Issue
For the purposes of the 'same user' rule in subsection 42-100(5) of the Income Tax Assessment Act 1997 (ITAA 1997), was the former owner of a unit of plant using an effective life to work out their depreciation deduction for that plant if they were using a rate in their calculation formula?
Decision
No. The former owner was not using an effective life for the purposes of the 'same user' rule in subsection 42-100(5) of the ITAA 1997 to work out their depreciation deduction because the rate they were using was accelerated and does not bear any direct relationship to the effective life of the plant.
Facts
The taxpayer acquired a unit of plant after 21 September 1999 in circumstances where the 'same user' rule in subsection 42-100(5) of the ITAA 1997 applied to the acquisition. The plant was being depreciated by the former owner (who had acquired the plant prior to 21 September 1999) using an 'accelerated' diminishing value rate set out in Subdivision 42-D of the ITAA 1997. The taxpayer does not meet the conditions for small business taxpayers to retain accelerated depreciation in section 42-345 of the ITAA 1997. The taxpayer did not allocate the plant to a 'same rate' pool (Subdivision 42-L of the ITAA 1997) or a low-value pool (Subdivision 42-M of the ITAA 1997).
Reasons for Decision
The amount you deduct for the depreciation of plant under Division 42 of the ITAA 1997 is worked out under Subdivision 42-E of the ITAA 1997, generally by using the relevant formula for either the diminishing value method or the prime cost method (subsection 42-20(1) of the ITAA 1997). A choice of the method you use is generally available (subsection 42-25(3) of the ITAA 1997). However, because of the application of the 'same user' rule in subsection 42-25(5) of the ITAA 1997 the taxpayer must use the diminishing value method because the former owner used that method.
The formula the taxpayer must use for the diminishing value method is contained in subsection 42-160(3) of the ITAA 1997 because they acquired the plant after 21 September 1999 (subsection 42-160(2) of the ITAA 1997). A component of this formula is the effective life of the unit of plant.
A choice of the effective life you use is generally available (subsection 42-100(1) of the ITAA 1997). However, because of the application of the 'same user' rule in subsection 42-100(5) of the ITAA 1997 the taxpayer must use the same effective life that the former owner was using (paragraph 42-100(5)(c) of the ITAA 1997).
The former owner was using the diminishing value method formula in subsection 42-160(1) of the ITAA 1997 because they acquired the plant before 21 September 1999. That formula contains a diminishing value 'rate' component which is set out in Subdivision 42-D of the ITAA 1997. While the starting point of working out that rate is the effective life of the plant, the rate incorporates a factor of loading and a factor of broadbanding. The result is a rate of depreciation that is 'accelerated' in comparison to the effective life of the plant. In these circumstances, the former owner is not 'using' an effective life for the purposes of paragraph 42-100(5)(c) of the ITAA 1997. This means that the taxpayer must, under subsection 42-100(6) of the ITAA 1997, use an effective life determined by the Commissioner.