of the GST Act).
Facts
A motor vehicle was acquired for a cost of $55,000 on 1 July 2001. The taxable purpose and creditable purpose are both 40%. There is a decreasing adjustment of $500 in the fourth quarter of the first year.
Reasons for Decision
Section 27-85 of the ITAA 1997 applies to an entity where it can deduct amounts for a depreciating asset under Division 40 of the ITAA 1997 and the entity has a decreasing adjustment in an income year that relates directly or indirectly to the asset.
The asset's cost is reduced by the amount of the adjustment if the adjustment arises in the income year in which the asset's start time occurs. The asset's opening adjustable value for an income year is reduced by the amount of the adjustment if the adjustment arises in a later year.
If the amount of the reduction exceeds the cost or opening adjustable value, as relevant, the excess is included in assessable income.
Section 27-85 of the ITAA 1997 does not apply to decreasing adjustments arising under Divisions 129 or 132 of the GST Act 1999.
In this case, the decreasing adjustment arises in the year in which the assets start time occurs. The cost of the car is reduced by the decreasing adjustment of $500 to $52 500. Note 1: the cost of the car would also be reduced by the amount of the input tax credit to which the entity was entitled in relation to the creditable acquisition or importation of the car. The input tax credit in this case would be is $2000 ($55 000 x 1/11th x 40%). Note 2: Section 27-90 of the ITAA 1997 provides a corresponding increase in the cost or opening adjustable value of a depreciating asset where there is an increasing adjustment.