Income Tax Assessment Act 1997

You can deduct an amount equal to the decline in value of a depreciating asset (an asset that has a limited effective life and that is reasonably expected to decline in value over the time it is used) that you hold.

That decline is generally measured by reference to the effective life of the asset.

You can also deduct amounts for certain other capital expenditure.

40‑10 Simplified outline of this Division

The key concepts about depreciating assets and certain other capital expenditure are outlined below (in bold italics).

Simplified outline of this Division
Item	Major topic Subordinate topics Rules	Provisions
1	Rules about depreciating assets
1.1	Core provisions Depreciating assets are assets with a limited effective life that are reasonably expected to decline in value. Broadly, the effective life of a depreciating asset is the period it can be used to produce income. The decline in value is based on the cost and effective life of the depreciating asset, not its actual change in value. It begins at start time, when you begin to use the asset (or when you have it installed ready for use). It continues while you use the asset (or have it installed). Usually, the owner of a depreciating asset holds the asset and can therefore claim deductions for its decline in value. Sometimes the economic owner will be different to the legal owner and the economic owner will be the holder.	Subdivision 40‑B
1.2	Cost The cost of a depreciating asset includes both: expenses you incur to start holding the asset; and additional expenses that contribute to its present condition and location (e.g. improvements).	Subdivision 40‑C
1.3	Balancing adjustments When you stop holding a depreciating asset you may have to include an amount in your assessable income, or deduct an amount under a balancing adjustment. The adjustment reconciles the decline with the actual change in value.	Subdivision 40‑D
1.4	Low‑value and software development pools Low‑cost assets and assets depreciated to a low value may be placed in a low value pool, which is treated as a single depreciating asset. You can also pool in‑house software expenditure in a software development pool.	Subdivision 40‑E
1.5	Primary production depreciating assets You can deduct amounts for capital expenditure on: water facilities immediately; or horticultural plants over a period that relates to the effective life of the plant; or fodder storage assets over 3 income years; or fencing assets immediately.	Subdivision 40‑F
2	Rules about other capital expenditure
2.1	Capital expenditure of primary producers and other landholders You can deduct amounts for capital expenditure on: landcare operations immediately; or electricity and telephone lines over 10 income years.	Subdivision 40‑G
2.2	Capital expenditure that is immediately deductible You can get an immediate deduction for certain capital expenditure on: exploration or prospecting; and rehabilitation of mine and quarry sites; and paying petroleum taxes; and environmental protection activities.	Subdivision 40‑H
2.3	Capital expenditure that is deductible over time You can deduct amounts for certain capital expenditure associated with projects you carry on. You deduct the amount over the life of the project using a project pool. You can also deduct amounts for certain business related costs over 5 years where the amounts are not otherwise taken into account and are not denied a deduction.	Subdivision 40‑I
2.4	Capital expenditure for establishing trees in carbon sink forests You can deduct amounts for capital expenditure for the establishment of trees in carbon sink forests.	Subdivision 40‑J

Subdivision 40‑A—Objects of Division

Table of sections

40‑15 Objects of Division

The objects of this Division are:

(a) to allow you to deduct the *cost of a *depreciating asset; and

(b) to spread the deduction over a period that reflects the time for which the asset can be used to obtain benefits; and

Note 1: This Division does not apply to some depreciating assets: see section 40‑45.

Note 2: The application of this Division to a life insurance company is affected by sections 320‑200 and 320‑255.

Subdivision 40‑B—Core provisions

Guide to Subdivision 40‑B

40‑20 What this Subdivision is about

The rules that apply to most depreciating assets are in this Subdivision. It explains:

• what a depreciating asset is; and

• when you start deducting amounts for depreciating assets; and

• how to work out your deductions.

It also contains rules for splitting and merging depreciating assets.

Table of sections

Operative provisions

40‑25 Deducting amounts for depreciating assets

40‑27 Further reduction of deduction for second‑hand assets in residential property

40‑30 What a depreciating asset is

40‑35 Jointly held depreciating assets

40‑40 Meaning of hold a depreciating asset

40‑45 Assets to which this Division does not apply

40‑50 Assets for which you deduct under another Subdivision

40‑53 Alterations etc. to certain depreciating assets

40‑55 Use of the “cents per kilometre” car expense deduction method

40‑60 When a depreciating asset starts to decline in value

40‑65 Choice of methods to work out the decline in value

40‑70 Diminishing value method

40‑72 Diminishing value method for post‑9 May 2006 assets

40‑75 Prime cost method

40‑80 When you can deduct the asset’s cost

40‑82 Assets costing less than $30,000—medium sized businesses—income years ending between 2 April 2019 and 30 June 2020

40‑85 Meaning of adjustable value and opening adjustable value of a depreciating asset

40‑90 Debt forgiveness

40‑95 Choice of determining effective life

40‑100 Commissioner’s determination of effective life

40‑102 Capped life of certain depreciating assets

40‑103 Effective life and remaining effective life of certain vessels

40‑105 Self‑assessing effective life

40‑110 Recalculating effective life

40‑115 Splitting a depreciating asset

40‑120 Replacement spectrum licences

40‑125 Merging depreciating assets

40‑130 Choices

40‑135 Certain anti‑avoidance provisions

40‑140 Getting tax information from associates

Operative provisions

40‑25 Deducting amounts for depreciating assets

You deduct the decline in value

(1) You can deduct an amount equal to the decline in value for an income year (as worked out under this Division) of a *depreciating asset that you *held for any time during the year.

Note 1: Sections 40‑70, 40‑72 and 40‑75 show you how to work out the decline for most depreciating assets. There is a limit on the decline: see subsections 40‑70(3), 40‑72(3) and 40‑75(7).

Note 2: Small business entities can choose to both deduct and work out the amount they can deduct under Division 328.

Note 3: Generally, only one taxpayer can deduct amounts for a depreciating asset. However, if you and another taxpayer jointly hold the asset, each of you deduct amounts for it: see section 40‑35.

Reduction of deduction

(2) You must reduce your deduction by the part of the asset’s decline in value that is attributable to your use of the asset, or your having it *installed ready for use, for a purpose other than a *taxable purpose.

Example: Ben holds a depreciating asset that he uses for private purposes for 30% of his total use in the income year.

If the asset declines by $1,000 for the year, Ben would have to reduce his deduction by $300 (30% of $1,000).

Note: You may have to make a further reduction under subsections (3) and (4) or section 40‑27.

Further reduction: leisure facilities

(3) You may have to make a further reduction for a *depreciating asset that is a *leisure facility attributable to your use of it, or your having it *installed ready for use, for a *taxable purpose.

(4) That reduction is the part of the *leisure facility’s decline in value that is attributable to your use of it, or your having it *installed ready for use, at a time when:

(a) its use did not constitute a *fringe benefit; or

(b) you did not use it or *hold it for use as mentioned in paragraph 26‑50(3)(b) (about using it in the course of your business or for your employees).

Exception: low‑value pools

(5) Subsections (2), (3) and (4) do not apply to *depreciating assets allocated to a low‑value pool.

Despite subsection (1), you can continue to deduct an amount equal to the decline in value for an income year (as worked out under this Division) of such an asset even though you do not continue to *hold that asset.

Note: See Subdivision 40‑E for low‑value pools.

Meaning of taxable purpose

(7) Subject to subsection (8), a taxable purpose is:

(a) the *purpose of producing assessable income; or

(b) the purpose of *exploration or prospecting; or

(d) *environmental protection activities.

Note 1: Where you have had a deduction under this Division an amount may be included in your assessable income if the expenditure was financed by limited recourse debt that has terminated: see Division 243.

Note 2: When this Division notionally applies under section 355‑310 (about depreciating assets used for R&D activities), the taxable purpose is sometimes only the purpose of conducting R&D activities.

(8) If Division 250 applies to you and an asset that is a *depreciating asset:

(a) if section 250‑150 applies—you are taken not to be using the asset for a *taxable purpose to the extent of the *disallowed capital allowance percentage; or

(b) otherwise—you are taken not to be using the asset for such a purpose.

40‑27 Further reduction of deduction for second‑hand assets in residential property

(1) In addition to subsections 40‑25(2) to (4), you may have to further reduce your deduction for a *depreciating asset for the income year.

(2) Reduce your deduction by any part of the asset’s decline in value that is attributable to your use of it, or your having it *installed ready for use, for the *purpose of producing assessable income:

(a) from the use of *residential premises to provide residential accommodation; but

(b) not in the course of carrying on a *business;

if:

(c) you did not *hold the asset when it was first used, or first installed ready for use, (other than as trading stock) by any entity; or

(d) at any time during the income year or an earlier income year, the asset was used, or installed ready for use, either:

(i) in residential premises that were one of your residences at that time; or

(ii) for a purpose that was not a *taxable purpose, and in a way that was not occasional.

Note: Your deduction could be reduced to nil if the purpose to which paragraphs (a) and (b) relate is your only taxable purpose for using the asset or having the asset installed ready for use.

Exception—kind of entity

(3) Subsection (2) does not apply to you for the asset if, at any time during the income year, you are:

(a) a *corporate tax entity; or

(b) a *superannuation plan that is not a *self managed superannuation fund; or

(d) a public unit trust (within the meaning of section 102P of the Income Tax Assessment Act 1936); or

(e) a unit trust or partnership, if each *member of the trust or partnership is covered by a paragraph of this subsection at that time during the income year.

Exception—certain assets in new residential premises

(4) Paragraph (2)(c) does not apply to you for the asset if:

(a) the *residential premises referred to in paragraph (2)(a) (the current premises) are supplied to you as new residential premises on a particular day (the current supply day); and

(b) the asset is supplied to you as part of that supply of the current premises; and

(c) at the time you first *hold the asset as a result of that supply, the asset is used, or *installed ready for use, in:

(i) the current premises; or

(ii) any other real property in which an interest was supplied to you as part of that supply of the current premises; and

(d) at any earlier time, no entity was residing in any residential premises in which the asset was used, or installed ready for use, at that earlier time; and

(e) no amount can be deducted under this Division, or under Subdivision 328‑D, for the asset for any income year by any previous holder of the asset.

Note: An entity residing at an earlier time in other residential premises in the same complex will not cause paragraph (d) to prevent this subsection from applying.

(5) However, disregard paragraph (4)(d) for an earlier time if:

(a) the asset was used, or installed ready for use, in the current premises at that time; and

(b) both that time, and the current supply, happen during the 6‑month period starting on the day the current premises became new residential premises.

Exception—low‑value pools

(6) Subsection (2) does not apply to *depreciating assets allocated to a low‑value pool.

Note: See Subdivision 40‑E for low‑value pools.

40‑30 What a depreciating asset is

(1) A depreciating asset is an asset that has a limited *effective life and can reasonably be expected to decline in value over the time it is used, except:

(a) land; or

(b) an item of *trading stock; or

(2) These intangible assets are depreciating assets if they are not *trading stock:

(a) *mining, quarrying or prospecting rights;

(b) *mining, quarrying or prospecting information;

(d) *in‑house software;

(e) *IRUs;

(f) *spectrum licences;

(g) *datacasting transmitter licences;

(h) *telecommunications site access rights.

(3) This Division applies to an improvement to land, or a fixture on land, whether the improvement or fixture is removable or not, as if it were an asset separate from the land.

Note 1: Whether such an asset is a depreciating asset depends on whether it falls within the definition in subsection (1).

Note 2: This Division does not apply to capital works for which you can deduct amounts under Division 43: see subsection 40‑45(2).

(4) Whether a particular composite item is itself a depreciating asset or whether its components are separate depreciating assets is a question of fact and degree which can only be determined in the light of all the circumstances of the particular case.

Example 1: A car is made up of many separate components, but usually the car is a depreciating asset rather than each component.

Example 2: A floating restaurant consists of many separate components (like the ship itself, stoves, fridges, furniture, crockery and cutlery), but usually these components are treated as separate depreciating assets.

(5) This Division applies to a renewal or extension of a *depreciating asset that is a right as if the renewal or extension were a continuation of the original right.

(6) This Division applies to a *mining, quarrying or prospecting right (the new right) as if it were a continuation of another mining, quarrying or prospecting right you *held if:

(a) the other right ends; and

(b) the new right and the other right relate to the same area, or any difference in area is not significant.

40‑35 Jointly held depreciating assets

(1) This Division and Divisions 41, 328 and 775 apply to a *depreciating asset (the underlying asset) that you *hold, and that is also held by one or more other entities, as if your interest in the underlying asset were itself the underlying asset.

