Capital Allowances: identical common property depreciating assets costing $300 or less - NSW

Can a taxpayer work out a decline in value of a depreciating asset under subsection 40-80(2) of the Income Tax Assessment Act 1997 (ITAA 1997) where their residential unit complex body corporate has acquired a number of identical depreciating assets collectively costing more than $300?

Yes. A taxpayer can work out a decline in value of a depreciating asset under subsection 40-80(2) of the ITAA 1997 if the cost attributable to their interest in the identical depreciating assets they hold is $300 or less and the other requirements of the subsection are met.

The taxpayer owns a unit in a residential unit complex in New South Wales (NSW) on freehold land. The unit is rented (or available for rent) on a commercial basis at all times. There are ten units in the complex which features a swimming pool, tennis court and change rooms.

During the income year the body corporate has acquired a number of door closers that are identical in colour, size and function. They have been purchased individually. The total cost of the door closers is $500.

These door closers form part of the common property of the residential unit complex and the portion of the cost of these door closers attributable to each unit owner's interest is $50.

Broadly speaking, section 40-25 of the ITAA 1997 allows a holder of a depreciating asset an annual deduction for the decline in value of the asset.

Under subsection 40-80(2) of the ITAA 1997 the decline in value of a depreciating asset in an income year is the asset's cost if all of the following tests are satisfied: • The cost of the depreciating asset is $300 or less (paragraph 40-80(2)(a) of the ITAA 1997) • The asset is used predominantly for the purpose of producing assessable income that is not income from carrying on a business (paragraph 40-80(2)(b) of the ITAA 1997) • The asset is not part of a set of assets that starts to be held in the income year where the set costs more than $300 (paragraph 40-80(2)(c) of the ITAA 1997); and • The asset is not one of a number of identical or substantially identical assets that starts to be held in the income year that together cost more than $300 (paragraph 40-80(2)(d) of the ITAA 1997).

Subsection 40-35(1) of the ITAA 1997 applies to a depreciating asset that is held by more than one entity. It treats each entity's interest in the underlying asset as if the interest were itself the underlying asset. This means that each unit owner's interest in a depreciating asset that forms part of the common property is treated as if their interest is the underlying asset. One consequence of this is that each unit owner must work out the cost of the depreciating asset that is their interest.

In this case the cost of the depreciating asset that is their interest is $50. As a consequence the condition contained in paragraph 40-80(2)(a) of the ITAA 1997 is met as the cost of their interest being the asset does not exceed $300.

Paragraphs 40-80(2)(b) and 40-80(2)(c) of the ITAA 1997 are also met as the taxpayer is not deriving business income through the renting of the property and the door closers do not form a part of set of assets as they have been bought individually throughout the income year.

Paragraph 40-80(2)(d) of the ITAA 1997 is also satisfied as the portion of the total cost of the identical depreciating assets attributable to each unit owner's interest in the depreciating assets does not exceed $300.

If, however, the total cost attributable to a unit owner's interest in the identical depreciating assets forming part of the common property is greater than $300, no immediate deduction is available even though the cost attributable to their interest in each depreciating asset forming part of the common property is $300 or less. This is because the requirement of paragraph 40-80(2)(d) of the ITAA 1997 is not satisfied. In this circumstance each unit owner will have to work out the effective life and choose a method to work out the decline in value of the depreciating asset that is their interest.

Accordingly, a taxpayer can work out a decline in value of a depreciating asset if the cost attributable to their interest in the identical depreciating assets they hold is $300 or less under subsection 40-80(2) of the ITAA 1997 and the other requirements of the subsection are met. In other words, the taxpayer can obtain an immediate deduction of $50.