Capital Allowances: start time of a depreciating asset

Was a car the taxpayer sold immediately after acquiring it used, or installed ready for use, for the purpose of establishing the asset's start time under section 40-60 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The taxpayer did not use the car, or have it installed ready for use, for the purpose of establishing the asset's start time under section 40-60 of the ITAA 1997.

The taxpayer leased a car which they used wholly in their business operations. The taxpayer was not, at any time during the term of the lease, a holder of the car under any item of the table in section 40-40 of the ITAA 1997.

On the expiry of the lease, the taxpayer started to hold the car under item 10 of the table in section 40-40 of the ITAA 1997 by acquiring it from the lessor.

Under a pre-arranged transaction, the taxpayer immediately sold the car to another unrelated party. As a result, the taxpayer stopped holding the car which caused a balancing adjustment event to occur for the asset under paragraph 40-295(1)(a) of the ITAA 1997.

The taxpayer acquired the car from the lessor for the sole purpose of selling it for a profit to the unrelated third party. There was never any intention on the part of the taxpayer to use the car in their business operations or for any other purpose.

The occurrence of a balancing adjustment event for a depreciating asset you hold may require you to make a balancing adjustment to your assessable income (section 40-285 of the ITAA 1997). In working out the balancing adjustment, you need to take into account the asset's decline in value for the period you held the asset.

A depreciating asset starts to decline in value from when its start time occurs. The start time of a depreciating asset is when it is first used, or installed ready for use, for any purpose (section 40-60 of the ITAA 1997).

'Used' is a word of wide import and its meaning in any particular case will depend on the context in which the word is employed and the purpose for which the thing in question has been acquired or created (see Newcastle City Council v. Royal Newcastle Hospital (1956) 96 CLR 493). In the context of Division 40 of the ITAA 1997, the use of a depreciating asset requires the employment of the asset in such a way that it can reasonably be expected to decline in value through and over the time of that use (see definition of depreciating asset in subsection 40-30(1) of the ITAA 1997). In this regard, use includes 'installed ready for use'.

For a tangible depreciating asset, physical or active employment of the asset might ordinarily be expected. This would include employment as a decorative instrument or as advertising for the asset. For an intangible depreciating asset, employment of the asset may not be physical and may be more passive.

In considering the nature of use of a car in the context of Division 40 of the ITAA 1997, exploitation of the inherent character of the car (for example, as a means of transport) would generally be expected. This would provide the necessary connection between the use of a car and a reasonable expectation of its decline in value through that use.

The acquisition of a car by the taxpayer solely for the purpose of its immediate sale is not a use that would generally be expected to give rise to a decline in value through the use of the car in the context of Division 40 of the ITAA 1997. This view is not affected by the profit motive of the acquisition and sale.