Note: Partners do not hold partnership assets: see section 40‑40.

(2) As a result, the decline in value of the underlying asset is not itself taken into account.

Example: Buford Corp owns an office block that it leases to 2 companies, Smokey Pty Ltd and Bandit Pty Ltd. Smokey and Bandit decide to install a fountain in front of the building.

They discuss it with Buford who agrees to pay half the cost (because the fountain won’t be removable at the end of the lease). Smokey and Bandit split the rest of the cost between them.

Smokey and Bandit would each hold the asset under item 3 of the table in section 40‑40 and Buford would hold it under item 10. They would be joint holders, so each would write‑off its interest in the fountain.

40‑40 Meaning of hold a depreciating asset

Use this table to work out who holds a *depreciating asset. An entity identified in column 3 of an item in the table as not holding a depreciating asset cannot hold the asset under another item.

Identifying the holder of a depreciating asset
Item	This kind of depreciating asset:	Is held by this entity:
1	A car in respect of which a lease has been granted that was a luxury car when the lessor first leased it	The lessee (while the lessee has the *right to use the car) and not the lessor
2	A depreciating asset that is fixed to land subject to a quasi‑ownership right (including any extension or renewal of such a right) where the owner of the right has a right to remove the asset	The owner of the quasi‑ownership right (while the right to remove exists)
3	An improvement to land (whether a fixture or not) subject to a *quasi‑ownership right (including any extension or renewal of such a right) made, or itself improved, by any owner of the right for the owner’s own use where the owner of the right has no right to remove the asset	The owner of the quasi‑ownership right (while it exists)
4	A *depreciating asset that is subject to a lease where the asset is fixed to land and the lessor has the right to recover the asset	The lessor (while the right to recover exists)
5	A right that an entity legally owns but which another entity (the economic owner) exercises or has a right to exercise immediately, where the economic owner has a right to become its legal owner and it is reasonable to expect that: (a) the economic owner will become its legal owner; or (b) it will be disposed of at the direction and for the benefit of the economic owner	The economic owner and not the legal owner
6	A *depreciating asset that an entity (the former holder) would, apart from this item, hold under this table (including by another application of this item) where a second entity (also the economic owner): (a) possesses the asset, or has a right as against the former holder to possess the asset immediately; and (b) has a right as against the former holder the exercise of which would make the economic owner the holder under any item of this table; and it is reasonable to expect that the economic owner will become its holder by exercising the right, or that the asset will be disposed of at the direction and for the benefit of the economic owner	The economic owner and not the former holder
7	A *depreciating asset that is a partnership asset	The partnership and not any particular partner
8	Mining, quarrying or prospecting information that an entity has and that is relevant to: (a) mining and quarrying operations carried on, or proposed to be carried on by the entity; or (b) a business carried on by the entity that includes exploration or prospecting for *minerals or quarry materials obtainable by such operations; whether or not it is generally available	The entity
9	Other *mining quarrying or prospecting information that an entity has and that is not generally available	The entity
10	Any *depreciating asset	The owner, or the legal owner if there is both a legal and equitable owner

Example 1: Power Finance leases a luxury car to Kris who subleases it to Rachael. As lessee, item 1 makes Rachael the holder of the car. Power, as the legal owner, would normally hold the car under item 10.

However, item 1 makes it clear that Power, as lessor, does not hold the car. As the lessee, item 1 would normally mean that Kris held the car but, again, she is also a lessor and so is not the holder (she also doesn’t have the right to use the car during the sublease).

Example 2: Sandra sells a packing machine to Jenny under a hire purchase agreement. Jenny holds the machine under item 6 because, although she is not the legal owner until she exercises her option to purchase, she possesses the machine now and can exercise an option to become its legal owner.

Jenny is reasonably expected to exercise that option because the final payment will be well below the expected market value of the machine at the end of the agreement. Sandra, as the machine’s legal owner, would normally be its holder under item 10 but item 6 makes it clear that the legal owner is not the holder.

Note 1: Some assets may have holders under more than one item in the table.

Note 2: As well as hire purchase agreements, items 5 and 6 cover cases like assets subject to chattel mortgages, sales subject to retention of title clauses and assets subject to bare trusts.

40‑45 Assets to which this Division does not apply

Eligible work related items

(1) This Division does not apply to an asset that is an eligible work related item for the purposes of section 58X of the Fringe Benefits Tax Assessment Act 1986 where the relevant benefit provided by the employer is an expense payment benefit or a property benefit (within the meaning of that Act).

Capital works

(2) This Division does not apply to capital works for which you can deduct amounts under Division 43, or for which you could deduct amounts under that Division:

(a) but for expenditure being incurred, or capital works being started, before a particular day; or

(b) had you used the capital works for a purpose relevant to those capital works under section 43‑140.

Note: Section 43‑20 lists the capital works to which that Division applies.

Films

(5) This Division does not apply to a *depreciating asset if you or another taxpayer has deducted or can deduct amounts for it under:

(a) former Division 10BA of Part III of the Income Tax Assessment Act 1936 (about Australian films); or

(b) former Division 10B of Part III of that Act if the depreciating asset relates to a copyright in an Australian film within the meaning of that Division.

(6) This Division applies to a *depreciating asset that is copyright in a *film where a company is entitled to a *tax offset under section 376‑55 in respect of the film as if the asset’s *cost were reduced by the amount of that offset.

40‑50 Assets for which you deduct under another Subdivision

(1) You cannot deduct an amount, or work out a decline in value, for a *depreciating asset under this Subdivision if you or another taxpayer has deducted or can deduct amounts for it under Subdivision 40‑F (about primary production depreciating assets), 40‑G (about capital expenditure of primary producers and other landholders) or 40‑J (about capital expenditure for the establishment of trees in carbon sink forests).

(2) You cannot deduct an amount, or work out a decline in value, for *in‑house software under this Subdivision if you have allocated expenditure on the software to a software development pool under Subdivision 40‑E.

40‑53 Alterations etc. to certain depreciating assets

(1) These things are not the same *depreciating asset for the purposes of section 40‑50 and Subdivision 40‑F:

(a) a depreciating asset; and

(b) a repair of a capital nature, or an alteration, addition or extension, to that asset that would, if it were a separate depreciating asset, be a *water facility, *fodder storage asset or *fencing asset.

(2) These things are not the same *depreciating asset for the purposes of section 40‑50 and Subdivision 40‑G:

(a) a depreciating asset; and

(b) a repair of a capital nature, or an alteration, addition or extension, to that asset that would, if it were a separate depreciating asset, be a *landcare operation.

40‑55 Use of the “cents per kilometre” car expense deduction method

You cannot deduct any amount for the decline in value of a *car for an income year if you use the “cents per kilometre” method for the car for that year.

Note: See Subdivision 28‑C for that method.

40‑60 When a depreciating asset starts to decline in value

(1) A *depreciating asset you *hold starts to decline in value from when its *start time occurs.

(2) The start time of a *depreciating asset is when you first use it, or have it *installed ready for use, for any purpose.

Note: Previous use by a transition entity is ignored: see section 58‑70.

(3) However, there is another start time for a *depreciating asset you *hold if a *balancing adjustment event referred to in paragraph 40‑295(1)(b) occurs for the asset and you start to use the asset again. Its second start time is when you start using it again.

40‑65 Choice of methods to work out the decline in value

(1) You have a choice of 2 methods to work out the decline in value of a *depreciating asset. You must choose to use either the *diminishing value method or the *prime cost method.

Note 1: Once you make the choice for an asset, you cannot change it: see section 40‑130.

Note 2: For the diminishing value method, see sections 40‑70 and 40‑72. For the prime cost method, see section 40‑75.

Note 3: In some cases you do not have to make the choice because you can deduct the asset’s cost: see sections 40‑80 and 40‑82.

Exception: asset acquired from associate

(2) For a *depreciating asset that you acquire from an *associate of yours where the associate has deducted or can deduct an amount for the asset under this Division, you must use the same method that the associate was using.

Note: You can require the associate to tell you which method the associate was using: see section 40‑140.

Exception: holder changes but user same or associate of former user

(3) For a *depreciating asset that you acquire from a former *holder of the asset, you must use the same method that the former holder was using for the asset if:

(a) the former holder or another entity (each of which is the former user) was using the asset at a time before you became the holder; and

(b) while you hold the asset, the former user or an *associate of the former user uses the asset.

(4) However, you must use the *diminishing value method if:

(a) you do not know, and cannot readily find out, which method the former holder was using; or

(b) the former holder did not use a method.

Exception: low‑value pools

(5) You work out the decline in value of a *depreciating asset in a low‑value pool under Subdivision 40‑E rather than under this Subdivision.

Exception: also notionally deductible under R&D provisions

(6) If:

(a) only one of the following events has happened:

(i) you have deducted one or more amounts under this Division for an asset;

(ii) you have been entitled under section 355‑100 (about R&D) to one or more *tax offsets because you can deduct one or more amounts under section 355‑305 for an asset; but

(b) later, the other event happens for the asset;

then, for the purposes of working out the deduction for the later event, you must choose the same method that you chose for the first event.

Note 1: Deductions under section 355‑305 (about decline in value of tangible depreciating assets used for R&D activities) are worked out using a notional application of this Division.

Note 2: This subsection applies with changes if you have or could have deducted an amount under former section 73BA of the Income Tax Assessment Act 1936 for the asset (see section 40‑67 of the Income Tax (Transitional Provisions) Act 1997).

(7) If:

(a) the events in paragraph (6)(a) could both arise for the same period for an asset; and

(b) neither event has already arisen for the asset;

then you must choose the same method for the purposes of working out the deduction for each event.

40‑70 Diminishing value method

(1) You work out the decline in value of a *depreciating asset for an income year using the diminishing value method in this way:

where:

base value is:

(a) for the income year in which the asset’s *start time occurs—its *cost; or

(b) for a later year—the sum of its *opening adjustable value for that year and any amount included in the second element of its cost for that year.

days held is the number of days you *held the asset in the income year from its *start time, ignoring any days in that year when you did not use the asset, or have it *installed ready for use, for any purpose.

Note 1: If you recalculate the effective life of a depreciating asset, you use that recalculated life in working out your deduction.

You can choose to recalculate effective life because of changed circumstances: see section 40‑110. That section also requires you to recalculate effective life in some cases.

Note 2: The effective life of a vessel can change in some cases: see subsection 40‑103(2).

Exception: intangibles

(2) You cannot use the *diminishing value method to work out the decline in value of:

(a) *in‑house software; or

(b) an item of *intellectual property (except copyright in a *film); or

(d) a *datacasting transmitter licence; or

(e) a *telecommunications site access right.

Limit on decline

(3) The decline in value of a *depreciating asset under this section for an income year cannot be more than the amount that is the asset’s *base value for that income year.

40‑72 Diminishing value method for post‑9 May 2006 assets

(1) You work out the decline in value of a *depreciating asset for an income year using the diminishing value method in this way if you started to *hold the asset on or after 10 May 2006:

where:

days held has the same meaning as in subsection 40‑70(1).

Note: If you recalculate the effective life of a depreciating asset, you use that recalculated life in working out your deduction.

You can choose to recalculate effective life because of changed circumstances: see section 40‑110. That section also requires you to recalculate effective life in some cases.

Exception: intangibles

(2) You cannot use the *diminishing value method to work out the decline in value of:

(a) *in‑house software; or

(b) an item of *intellectual property (except copyright in a *film); or

(d) a *datacasting transmitter licence; or

(e) a *telecommunications site access right.

Limit on decline

(3) The decline in value of a *depreciating asset under this section for an income year cannot be more than the amount that is the asset’s *base value for that income year.

40‑75 Prime cost method

(1) You work out the decline in value of a *depreciating asset for an income year using the prime cost method in this way:

where:

days held has the same meaning as in subsection 40‑70(1).

Example: Greg acquires an asset for $3,500 and first uses it on the 26th day of the income year. If the effective life of the asset is 31/3 years, the asset would decline in value in that year by:

The asset’s adjustable value at the end of the income year is:

(2) However, you must adjust the formula in subsection (1) for an income year (the change year):

(a) for which you recalculate the *depreciating asset’s *effective life; or

(b) after the year in which the asset’s start time occurs and in which an amount is included in the second element of the asset’s *cost; or

(d) in which the *remaining effective life of the asset is calculated under section 40‑103; or

(e) for which there is a reduction to the asset’s opening adjustable value under paragraph 40‑365(5)(b) (about involuntary disposals) where you are using the prime cost method; or

(f) for which the opening adjustable value of the asset is modified under subsection 27‑80(3A) or (4), 27‑85(3) or 27‑90(3); or

(g) for which there is a reduction in the asset’s opening adjustable value under section 775‑70; or

(h) for which there is an increase in the asset’s opening adjustable value under section 775‑75.

