Capital Allowances: allocating jointly held depreciating assets to a low-value pool

Can the taxpayer choose, under subsection 40-425(1) of the Income Tax Assessment Act 1997 (ITAA 1997), to allocate to a low-value pool their interest in a depreciating asset they start to hold jointly if the cost of their interest in the asset is less than $1,000 even though the cost of the asset exceeds $1,000?

Yes. The taxpayer can allocate their interest in the depreciating asset to a low-value pool because section 40-35 of the ITAA 1997 treats their interest in the asset as the asset for the purposes of Division 40 of the ITAA 1997.

The taxpayer jointly owns a rental property to the extent of 50%. In the 2001-02 income year, they jointly purchased for the property a new hot water system costing $1200. In accordance with their ownership interest in the rental property, the taxpayer contributed $600 to the purchase of the new hot water system.

For a depreciating asset that is a 'partnership asset', the asset is held by the partnership and not by any particular partner (item 7 of the table in section 40-40 of the ITAA 1997). In this context, the words 'partnership asset' carry their common law meaning. That is, they refer to assets of a partnership that are used for the purpose of the business carried on by the partnership. The words 'partnership asset' do not extend to assets that are merely co-owned even though their co-ownership and their employment for the purpose of receiving income jointly may be enough to recognise a partnership for income tax purposes (see definition of partnership in subsection 995-1(1) of the ITAA 1997). In the circumstances of this case, the taxpayer is not carrying on a business in partnership ( Cripps v FC of T 99 ATC 2428; (1999) 43 ATR 1202) but is merely undertaking a passive investment (Taxation Ruling IT 2423).

For depreciating assets that are co-owned but are not partnership assets, section 40-35 of the ITAA 1997 applies to the asset as if your interest in the asset is the relevant asset for the purposes of Division 40 of the ITAA 1997. This leads to the result that each co-owner must treat their depreciating asset (their interest in the underlying asset) in accordance with their own tax profile. In the present case, the taxpayer must work out the cost, effective life and choose a method to work out the decline in value of the depreciating asset that is their interest and to claim, in their own income tax return, the appropriate deduction for that decline in value. Provided the other requirements of the low-value pool provisions in Subdivision 40-E of the ITAA 1997 are satisfied, the taxpayer also may allocate their asset to a low-value pool because their interest in the underlying asset cost less than $1,000.