LECTURE 11 DEPRECIATION – CONTNIUED

Depreciation – s.21 Chargeable income is determined with reference to a period of 1 year Depreciation allowance is an annual allowance Plant owned and used in producing income for the full year benefits from a full annual allowance

Depreciation – s.21 Where plant is acquired or disposed off part way through the taxpayers fiscal year, necessarily there is only a partial allowance For depreciation purposes, tax year is divided into the twelve calendar months (not 365 days) A calendar moth includes a part of a calendar month One twelfth of a full allowance is allowed for any calendar month or part thereof that the taxpayer owns and uses the asset (para 4)

Depreciation – s.21 Other areas (elements) to consider: Cost Second hand assets Categorization of assets Variation of effective life Assets partly used for private purposes Short life and cheap assets Disposal of plant

Depreciation – s.21 Cessation of business Bulk sale Disposal at non-market value Rollover option

Depreciation – s.21 Costs: Included are - Annual depreciation allowance is calculated as a percentage of the cost of the asset Generally cost of an asset is the acquisition cost to the taxpayer This is the purchase price plus any installation cost including freight and delivery cost, import and customs charges and costs associated with locating the asset on site

Depreciation – s.21 Costs: Excluded are – Structural costs involving demolition of existing plant or Clearing a site for installation

Depreciation – s.21 An interest expense on financing the purchase of an asset under construction and not yet in use (e.g. installation payments on a ship under construction) is not deductible under s.19 Wharf Properties Ltd v CIR Commercial accounting capitalizes the interest expense as part of the cost of the asset

Depreciation – s.21 Where plant is obtained by taxpayer as gift, actual costs for taxpayer is zero E.g. taxpayer is sole trader, inherits car from deceased relative, taxpayer uses car in business. In this situation allowance is calculated as a percentage of the assets “notional depreciated value” (para 11) Para 2 – definition of notional depreciated value

Depreciation – s.21 Taxpayer purchased asset for private use and later uses asset in producing income Here, cost of asset for purpose of depreciation calculation is taxpayer’s original acquisition cost However, aggregate of depreciation which may be claimed is limited to the written down value of asset at time it is applied to the business, etc. calculated as if asset when originally acquired had been depreciated at minimum rate (para 14) Rule should not apply where taxpayer forms a partnership and uses asset owned for domestic purpose as capital contribution, ie. a capital contribution

Depreciation – s.21 Part VI of the Instructions outlines rules for depreciation of buildings These rules differ considerably from rules governing depreciation of plant Buildings are depreciated on a straight line basis Rate of depreciation is set by para 35 Taxpayer has no choice as to the rate Rate is dependant on type of material from which building is constructed

Depreciation – s.21 Annual depreciation allowance is calculated against the ‘prime cost’ of the building Prime cost is cost of construction of building itself It expressly excludes cost of land and any expenditure incurred in preparing the land prior to commencing construction Original prime cost may be increased where there are later additions to the building

Depreciation – s.21 Original owner claims depreciation calculated against prime cost of building, so too does successive owner This is principle difference between depreciation of buildings and plant Total depreciation claimed by original owner plus any successive owner cannot exceed the prime cost (including any increases thereto because of additions

Depreciation – s.21 Other specific deductions s.21 (1)(r) s.21 (1)(n) s.21 C

Losses – s.22 Deduction of losses in calculating total income/chargeable income First, a loss for the year from any particular source is to be set off against income from other sources for the year (s.22(1)(a)) Second, any loss in a year not fully set off by income from other sources may be carried forward and set off against income in the following year, and so up to 4 years (s.22(1)(b))

Losses – s.22 s.22(1)(b)(iv) Loss from any trade ceases to be available for relief in the year(s) following the year in which the trade, etc. is sold, ceases or substantially changes