The adjustments apply for the change year and later years.

Note 1: For recalculating a depreciating asset’s effective life: see section 40‑110.

Note 2: You may also adjust the formula for an income year if you had undeducted core technology expenditure for the asset at the end of your last income year commencing before 1 July 2011 (see section 355‑605 of the Income Tax (Transitional Provisions) Act 1997).

(3) The adjustments are:

(a) instead of the asset’s *cost, you use its *opening adjustable value for the change year plus the amounts (if any) included in the second element of its cost for that year; and

(b) instead of the asset’s *effective life, you use its *remaining effective life.

(4) The remaining effective life of a *depreciating asset is any period of its *effective life that is yet to elapse as at:

(a) the start of the change year; or

(b) in the case of a roll‑over under section 40‑340—the time when the *balancing adjustment event occurs for the transferor.

Note: Effective life is worked out in years and fractions of years.

(5) You must also adjust the formula in subsection (1) for an intangible *depreciating asset that:

(a) is mentioned in an item in the table in subsection 40‑95(7) (except item 5, 7 or 8); and

(b) you acquire from a former *holder of the asset.

The adjustment applies for the income year in which you acquire the asset and later income years.

(6) Instead of the asset’s *effective life under the table in subsection 40‑95(7), you use the number of years remaining in that effective life as at the start of the income year in which you acquire the asset.

Limit on decline

(7) The decline in value of a *depreciating asset under this section for an income year cannot be more than:

(a) for the income year in which the asset’s *start time occurs—its *cost; or

(b) for a later year—the sum of its *opening adjustable value for that year and any amount included in the second element of its cost for that year.

40‑80 When you can deduct the asset’s cost

Exploration or prospecting

(1) The decline in value of a *depreciating asset you *hold is the asset’s *cost if:

(a) you first use the asset for *exploration or prospecting for *minerals, or quarry materials, obtainable by *mining and quarrying operations; and

(b) when you first use the asset, you do not use it for:

(i) development drilling for *petroleum; or

(ii) operations in the course of working a mining property, quarrying property or petroleum field; and

(i) you carry on mining and quarrying operations;

(ii) it would be reasonable to conclude you proposed to carry on such operations;

(iii) you carry on a *business of, or a business that included, exploration or prospecting for minerals or quarry materials obtainable by such operations, and expenditure on the asset was necessarily incurred in carrying on that business; and

(d) in a case where the asset is a *mining, quarrying or prospecting right—you acquired the asset from an *Australian government agency or a *government entity; and

(e) in a case where the asset is *mining, quarrying or prospecting information:

(i) you acquired the asset from an Australian government agency or a government entity; or

(ii) the asset is a geophysical or geological data package you acquired from an entity to which subsection (1AA) applies; or

(iii) you created the asset, or contributed to the cost of its creation; or

(iv) you caused the asset to be created, or contributed to the cost of it being created, by an entity to which subsection (1AA) applies.

(1AA) This subsection applies to an entity if, at the time of the acquisition referred to in subparagraph (1)(e)(ii) or the creation referred to in subparagraph (1)(e)(iv), the entity predominantly carries on a *business of providing *mining, quarrying or prospecting information to other entities that:

(a) carry on *mining and quarrying operations; or

(b) it would be reasonable to conclude propose to carry on such operations; or

(c) carry on a business of, or a business that included, *exploration or prospecting for *minerals or quarry materials obtainable by such operations.

(1AB) If an amount is included in the second element of the *cost of a *depreciating asset, subsection (1) applies in relation to that amount only if:

(a) your first use of the asset, after the inclusion of the amount in the second element, is for *exploration or prospecting for *minerals, or quarry materials, obtainable by *mining and quarrying operations; and

(b) at the time of that first use:

(i) you satisfy paragraph (1)(b) as if that first use was your first use of the asset; and

(ii) you satisfy paragraph (1)(c) as if the time of that first use was the asset’s *start time; and

(c) if the amount relates to a *mining, quarrying or prospecting right—after the inclusion of the amount in the second element, you satisfy paragraph (1)(d) in relation to the right; and

(d) if the amount relates to *mining, quarrying or prospecting information—after the inclusion of the amount in the second element:

(i) you satisfy paragraph (1)(e) in relation to the information; or

(ii) you would satisfy that paragraph, in relation to the economic benefit that resulted in the inclusion of the amount in the second element, if that economic benefit were the asset referred to in that paragraph.

(1AC) If subsection (1) does not apply to a *depreciating asset:

(a) the fact that subsection (1) does not apply to the asset does not prevent the application of subsection (1AB) to an amount included in the second element of the *cost of the asset; but

(b) subsection (1) only affects the asset’s decline in value to the extent that the asset’s cost consists of that amount.

Depreciating assets used for certain purposes

(2) The decline in value of a *depreciating asset you start to *hold in an income year is the asset’s *cost if:

(a) that cost does not exceed $300; and

(b) you use the asset predominantly for the *purpose of producing assessable income that is not income from carrying on a *business; and

(c) the asset is not one that is part of a set of assets that you started to hold in that income year where the total cost of the set of assets exceeds $300; and

(d) the total cost of the asset and any other identical, or substantially identical, asset that you start to hold in that income year does not exceed $300.

40‑82 Assets costing less than $30,000—medium sized businesses—income years ending between 2 April 2019 and 30 June 2020

Year in which asset first used, or installed ready for use, for a taxable purpose

(1) The decline in value of a *depreciating asset you *hold for the income year (the current year) in which you start to use the asset, or have it *installed ready for use, for a *taxable purpose is the amount worked out under subsection (2) if:

(a) you are an entity covered by subsection (4) (about medium sized businesses) for the current year and for the income year in which you started to hold the asset; and

(b) you first acquired the asset in the period beginning at 7.30 pm, by legal time in the Australian Capital Territory, on 2 April 2019 and ending on 30 June 2020; and

(i) on or after 2 April 2019; and

(ii) on or before 30 June 2020; and

(d) the asset is a depreciating asset whose *cost as at the end of the current year is less than $30,000.

Note: The amount you can deduct may be reduced by other provisions, such as subsection 40‑25(2) (about taxable purpose) and section 40‑215 (about double deductions).

(2) The amount is:

(a) unless paragraph (b) applies—the asset’s *cost as at the end of the current year; or

(b) if the asset’s *start time occurred in an earlier income year—the sum of the asset’s *opening adjustable value for the current year and any amount included in the second element of its cost for the current year.

Later year

(3) The decline in value of a *depreciating asset you *hold for an income year (the later year) is the first amount included in the second element of the asset’s *cost for the later year if:

(a) you are an entity covered by subsection (4) (about medium sized businesses) for the later year; and

(b) the amount so included is less than $30,000; and

(d) the later year ends:

(i) on or after 2 April 2019; and

(ii) on or before 30 June 2020.

Note: The amount you can deduct may be reduced by other provisions, such as subsection 40‑25(2) (about taxable purpose) and section 40‑215 (about double deductions).

Medium sized business

(4) An entity is covered by this subsection for an income year if:

(a) the entity is not a *small business entity for the income year; and

(b) the entity would be a small business entity for the income year if:

(i) each reference in Subdivision 328‑C (about what is a small business entity) to $10 million were instead a reference to $50 million; and

(ii) the reference in paragraph 328‑110(5)(b) to a small business entity were instead a reference to an entity covered by this subsection.

Years ending after 30 June 2020

(5) For an income year ending after 30 June 2020, the asset’s decline in value is worked out under the other provisions of this Division.

40‑85 Meaning of adjustable value and opening adjustable value of a depreciating asset

(1) The adjustable value of a *depreciating asset at a particular time is:

(a) if you have not yet used it or had it *installed ready for use for any purpose—its *cost; or

(b) for a time in the income year in which you first use it, or have it installed ready for use, for any purpose—its cost less its decline in value up to that time; or

(c) for a time in a later income year—the sum of its *opening adjustable value for that year and any amount included in the second element of its cost for that year up to that time, less its decline in value for that year up to that time.

Note: The adjustable value of a depreciating asset may be modified by section 250‑285.

(2) The opening adjustable value of a *depreciating asset for an income year is its *adjustable value to you at the end of the previous income year.

Note: The opening adjustable value of a depreciating asset may be modified by one of these provisions:

(a) Subdivision 27‑B;

(b) subsection 40‑90(3);

(d) paragraph 40‑365(5)(b);

(e) section 775‑70;

(f) section 775‑75;

(g) section 355‑605 of the Income Tax (Transitional Provisions) Act 1997.

40‑90 Debt forgiveness

(1) This section applies if an amount (the debt forgiveness amount) is applied in reduction of expenditure for a *depreciating asset in an income year under section 245‑155 or 245‑157.

(2) The asset’s *cost is reduced for that income year by the debt forgiveness amount.

(3) The asset’s *opening adjustable value for that income year is reduced by the debt forgiveness amount if that income year is later than the one in which its *start time occurs.

40‑95 Choice of determining effective life

(1) You must choose either:

(a) to use an *effective life determined by the Commissioner for a *depreciating asset under section 40‑100; or

(b) to work out the effective life of the asset yourself under section 40‑105.

Note: If you choose to use an effective life determined by the Commissioner for a depreciating asset, a capped life may apply to the asset under section 40‑102.

(2) Your choice of an *effective life determined by the Commissioner for a *depreciating asset is limited to one in force as at:

(a) the time when you entered into a contract to acquire the asset, you otherwise acquired it or you started to construct it if its *start time occurs within 5 years of that time; or

(b) for *plant that you entered into a contract to acquire, you otherwise acquired or you started to construct before 11.45 am, by legal time in the Australian Capital Territory, on 21 September 1999—the time when you entered into the contract to acquire it, otherwise acquired it or started to construct it; or

(3) You must make the choice for the income year in which the asset’s *start time occurs.

Note: For rules about choices: see section 40‑130.

Exception: asset acquired from associate

(4) For a *depreciating asset that you start to *hold where the former holder is an *associate of yours and the associate has deducted or can deduct an amount for the asset under this Division, you must use:

(a) if the associate was using the *diminishing value method for the asset—the same *effective life that the associate was using; or

(b) if the associate was using the *prime cost method—an effective life equal to any period of the asset’s effective life the associate was using that is yet to elapse at the time you started to hold it.

Note: You can require the associate to tell you which effective life the associate was using: see section 40‑140.

(4A) Subsection (4) does not apply to a *depreciating asset if subsection (4B) or (4C) applies to the asset.

(4B) For a *depreciating asset that you start to *hold if:

(a) the former holder is an *associate of yours; and

(b) the associate has deducted or can deduct an amount for the asset under this Division; and

(c) section 40‑102 applied to the asset immediately before you started to hold it because an item in the tables in subsections 40‑102(4) and (5) applied to it at the relevant time (the relevant time for the associate) that applied to the associate under subsection 40‑102(3); and

(d) a different item in the tables in subsections 40‑102(4) and (5) applies to the asset when you start to hold it; and

(e) the item referred to in paragraph (d) would have applied to the asset at the relevant time for the associate if the use to which the asset were put at that time were the use (the new use) to which it is put when you start to hold it;

you must use:

(f) if the associate was using the *diminishing value method for the asset—an *effective life equal to the *capped life that would have applied to the asset under subsection 40‑102(4) or (5) at the relevant time for the associate if the use to which the asset were put at that time were the new use; or

(g) if the associate was using the *prime cost method—an effective life equal to the capped life that:

(i) would have applied to the asset under subsection 40‑102(4) or (5) at the relevant time for the associate if the use to which the asset were put at that time were the new use; and

(ii) is yet to elapse at the time you start to hold it.

Note 1: If paragraph (e) is not satisfied, subsection (4C) may apply to the depreciating asset.

Note 2: You can require the associate to tell you the relevant time that applied to the associate under subsection 40‑102(3): see section 40‑140.

(4C) For a *depreciating asset that you start to *hold if:

(a) the former holder is an *associate of yours; and

(b) the associate has deducted or can deduct an amount for the asset under this Division; and

(d) one of the following applies:

(i) no item in the tables in subsections 40‑102(4) and (5) applies to the asset when you start to hold it;

(ii) subsection (4B) would apply to the asset but for paragraph (e) of that subsection not being satisfied;

you must use:

(e) if the associate was using the *diminishing value method for the asset—the *effective life determined by the Commissioner for the asset under section 40‑100 that the associate would have used if section 40‑102 had not applied to the asset; or

(f) if the associate was using the *prime cost method—an effective life equal to any period of the effective life determined by the Commissioner for the asset under section 40‑100 that:

(i) the associate would have used if section 40‑102 had not applied to the asset; and

(ii) is yet to elapse at the time you start to hold it.

