Depreciating assets
Depreciation deductions are generally available (under the uniform capital allowance rules in Division 40) for a lessee that has incurred leasehold improvement costs which relate to depreciating assets. This is provided, broadly, the assets are used by the lessee in their business (or in gaining their assessable income). Alternatively, where the lessee is a small business entity (‘SBE’), accelerated depreciation deductions may be available under Subdivision 328-D.
What is a depreciating asset?
A depreciating asset is broadly defined under S.40-30(1) to be an asset with a limited effective life that is reasonably expected to decline in value over the time it is used. Certain assets are specifically excluded from being depreciating assets, including:
- land;
- trading stock;
- intangible assets (other than intellectual property, in-house software or other intangible assets specifically mentioned in S.40-30(2)); and
- assets for which the building write-off is available under Division 43 (refer to 40-45(2)). This paragraph is important as this prevents the duplication of depreciation deductions for assets where the building write-off is also available to be claimed.
This is particularly relevant for capital improvements to land or fixtures on land (whether they are removable or otherwise). As these capital improvements or fixtures are treated as assets separate from the land (under S.40-30(3)), they may qualify for depreciation deductions under Division 40 (or Subdivision 328-D) if they meet the definition of ‘depreciating assets’ in S.40-30(1).
In the first instance, it seems there is the potential to double dip as building write-off deductions are also available under Division 43. However, S.40-45(2) prevents this by providing priority to the building write-off provisions. Accordingly, where a taxpayer can claim deductions under both the depreciation provisions (i.e., Division 40 or Subdivision 328-D) and the capital works provisions (i.e., Division 43), deductions are claimed under Division 43 only (i.e., no depreciation deductions are available).