1. LECTURE 11
DEPRECIATION – CONTNIUED

2. 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

3. 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)

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

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

6. 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

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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

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

15. 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))

16. 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