Note: You can require the associate to tell you which effective life the associate would have used if section 40‑102 had not applied to the asset: see section 40‑140.

Exception: holder changes but user same or associate of former user

(5) For a *depreciating asset that you start to *hold where:

(a) the former holder or another entity (each of which is the former user) was using the asset at a time before you became the holder; and

(b) while you hold the asset, the former user or an *associate of the former user uses the asset;

you must use:

(c) if the former holder was using the *diminishing value method for the asset—the same *effective life that the former holder was using; or

(d) if the former holder was using the *prime cost method—an effective life equal to any period of the asset’s effective life the former holder was using that is yet to elapse at the time you started to hold it.

(5A) Subsection (5) does not apply to a *depreciating asset if subsection (5B) or (5C) applies to the asset.

(5B) For a *depreciating asset that you start to *hold if:

(a) paragraphs (5)(a) and (b) apply; and

(b) section 40‑102 applied to the asset immediately before you started to hold it because an item in the tables in subsections 40‑102(4) and (5) applied to it at the relevant time (the relevant time for the former holder) that applied to the former holder under subsection 40‑102(3); and

(d) the item referred to in paragraph (c) would have applied to the asset at the relevant time for the former holder if the use to which the asset were put at that time were the use (the new use) to which it is put when you start to hold it;

you must use:

(e) if the former holder was using the *diminishing value method for the asset—an *effective life equal to the *capped life that would have applied to the asset under subsection 40‑102(4) or (5) at the relevant time for the former holder if the use to which the asset were put at that time were the new use; or

(f) if the former holder was using the *prime cost method—an effective life equal to the capped life that:

(i) would have applied to the asset under subsection 40‑102(4) or (5) at the relevant time for the former holder if the use to which the asset were put at that time were the new use; and

(ii) is yet to elapse at the time you start to hold it.

Note: If paragraph (d) is not satisfied, subsection (5C) may apply to the depreciating asset.

(5C) For a *depreciating asset that you start to *hold if:

(a) paragraphs (5)(a) and (b) apply; and

(b) section 40‑102 applied to the asset immediately before you started to hold it; and

(i) no item in the tables in subsections 40‑102(4) and (5) applies to the asset when you start to hold it;

(ii) subsection (5B) would apply to the asset but for paragraph (d) of that subsection not being satisfied;

you must use:

(d) if the former holder was using the *diminishing value method for the asset—the *effective life determined by the Commissioner for the asset under section 40‑100 that the former holder would have used if section 40‑102 had not applied to the asset; or

(e) if the former holder was using the *prime cost method—an effective life equal to any period of the effective life determined by the Commissioner for the asset under section 40‑100 that:

(i) the former holder would have used if section 40‑102 had not applied to the asset; and

(ii) is yet to elapse at the time you start to hold it.

(6) However, you must use an *effective life determined by the Commissioner if:

(a) you do not know, and cannot readily find out, which effective life the former holder was using and, if subsection (5B) or (5C) applied to the asset, either of the following matters:

(i) the effective life the former holder would have used if section 40‑102 had not applied to the asset;

(ii) the relevant time that applied to the former holder under subsection 40‑102(3); or

(b) the former holder did not use an effective life.

Exception: intangible depreciating assets

(7) The effective life of an intangible *depreciating asset mentioned in this table is the period applicable to that asset under the table.

Effective life of certain intangible depreciating assets
Item	For this asset:	The effective life is:
1	Standard patent	20 years
2	Innovation patent	8 years
3	Petty patent	6 years
4	Registered design	15 years
5	Copyright (except copyright in a *film)	The shorter of: (a) 25 years from when you acquire the copyright; or (b) the period until the copyright ends
6	A licence (except one relating to a copyright or *in‑house software)	The term of the licence
7	A licence relating to a copyright (except copyright in a *film)	The shorter of: (a) 25 years from when you become the licensee; or (b) the period until the licence ends
8	*In‑house software	5 years
9	*Spectrum licence	The term of the licence
10	*Datacasting transmitter licence	15 years
14	*Telecommunications site access right	The term of the right

(8) The effective life of an intangible *depreciating asset that is not mentioned in the table in subsection (7) and is not an *IRU or a *mining, quarrying or prospecting right cannot be longer than the term of the asset as extended by any reasonably assured extension or renewal of that term.

(9) The effective life of an *IRU is the *effective life of the telecommunications cable over which the IRU is granted.

Exceptions: mining, quarrying or prospecting rights and mining, quarrying or prospecting information

(10) Subject to subsection (12), the effective life of:

(a) a *mining, quarrying or prospecting right; or

(b) *mining, quarrying or prospecting information;

is the period you work out yourself by estimating the period (in years, including fractions of years) set out in column 2 of this table:

Effective life of certain mining, quarrying or prospecting rights and mining, quarrying or prospecting information
Item	Column 1 For this asset:	Column 2 Estimate the period until the end of:
1	A mining, quarrying or prospecting right, or mining, quarrying or prospecting information, relating to mining and quarrying operations (except obtaining petroleum or quarry materials)	The life of the mine or proposed mine to which the right or information relates or, if there is more than one, the life of the mine that has the longest estimated life
2	A mining, quarrying or prospecting right, or mining, quarrying or prospecting information, relating to mining and quarrying operations to obtain petroleum	The life of the petroleum field or proposed petroleum field to which the right or information relates or, if there is more than one, the life of the petroleum field that has the longest estimated life
3	A mining, quarrying or prospecting right, or mining, quarrying or prospecting information, relating to *mining and quarrying operations to obtain quarry materials	The life of the quarry or proposed quarry to which the right or information relates or, if there is more than one, the life of the quarry that has the longest estimated life

(10A) However, if the only reason that subsection 40‑80(1) does not apply to the *mining, quarrying or prospecting right, or *mining, quarrying or prospecting information, is that the right or information does not meet the requirements of paragraph 40‑80(1)(d) or (e), the effective life of the right or information is the shorter of:

(a) the period that would, apart from this subsection, be the effective life of the information or right under subsection (10); and

(b) 15 years.

(11) You work out the period in subsection (10):

(a) as from the *start time of the *mining, quarrying or prospecting right or *mining, quarrying or prospecting information; and

(b) by reference only to the period of time over which the reserves, reasonably estimated using an appropriate accepted industry practice, are expected to be extracted from the mine, *petroleum field or quarry.

(12) The effective life of a *mining, quarrying or prospecting right, or *mining, quarrying or prospecting information, is 15 years if the right or information does not relate to:

(a) a mine or proposed mine; or

(b) a petroleum field or proposed petroleum field; or

40‑100 Commissioner’s determination of effective life

(1) The Commissioner may make a written determination specifying the effective life of *depreciating assets. The determination may specify conditions for particular depreciating assets.

(2) A determination may specify a day from which it takes effect for *depreciating assets specified in the determination.

(3) A determination may operate retrospectively to a day specified in the determination if:

(a) there was no applicable determination at that day for the *depreciating asset covered by the determination; or

(b) the determination specifies a shorter *effective life for the depreciating asset covered by the determination than was previously applicable.

Criteria for making a determination

(4) The Commissioner is to make a determination of the effective life of a *depreciating asset in accordance with subsections (5) and (6).

(5) Firstly, estimate the period (in years, including fractions of years) the asset can be used by any entity for one or more of the following purposes:

(a) a *taxable purpose;

(b) the purpose of producing *exempt income or *non‑assessable non‑exempt income;

(6) Secondly, if relevant for the asset:

(a) assume the asset will be subject to wear and tear at a rate that is reasonable for the Commissioner to assume; and

(b) assume the asset will be maintained in reasonably good order and condition; and

(c) have regard to the period within which the asset is likely to be scrapped, sold for no more than scrap value or abandoned.

However, for paragraph (c), disregard reasons attributable to the technical risk in conducting *R&D activities if it is reasonably likely that the asset will be used for such activities.

40‑102 Capped life of certain depreciating assets

(1) If this section applies to a *depreciating asset, the effective life of the asset is the period (the capped life) that applies to the asset under subsection (4) or (5) at the relevant time (which is worked out using subsection (3)).

Working out if this section applies

(2) This section applies to a *depreciating asset if:

(a) you choose, under paragraph 40‑95(1)(a), to use an *effective life determined by the Commissioner for the asset under section 40‑100; and

(b) your choice is limited to a determination in force at the time mentioned in paragraph 40‑95(2)(a) or (c); and

(c) a *capped life applies to the asset under subsection (4) or (5) at the relevant time (which is worked out using subsection (3)); and

(d) the capped life is shorter than the effective life mentioned in paragraph (a).

(3) For the purposes of this section, the relevant time is:

(a) the *start time of the *depreciating asset if:

(i) paragraph 40‑95(2)(c) applies to you; or

(ii) paragraph 40‑95(2)(a) applies to you and a *capped life does not apply to the asset under subsection (4) or (5) at the time mentioned in that paragraph; or

(iii) paragraph 40‑95(2)(a) applies to you and the capped life that applies to the asset under subsection (4) or (5) at the time mentioned in that paragraph is longer than the capped life that applies to the asset at its start time; or

(b) if paragraph (a) does not apply—the time mentioned in paragraph 40‑95(2)(a).

Capped life

(4) If the *depreciating asset corresponds exactly to the description in column 2 of the table, the capped life of the asset is the period specified in column 3 of the table.

Capped life of certain depreciating assets
Item	Kind of depreciating asset	Period
1	Aeroplane used predominantly for agricultural spraying or agricultural dusting	8 years
2	Aeroplane to which item 1 does not apply	10 years
3	Helicopter used predominantly for mustering, agricultural spraying or agricultural dusting	8 years
4	Helicopter to which item 3 does not apply	10 years
5	Bus with a *gross vehicle mass of more than 3.5 tonnes	7.5 years
6	Light commercial vehicle with a *gross vehicle mass of 3.5 tonnes or less and designed to carry a load of 1 tonne or more	7.5 years
7	Minibus with a *gross vehicle mass of 3.5 tonnes or less and designed to carry 9 or more passengers	7.5 years
8	Trailer with a *gross vehicle mass of more than 4.5 tonnes	10 years
9	Truck with a gross vehicle mass of more than 3.5 tonnes (other than a truck that is used in mining and quarrying operations and that is not of a kind that can be registered to be driven on a public road in the place in which the truck is operated)	7.5 years
10	Vessel for which you have a certificate under Part 2 of the Shipping Reform (Tax Incentives) Act 2012	10 years

(4A) Item 10 of the table in subsection 40‑102(4) does not apply to a vessel if:

(a) *ordinary income that you *derive, or your *statutory income, in relation to the vessel; or

(b) ordinary income that your *associate derives, or your associate’s statutory income, in relation to the vessel;

is exempt from income tax under section 51‑100 for the income year for which you are working out the vessel’s decline in value.

(5) If the *depreciating asset is of a kind described in column 2 of the table and is used in the industry specified in column 3 of the table for the asset, the capped life of the asset is the period specified in column 4 of the table.

Capped life of certain depreciating assets used in specified industries
Item	Kind of depreciating asset	Industry in which the asset is used	Period
1	Gas transmission asset	Gas supply	20 years
2	Gas distribution asset	Gas supply	20 years
3	Oil production asset (other than an electricity generation asset or an offshore platform)	Oil and gas extraction	15 years
4	Gas production asset (other than an electricity generation asset or an offshore platform)	Oil and gas extraction	15 years
5	Offshore platform	Oil and gas extraction	20 years
6	Asset (other than an electricity generation asset) used to manufacture condensate, crude oil, domestic gas, liquid natural gas or liquid petroleum gas but not if the manufacture occurs in an oil refinery	Petroleum refining	15 years
7	Harvester	Primary production sector	6 2/3 years
8	Tractor	Primary production sector	6 2/3 years

40‑103 Effective life and remaining effective life of certain vessels

(1) If, at a particular time, item 10 of the table in subsection 40‑102(4):

(a) starts to apply to a vessel (whether or not that item has previously applied to the vessel); or

(b) ceases to apply to a vessel (whether or not that item subsequently applies to the vessel);

at that time the effective life of the vessel changes accordingly.

