Issue
For the purpose of calculating the net income of the leasing partnership under section 90 of the Income Tax Assessment Act 1936 (ITAA 1936) is the partnership entitled to deduct, under section 40-25 of the Income Tax Assessment Act 1997 (ITAA 1997), an amount for the decline in value of the depreciating assets it holds?
Decision
Yes, the leasing partnership is entitled to deduct, under section 40-25 of the ITAA 1997, an amount equal to the decline in value for an income year (as worked out under Division 40 of the ITAA 1997) of the depreciating assets it holds.
Facts
A partnership purchased various depreciating assets under a manufacture and supply agreement. It immediately leased the assets on commercial terms to an unrelated entity that had been awarded a franchise by another unrelated entity to operate a business in which the assets are used. Under the lease agreement the lessee is required to make quarterly payments of rent to the leasing partnership for use of the assets. The partnership is a common law partnership and the assets are held by the partnership.
Reasons for Decision
'Net income' in relation to a partnership means the assessable income of the partnership, calculated as if the partnership were a taxpayer who was a resident, less all allowable deductions except deductions allowable under section 82AAT of the ITAA 1936 or Division 36 of the ITAA 1997 (section 90 of the ITAA 1936).
'Partnership loss' in relation to a partnership means the excess (if any) of the allowable deductions, except deductions allowable under section 82AAT of the ITAA 1936 or Division 36 of the ITAA 1997, over the assessable income of the partnership calculated as if the partnership were a taxpayer who was a resident (section 90 of the ITAA 1936).
A deduction for an amount equal to the decline in value for an income year of a depreciating asset (as worked out under Division 40 of the ITAA 1997) is allowable for an asset held during the income year (section 40-25 of the ITAA 1997). The assets in question are depreciating assets (section 40-30 of the ITAA 1997) and are not depreciating assets to which Division 40 does not apply (section 40-45 of the ITAA 1997).
As the partnership is a holder of the depreciating assets in an income year, deductions under section 40-25 of the ITAA 1997 are allowable deductions for the purposes of calculating the net income or partnership loss of the partnership for the income year.