Capital Allowances: effect of certain GST decreasing adjustments on depreciating assets

Is the cost or opening adjustable value of a depreciating asset affected by a decreasing adjustment arising under Division 129 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

No. A decreasing adjustment arising under Division 129 of the GST Act has no effect on the cost or opening adjustable value of a depreciating asset because, generally, the decreasing adjustment is included in assessable income under section 27-87 of the Income Tax Assessment Act 1997 (ITAA 1997).

The taxpayer purchased a computer on 1 July 2001. They intended to apply the computer for a creditable purpose to the extent of 20%. At the end of the first adjustment period, the computer had actually been applied for a creditable purpose to the extent of 60%. As a consequence, a decreasing adjustment arose, under Division 129 of the GST Act, for the first adjustment period ending 30 June 2003.

Subdivision 27-B of the ITAA 1997 deals with, among other things, the effect of the GST in working out deductions under Division 40 of the ITAA 1997.

Section 27-85 of the ITAA 1997 generally reduces the cost or opening adjustable value of a depreciating asset if an amount may be deducted under Division 40 of the ITAA 1997 and there is a decreasing adjustment that relates directly or indirectly to the asset. However, that section does not apply to a decreasing adjustment that arises under Division 129 of the GST Act.

Section 27-87 of the ITAA 1997 provides specific treatment for decreasing adjustments arising under Division 129 of the GST Act in relation to depreciating assets for which an amount can be deducted under Division 40 of the ITAA 1997. This specific treatment does not apply, however, if a balancing adjustment event occurs for the asset, the event is a taxable supply and there is a decreasing adjustment that relates directly or indirectly to that taxable supply (subsections 27-95(3) and 27-95(5) of the ITAA 1997).

Section 27-87 of the ITAA 1997 requires the decreasing adjustment to be included in assessable income for the income year in which the decreasing adjustment arises.

Since the decreasing adjustment in relation to the computer arose under Division 129 of the GST Act and did not involve a balancing adjustment event, the decreasing adjustment is included in the taxpayer's assessable income for the income year in which the decreasing adjustment arose. That will be the 2002-03 income year. Consequently, the cost or the opening adjustable value of the computer is unaffected by the adjustment.