(2) If subsection (1) applies and the decline in value of the vessel is worked out using the *prime cost method, the remaining effective life of the vessel just after that time is:

where:

alternative effective life is:

(a) if that item starts to apply to the vessel at that time—what would have been the *effective life of the vessel just before that time if that item had applied to the vessel; or

(b) if that item ceases to apply to the vessel at that time—what would have been the effective life of the vessel just before that time if that item had not applied to the vessel.

unadjusted effective life is what was the *effective life of the vessel just before that time.

unadjusted remaining effective life is what was the *remaining effective life of the vessel just before that time.

Example: Assume that item 10 of the table in subsection 40‑102(4) ceases to apply to a vessel after having applied to the vessel for 7 years, and again starts to apply after another 4 years. Assume further that the effective life of a vessel of that kind has been determined under section 40‑100 to be 20 years.

The remaining effective life of the vessel just before that item ceases to apply to the vessel is 3 years. Its alternative effective life is 20 years, and its unadjusted effective life is 10 years. Its remaining effective life just after that time is therefore 6 years.

The remaining effective life of the vessel just before that item again starts to apply to the vessel is 2 years. Its alternative effective life is 10 years, and its unadjusted effective life is 20 years. Its remaining effective life just after that time is therefore 1 year.

40‑105 Self‑assessing effective life

(1) You work out the effective life of a *depreciating asset yourself in accordance with this section.

(1A) Firstly, estimate the period (in years, including fractions of years) the asset can be used by any entity for one or more of the following purposes:

(a) a *taxable purpose;

(b) the purpose of producing *exempt income or *non‑assessable non‑exempt income;

(1B) Secondly, if relevant for the asset:

(a) have regard to the wear and tear you reasonably expect from your expected circumstances of use; and

(b) assume that the asset will be maintained in reasonably good order and condition.

(2) If, in working out that period, you decide that the asset would be likely to be:

(a) scrapped; or

(b) sold for no more than scrap value or abandoned;

before the end of that period, its effective life ends at the earlier time. However, when making your decision, disregard reasons attributable to the technical risk in conducting *R&D activities if it is reasonably likely that the asset will be used for such activities.

(3) You work out the period mentioned in subsection (1A) or (2) beginning at the *start time of the *depreciating asset.

Exception: intangibles

(4) This section does not apply to the following intangible *depreciating assets:

(a) assets to which an item in the table in subsection 40‑95(7) applies;

(b) *mining, quarrying or prospecting rights;

40‑110 Recalculating effective life

(1) You may choose to recalculate the *effective life of a *depreciating asset from a later income year if the effective life you have been using is no longer accurate because of changed circumstances relating to the nature of the use of the asset.

Example: Some examples of changes in circumstances that may result in your recalculating the effective life of a depreciating asset are:

• your use of the asset turns out to be more or less rigorous than you expected (or was anticipated by the Commissioner’s determination);

• there is a downturn in demand for the goods or services the asset is used to produce that will result in the asset being scrapped;

• legislation prevents the asset’s continued use;

• changes in technology make the asset redundant;

• there is an unexpected demand, or lack of success, for a film.

(2) You must recalculate a *depreciating asset’s *effective life from a later income year if:

(a) you:

(i) self‑assessed its effective life; or

(ii) are using an effective life worked out under section 40‑100 (about the Commissioner’s determination), or 40‑102 (about the capped life of certain depreciating assets), and the *prime cost method; or

(iii) are using an effective life because of subsection 40‑95(4), (4B), (4C), (5), (5B) or (5C); and

(b) its *cost is increased in that year by at least 10%.

Note 1: You may conclude that the effective life is the same.

Note 2: For the elements of the cost of a depreciating asset, see Subdivision 40‑C.

Example 1: Paul purchases a photocopier and self‑assesses its effective life at 6 years. In a later year he incurs expenditure to increase the quality of the reproductions it makes. He recalculates its effective life, but concludes that it remains the same.

Example 2: Fiona also purchases a photocopier and self‑assesses its effective life at 6 years. In a later year she incurs expenditure to incorporate a more robust paper handling system. She recalculates its effective life, and concludes that it is increased to 7 years.

(3) You must recalculate a *depreciating asset’s *effective life for the income year in which you started to *hold it if:

(a) you are using an effective life because of subsection 40‑95(4), (4B), (4C), (5), (5B) or (5C); and

(b) the asset’s *cost is increased after you started to hold it in that year by at least 10%.

(3A) Subsections (1), (2) and (3) do not apply to a *depreciating asset that is a *mining, quarrying or prospecting right or *mining, quarrying or prospecting information.

(3B) You may choose to recalculate the *effective life of a *mining, quarrying or prospecting right, or *mining, quarrying or prospecting information, from a later income year if the effective life you have been using is no longer accurate:

(a) because of changed circumstances relating to an existing or proposed mine, petroleum field or quarry to which that right or information relates; or

(b) because that right or information now relates to an existing or proposed mine, petroleum field or quarry; or

(4) A recalculation under this section must be done using:

(a) if paragraph (b) does not apply—section 40‑105 (about self‑assessing effective life); or

(b) if the *depreciating asset is a *mining, quarrying or prospecting right or *mining, quarrying or prospecting information:

(i) subsections 40‑95(10) and (11) (if the right or information relates to an existing or proposed mine, petroleum field or quarry); or

(ii) subsection 40‑95(12) (if the right or information no longer relates to an existing or proposed mine, petroleum field or quarry).

Exception: intangibles

(5) This section does not apply to an intangible *depreciating asset to which an item in the table in subsection 40‑95(7) applies.

40‑115 Splitting a depreciating asset

(1) If a *depreciating asset you *hold is split into 2 or more assets, this Division applies as if you had stopped holding the original asset and started holding the assets into which it is split.

Note 1: For the cost of the split assets, see section 40‑205.

Note 2: A balancing adjustment event does not occur just because you split a depreciating asset: see section 40‑295.

(2) If you stop *holding part of a *depreciating asset, this Division applies as if, just before you stopped holding that part, you had split the original asset into the part you stopped holding and the rest of the original asset. (The rest of the original asset is then taken to be a different asset from the original asset.)

Example: Bronwyn sells Tim a part interest in a depreciating asset she owns. They become joint holders under section 40‑35. She is taken to have split the underlying asset into the interest she retains and the interest Tim buys. She now holds an interest (a new depreciating asset) in the underlying asset and is taken to have stopped holding the interest sold.

(3) If you grant or assign an interest in an item of *intellectual property, subsection (2) applies to you as if you had stopped *holding part of the item.

40‑120 Replacement spectrum licences

(1) If:

(a) some (but not all) of a *spectrum licence you *hold is assigned or resumed; and

(b) your original licence is replaced by one or more other spectrum licences (possibly including a modified version of your original licence); and

(c) the replacement licences together cover exactly the same rights as were covered by your original licence just after the assignment or resumption;

this Division applies as if your original licence (as it existed just after the assignment or resumption) had been split into the replacement licences.

Example: MGP Communications Ltd buys a spectrum licence on 1 July 2003 for $5 million. The licence specifies areas A, B, C and D. The company assigns the spectrum relating to area C. Area C represents 20% of the market value of the overall licence. $1m of the adjustable value is allocated to it and $4m is allocated to the remaining licence.

The Australian Communications and Media Authority adjusts the licence to specify only areas A and B, and issues a new licence specifying area D.

Area D represents 25% of the market value of the spectrum remaining in the licence. The adjustable value of the new licence is therefore $1m and the adjustable value of the original (modified) licence is $3m.

(2) If a *spectrum licence you *hold is replaced by 2 or more spectrum licences (possibly including a modified version of your original licence) that together cover exactly the same rights as your original licence, this Division applies as if the original licence had been split into the replacement licences.

40‑125 Merging depreciating assets

If a *depreciating asset or assets that you *hold is or are merged into another depreciating asset, this Division applies as if you had stopped holding the original asset or assets and started holding the merged asset.

Note 1: For the cost of the merged asset, see section 40‑210.

Note 2: A balancing adjustment event does not occur just because you merge depreciating assets: see section 40‑295.

40‑130 Choices

(1) A choice you can make under this Division about a *depreciating asset must be made:

(a) by the day you lodge your *income tax return for the income year to which the choice relates; or

(b) within a further time allowed by the Commissioner.

(2) Your choice, once made, applies to that income year and all later income years.

Exception: recalculating effective life

(3) However, subsection (2) does not apply to a choice to recalculate the *effective life of a *depreciating asset under section 40‑110.

40‑135 Certain anti‑avoidance provisions

These anti‑avoidance provisions:

(a) section 51AD (Deductions not allowable in respect of property under certain leveraged arrangements) of the Income Tax Assessment Act 1936;

(b) Division 16D (Certain arrangements relating to the use of property) of Part III of that Act;

apply to your deductions under this Division for a *depreciating asset you *hold as if you were the owner of the asset instead of any other person.

40‑140 Getting tax information from associates

(1) If you acquire a *depreciating asset from an *associate of yours where the associate has deducted or can deduct an amount for the asset under this Division, you may give the associate a written notice requiring the associate to tell you:

(a) the method the associate was using to work out the decline in value of the asset; and

(b) the *effective life the associate was using; and

(i) the effective life that the associate would have used if section 40‑102 had not applied to the asset; and

(ii) the relevant time that applied to the associate under subsection 40‑102(3).

(2) The notice must:

(a) be given within 60 days of your acquiring the asset; and

(b) specify a period of at least 60 days within which the information must be given; and

Note: Subsections (4) and (5) explain how this subsection operates if the associate is a partnership.

Requirement to comply with notice

(3) The *associate must not intentionally refuse or fail to comply with the notice.

Penalty: 10 penalty units.

Giving the notice to a partnership

(4) If the *associate is a partnership:

(a) you may give it to the partnership by giving it to any of the partners (this does not limit how else you can give it); and

(b) the obligation to comply with the notice is imposed on each of the partners (not on the partnership), but may be discharged by any of them.

(5) A partner must not intentionally refuse or fail to comply with that obligation, unless another partner has already complied with it.

Penalty: 10 penalty units.

Limits on giving a notice

(6) Only one notice can be given in relation to the same *depreciating asset.

Subdivision 40‑C—Cost

Guide to Subdivision 40‑C

40‑170 What this Subdivision is about

Your cost of a depreciating asset is a component in working out the amounts you can deduct for it.

There are 2 elements of the cost of a depreciating asset. This Subdivision shows you how to work out those elements.

Table of sections

Operative provisions

40‑175 Cost

40‑180 First element of cost

40‑185 Amount you are taken to have paid to hold a depreciating asset or to receive a benefit

40‑190 Second element of cost

40‑195 Apportionment of cost

40‑200 Exclusion from cost

40‑205 Cost of a split depreciating asset

40‑210 Cost of merged depreciating assets

40‑215 Adjustment: double deduction

40‑220 Cost reduced by amounts not of a capital nature

40‑222 Cost reduced by water infrastructure improvement expenditure

40‑225 Adjustment: acquiring a car at a discount

40‑230 Adjustment: car limit

40‑235 Adjustment: National Disability Insurance Scheme costs

Operative provisions

40‑175 Cost

The cost of a *depreciating asset you *hold consists of 2 elements.

Note: The cost of a depreciating asset may be modified by one of these provisions:

• Subdivision 27‑B;

• subsection 40‑90(2);

• paragraph 40‑362(3)(c);

• paragraph 40‑365(5)(a);

• section 40‑1110;

• section 775‑70;

• section 775‑75.

40‑180 First element of cost

(1) The first element is worked out as at the time when you began to *hold the *depreciating asset (except for a case to which item 3, 4 or 14 of the table in subsection (2) applies). It is:

(a) if an item in that table applies—the amount specified in that item; or

(b) otherwise—the amount you are taken to have paid to hold the asset under section 40‑185.

Note 1: The first element of the cost may be modified by a later provision in this Subdivision.

Note 2: Section 230‑505 provides special rules for working out the amount of consideration for an asset if the asset is a Division 230 financial arrangement or a Division 230 financial arrangement is involved in that consideration.

(2) If more than one item in this table covers the asset, apply the last item that covers it.

