Capital Allowances: Cost of non-cash benefit

Is the amount of salary forgone by an employee in return for an employer providing a computer under an effective salary sacrifice arrangement the cost of the computer under Subdivision 40-C of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. Where the computer was acquired through an effective salary sacrifice arrangement, the cost is the amount of salary that is foregone in return for the employer providing the computer (items 4 and 5 in the table in section 40-185 of the ITAA 1997).

An employer provides an employee with a desktop computer, pursuant to an effective salary sacrifice agreement, as a fringe benefit. The employee uses the computer to some extent for a taxable purpose.

By entering into an effective salary sacrifice arrangement, as defined in paragraphs 19 and 20 of Taxation Ruling TR 2001/10, the employee and employer have agreed to an exchange of non-cash benefits. The employee has elected to forgo cash remuneration for their labour and in return the employer will provide a desktop computer of similar value.

The employee will be entitled to deduct an amount for the decline in value of the depreciating asset as the employee is the legal owner and therefore the holder of the asset under item 10 of the table in section 40-40 of the ITAA 1997.

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

The first element of cost is either an amount specified in the table in subsection 40-180(2) of the ITAA 1997 for particular circumstances or the amount taken to have been paid under section 40-185 of the ITAA 1997 for general circumstances.

Item 4and item 5 of the table in section 40-185 of the ITAA 1997 include amounts in cost where a non-cash benefit is provided or a liability to provide such a benefit is incurred or increased. Therefore the amount taken to have been paid under section 40-185 of the ITAA 1997 for a depreciating asset received under an effective salary sacrifice arrangement is the market value of the employee's labour for which they have forgone entitlement to cash remuneration. For example, if the taxpayer has their cash salary reduced by $3,000 and a computer provided instead, then the cost of the computer to the employee under section 40-185 of the ITAA 1997 will be $3,000.

The employee will be required to reduce their deduction for the decline in value of the computer under subsection 40-25(2) of the ITAA 1997 to the extent it is used for a non-taxable purpose.