Capital Allowances: taxable purpose - use of depreciating assets

Did the taxpayer use their depreciating assets for a taxable purpose, as defined in paragraph 40-25(7)(a) of the Income Tax Assessment Act 1997 (ITAA 1997), when they used the assets in the process of creating the manuscript of a book they sought to have published?

Yes. The taxpayer used their depreciating assets for a taxable purpose, as defined in paragraph 40-25(7)(a) of the ITAA 1997, when they used those assets in the process of creating the manuscript of a book they sought to have published.

The taxpayer sought to write and have published a book about a topic in which they had extensive experience. The taxpayer had previously written a book on the same broad topic. The taxpayer's writing activity did not, however, constitute the carrying on of a business of author. The taxpayer purchased a camera, camera lenses and a scanner to use in the process of creating the manuscript of the book. Prior to completing the manuscript, the taxpayer successfully negotiated a publishing contract for the book from which they derived royalty income.

Subsection 40-25(1) of the ITAA 1997 provides an annual deduction to a holder of a depreciating asset of an amount equal to the decline in value of the asset (as worked out under Division 40 of the ITAA 1997). The deduction is reduced by the part of the asset's decline in value that is attributable to the holder's use of the asset for a purpose other than a taxable purpose (subsection 40-25(2) of the ITAA 1997).

So far as is relevant here, taxable purpose is the purpose of producing assessable income (paragraph 40-25(7)(a) of the ITAA 1997). Something is done for the purpose of producing assessable income if it is done: (a) for the purpose of gaining or producing assessable income; or (b) in carrying on a business for the purpose of gaining or producing assessable income (subsection 995-1(1) of the ITAA 1997).

As the taxpayer's writing activity does not amount to carrying on a business, only paragraph (a) of this definition needs to be considered. To satisfy this paragraph, the taxpayer must use their depreciating assets for the requisite purpose: that is, the purpose of gaining or producing assessable income.

The taxpayer used their camera, lenses and scanner in the process of creating the manuscript for the publisher. That process constituted the undertaking of activities for the purpose of producing assessable income because those activities were directed to producing royalty income. The connection between the taxpayer's use of the assets and the purpose of producing assessable income was sufficiently direct to conclude that the assets were used for a taxable purpose as defined in paragraph 40-25(7)(a) of the ITAA 1997.