First element of the cost of a depreciating asset
Item	In this case:	The cost is:
1	A depreciating asset you hold is split into 2 or more assets	For each of the assets into which it is split, the amount worked out under section 40‑205
2	A depreciating asset or assets that you hold is or are merged into another depreciating asset	For the other asset, the amount worked out under section 40‑210
3	A balancing adjustment event happens to a depreciating asset you *hold because you stop using it for any purpose expecting never to use it again, and you continue to hold it	The *termination value of the asset at the time of the event
4	A balancing adjustment event happens to a depreciating asset you *hold but have not used because you expect never to use it, and you continue to hold it	The *termination value of the asset at the time of the event
5	A partnership asset that was *held, just before it became a partnership asset, by one or more partners (whether or not any other entity was a joint holder) or a partnership asset to which subsection 40‑295(2) applies	The *market value of the asset when the partnership started to hold it or when the change referred to in subsection 40‑295(2) occurred
6	There is roll‑over relief under section 40‑340 for a balancing adjustment event happening to a depreciating asset	The *adjustable value of the asset to the transferor just before the balancing adjustment event occurred
7	You are the legal owner of a depreciating asset that is hired under a hire purchase agreement and you start *holding it because the entity to whom it is hired does not become the legal owner	The *market value of the asset when you started to hold it
8	You started to hold the asset under an arrangement and: (a) there is at least one other party to the arrangement with whom you did not deal at arm’s length; and (b) apart from this item, the first element of the asset’s cost would exceed its market value	The market value of the asset when you started to hold it
9	You started to hold the asset under an arrangement that was private or domestic in nature to you (for example, a gift)	The *market value of the asset when you started to hold it
10	The *Finance Minister has determined a cost for you under section 49A, 49B, 50A, 50B, 51A or 51B of the Airports (Transitional) Act 1996	The cost so determined
11	To which Division 58 (which deals with assets previously owned by an *exempt entity) applies	The amount applicable under subsections 58‑70(3) and (5)
12	A balancing adjustment event happens to a depreciating asset because a person dies and the asset devolves to you as the person’s *legal personal representative	The asset’s adjustable value on the day the person died or, if the asset is allocated to a low‑value pool, so much of the closing pool balance for the income year in which the person died as is reasonably attributable to the asset
13	You started to hold a depreciating asset because it *passed to you as the beneficiary or a joint tenant	The market value of the asset when you started to hold it reduced by any capital gain that was disregarded under section 128‑10 or subsection 128‑15(3), whether by the deceased or by the *legal personal representative
14	A balancing adjustment event happens to a depreciating asset you *hold because of subsection 40‑295(1B)	What would, apart from subsection 40‑285(3), be the asset’s adjustable value on the day the balancing adjustment event occurs

(3) The first element of *cost includes an amount you paid or are taken to have paid in relation to starting to *hold the *depreciating asset if that amount is directly connected with holding the asset.

(4) The first element of *cost of a *depreciating asset does not include an amount that forms part of the second element of cost of another depreciating asset.

Note: The first element of cost may be reduced under section 40‑1130 to account for exploration benefits received under farm‑in farm‑out arrangements.

40‑185 Amount you are taken to have paid to hold a depreciating asset or to receive a benefit

(1) This Division applies to you as if you had paid, to *hold a *depreciating asset or for an economic benefit for such an asset, the greater of these amounts:

(a) the sum of the amounts that would have been included in your assessable income because you started to hold the asset or received the benefit, or because you gave something to start holding the asset or receive the benefit, if you ignored the value of anything you gave that reduced the amount actually included; or

(b) the sum of the applicable amounts set out in this table in relation to holding the asset or receiving the benefit.

Example 1: Gold Medals Ltd manufactures some medals for a local sporting association’s annual meeting in return for a die cut stamping machine. The medals have a market value of $20,000. The machine has an arm’s length value of $100,000 but Gold Medals has to contribute $75,000 towards acquiring it from the association. Gold Medals will have to include:

in its assessable income because of section 21A of the Income Tax Assessment Act 1936.

The first element of the machine’s cost will be the greater of:

• the amount it paid ($75,000) plus the market value of the non‑cash benefits it provided ($20,000), which comes to $95,000; and

• the amount that was assessable income from receiving the machine ($25,000) plus the amount by which that assessable income was reduced because of the payment Gold Medals made ($75,000), which comes to $100,000.

So, in this case, the first element of the machine’s cost to Gold Medals is $100,000.

Example 2: Laura travels overseas to purchase a purpose‑built vehicle for use in her trade. The purchase of the vehicle is the sole reason for the trip. Laura incurs expenses for airfares and accommodation. These expenses are included in the cost of the vehicle because they are “in relation to starting to hold” the vehicle.

Amount you are taken to have paid to hold a depreciating asset or to receive a benefit
Item	In this case:	The amount is:
1	You pay an amount	The amount
2	You incur or increase a liability to pay an amount	The amount of the liability or increase when you incurred or increased it
3	All or part of a liability to pay an amount owed to you by another entity is terminated	The amount of the liability or part when it is terminated
4	You provide a *non‑cash benefit	The *market value of the non‑cash benefit when it is provided
5	You incur or increase a liability to provide a *non‑cash benefit	The *market value of the non‑cash benefit or the increase when you incurred or increased the liability
6	All or part of a liability to provide a non‑cash benefit (except the depreciating asset) owed to you by another entity is terminated	The *market value of the non‑cash benefit when the liability is terminated

Note 1: Item 1 includes not only amounts actually paid but also amounts taken to have been paid. Examples include the price of the notional purchase made when trading stock is converted to a depreciating asset under section 70‑110, the cost of an asset held under a hire purchase arrangement under section 240‑25 and a lessor’s deemed purchase price when a luxury car lease ends under subsection 242‑90(3).

(2) In applying the table in subsection (1) to a liability of yours to pay an amount or provide a *non‑cash benefit, don’t count any part of the liability you have already satisfied.

40‑190 Second element of cost

(1) The second element is worked out after you start to *hold the *depreciating asset.

(2) The second element is:

(a) the amount you are taken to have paid under section 40‑185 for each economic benefit that has contributed to bringing the asset to its present condition and location from time to time since you started to *hold the asset; and

(b) expenditure you incur that is reasonably attributable to a *balancing adjustment event occurring for the asset.

Example 1: Andrew adds a new tray and canopy to his ute. The materials and labour that go into the addition are economic benefits that Andrew received and that contribute to the ute’s present condition.

The payments he makes for those economic benefits are included in the second element of the ute’s cost.

Example 2: Leonie needed to replace one of her old depreciating assets that was fixed to her land with a new, more efficient one. Leonie paid a contractor a fee to demolish and remove the old asset. This resulted in a balancing adjustment event occurring for the old asset, and the fee forms part of the second element of the cost of the old asset that was demolished.

Note: The second element of the cost may be modified by a later provision in this Subdivision.

(2A) Paragraph (2)(b) does not apply to a *balancing adjustment event referred to in item 6 or 11 of the table in subsection 40‑300(2).

(3) However, the second element is worked out using this table if an item in it applies. Use the last applicable item.

Second element of the cost of a depreciating asset
Item	In this case:	The second element of cost is:
1	You received the benefit under an arrangement and: (a) there is at least one other party to the arrangement with whom you did not deal at arm’s length; and (b) apart from this item, the second element of cost for the benefit would exceed its *market value	The market value of the benefit when you received it
2	You received the benefit under an *arrangement that was private or domestic in nature to you	The *market value of the benefit when you received it

40‑195 Apportionment of cost

If you pay an amount for 2 or more things that include at least one *depreciating asset, or that include a contribution to bringing a depreciating asset to its present condition and location, you take into account as part of its *cost only that part of what you paid that is reasonably attributable to the asset.

Example: Ian buys 3 assets (one depreciating asset and 2 other assets) under the one transaction. He pays $30,000 for the 3 assets. $25,000 of that amount is reasonably attributable to the depreciating asset.

The first element of the depreciating asset’s cost is $25,000.

40‑200 Exclusion from cost

The *cost of a *depreciating asset that is not *plant does not include any amount that was incurred:

(a) before 1 July 2001; or

(b) under a contract entered into before that day.

40‑205 Cost of a split depreciating asset

If you split a *depreciating asset into separate assets as mentioned in section 40‑115, the first element of the cost of each of the separate assets is a reasonable proportion of the sum of these amounts:

(a) the *adjustable value of the original asset just before it was split; and

(b) the amount you are taken to have paid under section 40‑185 for any economic benefit involved in splitting the original asset.

Example: Barry owns a spectrum licence that covers 3 areas: Area A, area B and area C. The licence has an adjustable value of $160,000. He sells area A to Chris, and his costs of splitting are $10,000. Barry is taken to have split the licence into 2 assets.

On the basis of their relative market values, Barry apportions $170,000 to area A (that he disposed of) and to the licence he still holds for areas B and C.

40‑210 Cost of merged depreciating assets

If a *depreciating asset or assets that you *hold is or are merged into another depreciating asset as mentioned in section 40‑125, the first element of the cost of the merged asset is a reasonable proportion of the sum of:

(a) the *adjustable value or adjustable values of the original asset or assets just before the merger; and

(b) the amount you are taken to have paid under section 40‑185 for any economic benefit involved in merging the original asset or assets.

40‑215 Adjustment: double deduction

Each element of the *cost of a *depreciating asset is reduced by any portion of that element of cost that you have deducted or can deduct, or that has been or will be taken into account in working out an amount you can deduct, other than under this Division, Division 41 or Division 328.

Note: This section does not apply to notional deductions under section 355‑305 or 355‑520 (about R&D) because those provisions are about deducting the asset’s decline in value, not its cost.

40‑220 Cost reduced by amounts not of a capital nature

The *cost of a *depreciating asset is reduced by any portion of it that consists of an amount that is not of a capital nature.

40‑222 Cost reduced by water infrastructure improvement expenditure

The *cost of a *depreciating asset is reduced by any portion of it that consists of expenditure that you cannot deduct because of section 26‑100.

40‑225 Adjustment: acquiring a car at a discount

(1) You must increase the first element of the cost of a *car designed mainly for carrying passengers you acquire at a discount if:

(a) it is reasonable to conclude that any portion (the discount portion) of the discount is referable to you or another entity selling another asset for less than its *market value; and

(b) you, or another entity, has deducted or can deduct an amount for the other asset for any income year; and

(c) the sum of the cost of the car and the discount portion exceeds the *car limit for the *financial year in which you first use the car for any purpose.

(2) The first element of the cost of the *car is increased by the discount portion.

(3) This section does not apply to a *car that is excluded from the *car limit by subsection 40‑230(2).

40‑230 Adjustment: car limit

(1) The first element of the cost of a *car designed mainly for carrying passengers (after applying section 40‑225 and Subdivision 27‑B) is reduced to the *car limit for the *financial year in which you started to *hold it if its cost exceeds that limit.

(2) However, the *car limit does not apply to a *car:

(a) fitted out for transporting disabled people in wheelchairs for profit; or

(b) whose first element of *cost exceeds that limit only because of modifications made to enable an individual with a disability to use it for a *taxable purpose.

(3) The car limit for the 2000‑01 *financial year is $55,134. The limit is indexed annually.

Note: Subdivision 960‑M shows you how to index amounts.

(4) If you *hold a *car that is also held by one or more other entities, subsection (1) applies to the *cost of the car despite section 40‑35. Then section 40‑35 applies to the cost of the car as reduced under subsection (1).

40‑235 Adjustment: National Disability Insurance Scheme costs

The *cost of a *depreciating asset does not include an amount to the extent that section 26‑97 prevents the amount from being deducted (even if some other provision also prevents it being deducted).

Note: Section 26‑97 denies deductions for National Disability Insurance Scheme expenditure.

Subdivision 40‑D—Balancing adjustments

Guide to Subdivision 40‑D

40‑280 What this Subdivision is about

You may have to make an adjustment to your taxable income if you stop holding a depreciating asset.

The adjustment is generally based on the difference between the actual value of the asset when you stop holding it and its adjustable value.

Table of sections

Operative provisions

40‑285 Balancing adjustments

40‑290 Reduction for non‑taxable use

40‑291 Reduction for second‑hand assets used in residential property

40‑292 Adjustments—assets used for both general tax purposes and R&D activities

40‑293 Adjustments—partnership assets used for both general tax purposes and R&D activities

40‑295 Meaning of balancing adjustment event

40‑300 Meaning of termination value

40‑305 Amount you are taken to have received under a balancing adjustment event

40‑310 Apportionment of termination value

40‑320 Car to which section 40‑225 applies

40‑325 Adjustment: car limit

40‑335 Deduction for in‑house software where you will never use it

40‑340 Roll‑over relief

40‑345 What the roll‑over relief is

40‑350 Additional consequences

40‑360 Notice to allow transferee to work out how this Division applies

40‑362 Roll‑over relief for holders of vessels covered by certificates under the Shipping Reform (Tax Incentives) Act 2012

40‑363 Roll‑over relief for interest realignment arrangements

40‑364 Interest realignment adjustments

40‑365 Involuntary disposals

40‑370 Balancing adjustments where there has been use of different car expense methods

Operative provisions

40‑285 Balancing adjustments

(1) An amount is included in your assessable income if:

(a) a *balancing adjustment event occurs for a *depreciating asset you *held and:

(i) whose decline in value you worked out under Subdivision 40‑B; or

(ii) whose decline in value you would have worked out under that Subdivision if you had used the asset; and

(b) the asset’s *termination value is more than its *adjustable value just before the event occurred.

