Capital Allowances: cost to find a depreciating asset - first element of cost

Does capital expenditure incurred by the taxpayer in order to find a depreciating asset form part of the first element of cost of that asset under section 40-180 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. Capital expenditure incurred to find a depreciating asset is not a cost to hold the asset and therefore does not form part of the first element of cost of the asset under section 40-180 of the ITAA 1997.

The taxpayer needed a vehicle to tow a trailer to carry equipment and materials used in the business. In the 2001-02 income year the taxpayer incurred expenditure on airfares to travel overseas, to look for an appropriate vehicle.

Before the taxpayer left Australia, internet research was conducted to determine the availability of the required type of vehicles at the intended overseas destination. At the time the taxpayer left Australia the taxpayer had not signed a contract for the acquisition of the vehicle. Nor did the taxpayer have a particular vehicle in mind.

The taxpayer's itinerary indicated that the first half of the trip was dedicated to searching for an appropriate vehicle. During this period the taxpayer incurred expenditure on car hire, fuel and meals.

The taxpayer ultimately succeeded in finding a suitable vehicle, which was subsequently purchased in an arm's length transaction. The remainder of the trip was spent organising fund transfers, collecting spare parts and arranging for the export of the vehicle and its transportation to Australia.

Under section 40-175 of the ITAA 1997, the cost of a depreciating asset you hold consists of two elements, namely, first element of cost and second element of cost.

Under subsection 40-180(1) of the ITAA 1997, the first element of cost is worked out as at the time when you begin to hold the depreciating asset. Subsection 40-180(1) of the ITAA 1997 provides that the first element of cost is the amount specified in the last applicable item in the table in subsection 40-180(2) or, if no item in the table applies, the amount you are taken to have paid to hold the depreciating asset under section 40-185 of the ITAA 1997.

No item in the table in subsection 40-180(2) of the ITAA 1997 applies.

Paragraph 40-185(1)(b) of the ITAA 1997 provides that you are taken to have paid an amount to hold a depreciating asset in the circumstances specified in the table in subsection 40-185(1) of the ITAA 1997. Item 1 of the table specifies that if you pay an amount, the amount you are taken to have paid to hold a depreciating asset is the amount so paid.

An amount is paid to hold an asset if it is for, or incidental to, the acquisition, construction or creation of the asset. What is incidental to the acquisition, construction or creation of an asset is a question of fact in each case.

The taxpayer was not the holder of the asset when the trip was undertaken. It was uncertain that a suitable vehicle would be found. The payments for airfares, car hire, fuel and meals were not made to hold a depreciating asset. The payments were made to put the taxpayer in a position where a suitable vehicle might potentially be located. The expenditure was not for, or incidental, to the acquisition of the asset. The expenditure lacks a sufficiently close connection with the acquisition of the asset to be regarded as incidental to its acquisition.

The expenditure incurred on airfares, car hire, fuel and meals are not amounts the taxpayer is taken to have paid to hold the vehicle for the purposes of section 40-185 of the ITAA 1997. These amounts do not form part of the first element of cost under section 40-180 of the ITAA 1997.