Determining Single or Multiple Depreciating Assets

Posted at 13:14h in Business, News by Simmons Livingstone

0 Likes

The Australian Taxation Office (ATO) has released a new draft ruling, TR 2023/D2, on how to determine whether an item should be considered as one whole depreciating asset or if its parts can be treated as separate depreciating assets. This is a significant distinction, especially when we need to determine if the combined cost of various items or components falls below a specific instant asset write-off threshold.

This issue has gained extra importance lately due to the recent end of the temporary full expensing rules on June 30, 2023. While this proposed change is not law yet and is awaiting parliamentary approval, the government intends to introduce a small business instant asset write-off threshold of $20,000 for the 2024 income year.

This isn’t the first time the ATO has tackled this issue. In January 2017, the ATO issued a draft ruling on the same matter. However, considering the time that has passed since the initial release, the ATO has reissued the draft ruling with some adjustments.

While the ATO has incorporated some feedback from the initial release, many of the core principles from the original draft ruling remain largely unchanged. Let’s break down some of the key principles:

Separate Identifiability and Commercial Value: To determine that a component is a separate depreciating asset, it must be identifiable on its own and seen as valuable for business or financial purposes.

Purpose or Function as a Guide: The purpose or function of an item is often a useful guide in identifying a depreciating asset. The ATO provides the following principles:

The depreciating asset is typically the item that performs a separate identifiable function in the business.
An item can be seen as a depreciating asset if it has a unique function, even if it’s not self-contained or used independently.
The more an item is physically or functionally combined with other components, the more likely the entire composite item is the depreciating asset.
If attaching an item to another affects that other item’s function, it’s more likey to be a separate depreciating asset.
When purchasing various components that must work together as a system and are interconnected in how they function, the depreciating asset is typically the entire system or composite item.

Connected Items Can Still Be Separate: Importantly, an item that cannot operate independently and has no commercial utility unless linked or connected to another item does not necessarily preclude it from being a separate depreciating asset.

Versatility and Independence: Items designed to be used in various settings, in conjunction with a wide range of equipment or systems, and not acquired with other items as part of a system may indicate they are separate depreciating assets.

To delve deeper into these guidelines and how they may impact your financial situation, we encourage you to get in touch with your dedicated Simmons Livingstone advisor. They’re here to assist you every step of the way.