The amount included is the difference between those amounts, and it is included for the income year in which the balancing adjustment event occurred.

Note 1: The most common balancing adjustment event is where you sell the depreciating asset.

Note 2: There is a different calculation if you had used different car expense methods for a car: see section 40‑370.

Note 3: There is a modification to the calculation in the case of misappropriation by your employee or agent: see section 25‑47.

(2) You can deduct an amount if:

(a) a *balancing adjustment event occurs for a *depreciating asset you *held and:

(i) whose decline in value you worked out under Subdivision 40‑B; or

(ii) whose decline in value you would have worked out under that Subdivision if you had used the asset; and

(b) the asset’s *termination value is less than its *adjustable value just before the event occurred.

The amount you can deduct is the difference between those amounts, and you can deduct it for the income year in which the balancing adjustment event occurred.

Note 1: There is a different calculation if you had used different car expense methods for a car: see section 40‑370.

Note 2: The timing of a deduction allowed under this subsection is determined under Subdivision 170‑D where that Subdivision applies to the balancing adjustment event.

Note 3: There is a modification to the calculation in the case of misappropriation by your employee or agent: see section 25‑47.

(3) The *adjustable value of a *depreciating asset you *hold after this section applies to it is then zero.

(4) However, subsection (3) does not apply to a *depreciating asset for which you have a *cost under item 3, 4 or 14 of the table in subsection 40‑180(2). Instead, the asset’s *opening adjustable value for the income year (the later year) after the one in which the *balancing adjustment event occurred is that cost plus any amounts included in the second element of that cost after the event occurred and before the start of the later year.

Note: Those items deal with a case where a balancing adjustment event happens even though you still hold the asset in question.

(5) Despite subsection (1), an amount included in your assessable income under that subsection is included for the second income year after the income year in which the *balancing adjustment event occurs if:

(a) the *depreciating asset is a vessel; and

(b) you have a certificate for the vessel under Part 2 of the Shipping Reform (Tax Incentives) Act 2012 that:

(i) applies to the day that the balancing adjustment event occurs; and

(ii) is not a *shipping exempt income certificate.

Note: An amount will not be included in your assessable income in relation to the balancing adjustment event if you choose roll‑over relief under section 40‑362.

40‑290 Reduction for non‑taxable use

(1) You must reduce the amount (the balancing adjustment amount) included in your assessable income, or the amount you can deduct, under section 40‑285 for a *depreciating asset if your deductions for the asset have been reduced under section 40‑25.

(2) The reduction is:

where:

sum of reductions is the sum of:

(a) the reductions in your deductions for the asset under section 40‑25; and

(b) if there has been roll‑over relief for the asset under section 40‑340—the reductions in deductions for the asset for the transferor or an earlier successive transferor under section 40‑25; and

(c) if you *hold the asset as the *legal personal representative of an individual—the reductions in deductions for the asset for the individual under section 40‑25.

total decline is the sum of:

(a) the decline in value of the *depreciating asset since you started to *hold it; and

(b) if there has been roll‑over relief for the asset under section 40‑340—the decline in value of the asset for the transferor or an earlier successive transferor; and

(c) if you *hold the asset as the *legal personal representative of an individual—the decline in value of the asset for the individual.

(3) You must further reduce the amount included in your assessable income, or the amount you can deduct, under section 40‑285 for a *depreciating asset (the current asset) if:

(a) the asset’s *cost (for you) was worked out under section 40‑205 (Cost of a split depreciating asset) or 40‑210 (Cost of merged depreciating assets); and

(b) you used the depreciating asset from which the current asset was split, or a depreciating asset that was merged into the current asset, or had it *installed ready for use, for a purpose other than a *taxable purpose.

(4) The further reduction is such amount as is reasonable having regard to the extent of the use referred to in paragraph (3)(b).

Exception: mining, quarrying or prospecting information

(5) This section does not apply to *mining, quarrying or prospecting information.

40‑291 Reduction for second‑hand assets used in residential property

(1) In addition to section 40‑290, you must reduce the amount (the balancing adjustment amount) included in your assessable income, or that you can deduct, under section 40‑285 for a *depreciating asset if your deductions for the asset have been reduced under section 40‑27.

(2) The reduction is the following, as increased under subsection (3) if applicable:

where:

sum of section 40‑27 reductions is the sum of:

(a) the reductions in your deductions for the asset under section 40‑27; and

(c) if you *hold the asset as the *legal personal representative of an individual—the reductions in deductions for the asset for the individual under section 40‑27.

total decline is the sum of:

(a) the decline in value of the *depreciating asset since you started to *hold it; and

(b) if there has been roll‑over relief for the asset under section 40‑340—the decline in value of the asset for the transferor or an earlier successive transferor; and

(c) if you hold the asset as the *legal personal representative of an individual—the decline in value of the asset for the individual.

(3) If:

(a) the *cost (for you) of the asset (the current asset) was worked out under section 40‑205 (Cost of a split depreciating asset) or 40‑210 (Cost of merged depreciating assets); and

(b) you used the *depreciating asset from which the current asset was split, or a depreciating asset that was merged into the current asset, or had it *installed ready for use, for the purpose to which paragraphs 40‑27(2)(a) and (b) relate;

the reduction includes an increase equal to such amount as is reasonable having regard to the extent of the use referred to in paragraph (b) of this subsection.

40‑292 Adjustments—assets used for both general tax purposes and R&D activities

(1) This section applies if:

(a) a *balancing adjustment event happens in an income year (the event year) for an asset you *held and for which:

(i) you can deduct, for an income year, an amount under section 40‑25, as that section applies apart from Division 355 and former section 73BC of the Income Tax Assessment Act 1936; or

(ii) you could have deducted, for an income year, an amount as described in subparagraph (i) if you had used the asset; and

(b) you are entitled under section 355‑100 to *tax offsets for one or more income years for deductions (the R&D deductions) under section 355‑305 for the asset.

Note: This section applies in a modified way if you have deductions for the asset under former section 73BA or 73BH of the Income Tax Assessment Act 1936 (see section 40‑292 of the Income Tax (Transitional Provisions) Act 1997).

Section 40‑290 to be applied as if use for conducting R&D activities were use for a taxable purpose

(2) In applying section 40‑290 (including references in that section to the reduction of deductions under section 40‑25) in relation to the asset, assume that using the asset for a *taxable purpose includes using it for the purpose of conducting the *R&D activities to which the R&D deductions relate.

Increase in amounts deductible under section 40‑285

(3) If you are entitled under section 355‑100 to a *tax offset for the event year in respect of deductions under Division 355 totalling at least $20,000, any amount (the section 40‑285 amount) you can deduct for the asset under section 40‑285 (after applying subsection (2) of this section) for the event year is increased by:

(a) if your *aggregated turnover for the event year is less than $20 million—1/2 of the amount worked out under subsection (5) of this section; and

(b) otherwise—1/3 of the amount worked out under subsection (5) of this section.

Increase in amounts assessable under section 40‑285

(4) Any amount (the section 40‑285 amount) that is included in your assessable income for the asset under section 40‑285 (after applying subsection (2) of this section) for the event year is increased by 1/3 of the amount worked out under subsection (5) of this section.

Component of any increase in amounts deductible or assessable

(5) The amount is worked out as follows:

where:

adjusted section 40‑285 amount means:

(a) if the section 40‑285 amount is a deduction—the amount of the deduction; or

(b) if the section 40‑285 amount is an amount included in your assessable income—so much of the section 40‑285 amount as does not exceed the total decline in value.

total decline in value means the *cost of the asset less its *adjustable value.

40‑293 Adjustments—partnership assets used for both general tax purposes and R&D activities

(1) This section applies to an *R&D partnership if:

(a) a *balancing adjustment event happens in an income year (the event year) for a *depreciating asset *held by the R&D partnership and for which:

(i) the R&D partnership can deduct, for an income year, an amount under section 40‑25, as that section applies apart from Division 355 and former section 73BC of the Income Tax Assessment Act 1936; or

(ii) the R&D partnership could have deducted, for an income year, an amount as described in subparagraph (i) if it had used the asset; and

(b) one or more partners of the R&D partnership are entitled under section 355‑100 to *tax offsets for one or more income years for deductions (the R&D deductions) under section 355‑520 for the asset.

Note: This section applies in a modified way if the partners have deductions for the asset under former section 73BA or 73BH of the Income Tax Assessment Act 1936 (see section 40‑293 of the Income Tax (Transitional Provisions) Act 1997).

Section 40‑290 to be applied as if use for conducting R&D activities were use for a taxable purpose

Increase in amounts deductible or assessable under section 40‑285

(3) Any amount (the section 40‑285 amount):

(a) that the *R&D partnership can deduct for the asset under section 40‑285 (after applying subsection (2) of this section) for the event year; or

(b) that is included in the R&D partnership’s assessable income for the asset under section 40‑285 (after applying subsection (2) of this section) for the event year;

is increased by 1/3 of the following amount:

where:

adjusted section 40‑285 amount means:

(a) if the section 40‑285 amount is a deduction—the amount of the deduction; or

(b) if the section 40‑285 amount is an amount included in the *R&D partnership’s assessable income—so much of the section 40‑285 amount as does not exceed the total decline in value.

total decline in value means the *cost of the asset less its *adjustable value.

40‑295 Meaning of balancing adjustment event

(1) A balancing adjustment event occurs for a *depreciating asset if:

(a) you stop *holding the asset; or

(b) you stop using it, or having it *installed ready for use, for any purpose and you expect never to use it, or have it installed ready for use, again; or

(i) if you have had it installed ready for use—you stop having it so installed; and

(ii) you decide never to use it.

Note: A balancing adjustment event occurs under paragraph 40‑295(1)(a) when you start holding a depreciating asset as trading stock.

(1A) A balancing adjustment event occurs for a *depreciating asset you *hold that is a *mining, quarrying or prospecting right, or *mining, quarrying or prospecting information, if:

(a) the only reason that subsection 40‑80(1) does not apply to the right or information is that the right or information does not meet the requirements of paragraph 40‑80(1)(d) or (e); and

(b) you have neither budgeted nor planned for further expenditure that:

(i) will relate to the tenement to which the right or information relates; and

(ii) will exceed the minimum expenditure required to maintain the tenement; and

(1B) A balancing adjustment event occurs for a *depreciating asset you *hold that is a *mining, quarrying or prospecting right, or *mining, quarrying or prospecting information, if:

(a) since the last time you commenced to hold the right or information, a *balancing adjustment event occurred, because of subsection (1A), to the right or information; and

(b) paragraph (1A)(b) no longer applies.

(2) A balancing adjustment event occurs for a *depreciating asset if:

(a) for any reason, a change occurs in the *holding of, or in the interests of entities in, the asset; and

(b) the entity or one of the entities that had an interest in the asset before the change has an interest in it after the change; and

(3) However, a balancing adjustment event does not occur for a *depreciating asset merely because you split it into 2 or more depreciating assets or you merge it with one or more other depreciating assets.

Note: A balancing adjustment event will occur if you stop holding part of a depreciating asset.

40‑300 Meaning of termination value

(1) The termination value of a *depreciating asset is worked out as at the time when the *balancing adjustment event occurs. It is:

(a) if an item in the table in subsection (2) applies—the amount specified in that item; or

(b) otherwise—the amount you are taken to have received under section 40‑305 for the asset.

Note: Section 230‑505 provides special rules for working out the amount of consideration for an asset if the asset is a Division 230 financial arrangement or a Division 230 financial arrangement is involved in that consideration.

(2) If more than one item applies, use the value under the last applicable item.

Termination value table
Item	For this balancing adjustment event:	The termination value is:
1	You stop using a depreciating asset, or having it installed ready for use, for any purpose and you expect never to use it again even though you still *hold it	The market value of the asset when you stopped using it or having it installed ready for use
2	You decide never to use a depreciating asset that you have not used even though you still hold it	The *market value of the asset when you make the decision
3	You stop using in‑house software for any purpose and you expect never to use it again even though you still hold it	Zero
4	You decide never to use in‑house software that you have not used even though you still hold it	Zero
5	One or more partners stop holding a depreciating asset when it becomes a partnership asset or a balancing adjustment event referred to in subsection 40‑295(2) occurs	The market value of the asset when the partnership started to hold it or when the balancing adjustment event occurred
6	You stop holding a depreciating asset under an arrangement and: (a) there is at least one other party to the arrangement with whom you did not deal at arm’s length; and (b) apart from this item, the termination value would be less than its market value	The market value of the asset just before you stopped holding it
7	You stop holding a depreciating asset under an *arrangement that was private or domestic in nature to you (for example, a gift)	The market value of the asset just before you stopped holding it
8	A *depreciating asset is lost or destroyed	The amount or value received or receivable under an insurance policy or otherwise for the loss or destruction
9	You stop holding a depreciating asset because you die and the asset starts being held by the *legal personal representative	The asset’s adjustable value on the day you died or, if the asset is allocated to a low‑value pool, so much of the closing pool balance for the income year in which you died as is reasonably attributable to the asset
10	You stop holding a depreciating asset because it *passes directly to a beneficiary or joint tenant when you die	The *market value of the asset on the day you die
11	A depreciating asset for which the Finance Minister has determined an amount for you under section 52A of the Airports (Transitional) Act 1996	The amount so determined
13	The *balancing adjustment event occurs under subsection 40‑295(1A)	Zero
14	The *balancing adjustment event occurs under subsection 40‑295(1B)	What would, apart from subsection 40‑285(3), be the asset’s adjustable value on the day the balancing adjustment event occurs

(3) The termination value of a *depreciating asset does not include an amount that is included in assessable income as *ordinary income under section 6‑5 or as *statutory income under section 6‑10 (except an amount that is statutory income under this Division).

Note 1: Termination value may be adjusted under Subdivision 27‑B so that any GST consequences are accounted for.

Note 2: Termination value may be reduced under section 40‑1105 to account for exploration benefits received under farm‑in farm‑out arrangements.

40‑305 Amount you are taken to have received under a balancing adjustment event

(1) This Division applies to you as if you had received, under a *balancing adjustment event, the greater of these amounts:

(a) the sum of the amounts you have deducted or can deduct, or has been or will be taken into account in working out an amount you can deduct because of the balancing adjustment event and any amount by which the amount so deductible was reduced because of a case described in the table in this subsection; and

(b) the sum of the applicable amounts set out in that table:

Amount you are taken to have received under a balancing adjustment event
Item	In this case:	The amount is:
1	You receive an amount	The amount
2	You terminate all or part of a liability to pay an amount	The amount of the liability or part when you terminate it
3	You are granted a right to receive an amount or an amount to which you are entitled is increased	The amount of the right or increase when it is granted or increased
4	You receive a *non‑cash benefit	The *market value of the non‑cash benefit when it is received
5	You terminate all or part of a liability to provide a *non‑cash benefit	The *market value of the non‑cash benefit or reduction in the non‑cash benefit when the liability or part is terminated
6	You are granted a right to receive a *non‑cash benefit or you become entitled to an increased non‑cash benefit	The *market value of the non‑cash benefit, or the increase, when it is granted or increased

Note 1: Item 1 includes not only amounts actually received but also amounts taken to have been received. Examples include the price of the notional sale made when a depreciating asset is converted to trading stock under section 70‑30, the consideration for an asset held under a hire purchase arrangement under section 240‑25 and a lessee’s deemed consideration when a luxury car lease ends under subsection 242‑90(3).

(2) In applying the table in subsection (1) to a right you have to receive an amount or a *non‑cash benefit, don’t count any part of the right that has already been satisfied.

40‑310 Apportionment of termination value

If you receive an amount for 2 or more things that include a *balancing adjustment event occurring for a *depreciating asset, you take into account as its *termination value only that part of what you received that is reasonably attributable to the asset.

40‑320 Car to which section 40‑225 applies

You must increase the *termination value of a *car the *cost of which was increased under section 40‑225 by the discount portion for the car referred to in that section.

40‑325 Adjustment: car limit

The termination value of a *car the *cost of which was worked out by applying section 40‑230 (Car limit) is the amount worked out under subsection 40‑300(1) multiplied by the fraction:

where:

CL is the *car limit for the *car for the *financial year in which you first used it for any purpose.

40‑335 Deduction for in‑house software where you will never use it

(1) You can deduct expenditure you incurred on *in‑house software if:

(a) you incurred the expenditure with the intention of using the software for a *taxable purpose; and

(b) the expenditure relates to a unit of software that you have not used or had *installed ready for use; and

(d) in the *current year, you have decided that you will never use the software, or have it installed ready for use.

(2) The amount that you can deduct in the *current year is:

(a) the total of your expenditure on the *in‑house software in the current year and any previous income year; less

(b) any amount of consideration you *derive in relation to the software or any part of it (but no more than the total in paragraph (a));

but only to the extent that, when you incurred the expenditure, you intended to use the software, or have it *installed ready for use, for a *taxable purpose.

Example: Shannon has abandoned a software project that she was working on. She could not deduct expenditure on the project for the current year or any previous income year under any other provision. Shannon can deduct it under this section, to the extent that she intended to use it, or have it installed ready for use, for a taxable purpose.

Note: If an amount of the expenditure is recouped, the amount may be included in her assessable income: see Subdivision 20‑A.

40‑340 Roll‑over relief

Automatic roll‑over relief

(1) There is roll‑over relief if:

(a) there is a *balancing adjustment event because an entity (the transferor) disposes of a *depreciating asset in an income year to another entity (the transferee); and

(b) the disposal involves a *CGT event; and

CGT roll‑overs that qualify transferor for relief
Item	Type of CGT roll‑over	Conditions
1	Disposal of asset to wholly‑owned company	The transferor is able to choose a roll‑over under Subdivision 122‑A for the *CGT event.
2	Disposal of asset by partnership to wholly‑owned company	The transferor is a partnership, the property is partnership property and the partners are able to choose a roll‑over under Subdivision 122‑B for the disposal by the partners of the *CGT assets consisting of their interests in the property.
2A	Transfer of a *CGT asset of a trust to a company under a trust restructure	The transferor and transferee are able to choose a roll‑over under Subdivision 124‑N for the *CGT event.
3	Marriage or relationship breakdown	There is a roll‑over under Subdivision 126‑A for the *CGT event.
4	Disposal of asset to another member of the same wholly‑owned group	The transferor is able to choose a roll‑over under Subdivision 126‑B for the *CGT event.
5	*Disposal of asset between certain trusts	The trustees of the trusts choose to obtain a roll‑over under Subdivision 126‑G in relation to the disposal.
6	Disposal of asset as part of merger of superannuation funds	The transferor chooses a roll‑over under Subdivision 310‑D in relation to the disposal.
8	Transfer of asset under a small business restructure roll‑over	A roll‑over under Subdivision 328‑G would be available in relation to the asset if the asset were not a *depreciating asset.

Note 1: Section 40‑345 sets out what the relief is.

Note 2: This Act also applies as if there were roll‑over relief under this subsection in the circumstances set out in section 620‑30 (which is about a body incorporated under one law ceasing to exist and disposing of its assets to a company incorporated under another law that has not significantly different ownership).

(2) In applying an item in the table in subsection (1), disregard the following so far as they relate to the *depreciating asset you disposed of:

(a) an exemption in Division 118 (which contains the general exemptions from CGT); and

(b) subsection 122‑25(3) (which excludes certain assets from some kinds of CGT roll‑over); and

Choosing roll‑over relief

(3) There is also roll‑over relief if:

(a) there is a *balancing adjustment event for a *depreciating asset because of subsection 40‑295(2) (about a change in the holding of, or in interests in, the asset); and

(b) the entity or entities that had an interest in the asset before the change (also the transferor) and the entity or entities that have an interest in the asset after the change (also the transferee) jointly choose the roll‑over relief.

Example: The change could be a variation in the constitution of a partnership or in the interests of the partners.

Note 1: Section 40‑345 sets out what the relief is.

Note 2: Subdivision 328‑D sets out what the relief is for small business entities that calculate deductions for their depreciating assets under that Subdivision.

(4) The choice must:

(a) be in writing; and

(b) contain enough information about the transferor’s holding of the property for the transferee to work out how this Division or Subdivision 328‑D applies to the transferee’s holding of the *depreciating asset; and

(c) be made within 6 months after the end of the transferee’s income year in which the *balancing adjustment event occurred, or within a longer period allowed by the Commissioner.

(5) If you die before the end of the time allowed for jointly choosing roll‑over relief, the trustee of your estate may be a party to the choice.

(6) The transferor must keep the choice or a copy of it for 5 years after the *balancing adjustment event occurred.

Penalty: 30 penalty units.

(7) The transferee must keep the choice or a copy of it until the end of 5 years after the next *balancing adjustment event occurs for the *depreciating asset.

Penalty: 30 penalty units.

Exception: Subdivision 170‑D applies

(8) There can be no roll‑over relief if Subdivision 170‑D (about transactions by a company that is a member of a linked group) applies to the disposal of the *depreciating asset or the change in interests in it.

40‑345 What the roll‑over relief is

(1) Section 40‑285 does not apply to the *balancing adjustment event for the transferor.

(2) The transferee can deduct the decline in value of the *depreciating asset using the same method and *effective life (or *remaining effective life if that method is the *prime cost method) that the transferor was using.

40‑350 Additional consequences

(1) For the purposes of Division 45:

(a) if the transferor, or a partnership of which the transferor was a member, leased the *depreciating asset to another entity for most of the time that the transferor or partnership *held the asset, the transferee is taken also to have done so; and

(b) if the transferor, or a partnership of which the transferor was a member, leased the asset to another entity for a period on or after 22 February 1999, the transferee is taken also to have done so; and

(c) if the main *business of the transferor, or a partnership of which the transferor was a member, was to lease assets, the main business of the transferee is taken also to have been to lease assets.

(2) However, subsection (1) does not apply to roll‑over relief under subsection 40‑340(3) if the sum of the amounts specified in paragraph 45‑5(1)(e) or 45‑10(1)(f), or subsection 45‑5(4) or 45‑10(4), is at least equal to the *market value of the *plant or interest concerned.

40‑360 Notice to allow transferee to work out how this Division applies

(1) This section applies if there is roll‑over relief because of subsection 40‑340(1).

(2) The transferor must give the transferee a notice containing enough information about the transferor’s *holding of the property for the transferee to work out how this Division applies to the transferee’s holding of the *depreciating asset.

(3) The transferor must give the notice within 6 months after the end of the transferee’s income year in which the *balancing adjustment event occurred, or within a longer period allowed by the Commissioner.

(4) The transferee must keep the notice until the end of 5 years after the earlier of these events:

(a) the transferee disposes of the property;

(b) the property is lost or destroyed.

Penalty: 30 penalty units.

40‑362 Roll‑over relief for holders of vessels covered by certificates under the Shipping Reform (Tax Incentives) Act 2012

Circumstances giving rise to roll‑over relief

(1) There is roll‑over relief if:

(a) there is a *balancing adjustment event under section 40‑295 because you cease to *hold a *depreciating asset that is a vessel (the original vessel); and

(b) on the day that the balancing adjustment event occurs, you have a certificate for the vessel under Part 2 of the Shipping Reform (Tax Incentives) Act 2012 that:

(i) applies to that day; and

(ii) is not a *shipping exempt income certificate; and

(d) on the day occurring 2 years after the day you cease to hold the original vessel, you are the holder of another depreciating asset that is a vessel (the other vessel):

(i) for which you choose to apply roll‑over relief in relation to the original vessel; and

(ii) for which you have a certificate under Part 2 of the Shipping Reform (Tax Incentives) Act 2012 (other than a shipping exempt income certificate) that applies to the day of that choice; and

(e) you became the holder of the other vessel during the period starting 1 year before the day you cease to hold the original vessel and ending 2 years after that day.

Choosing to apply roll‑over relief

(2) The choice must:

(a) be in writing; and

(b) be made within 6 months after the end of the second income year after the income year in which the *balancing adjustment event occurs, or within a longer period allowed by the Commissioner.

The effect of roll‑over relief

(3) If there is roll‑over relief under this section:

(a) subsection 40‑285(1) does not apply to the *balancing adjustment event in relation to the original vessel; and

(b) an amount is included in your assessable income if the original vessel’s *termination value exceeds the sum of:

(i) the original vessel’s *adjustable value just before the balancing adjustment event occurred; and

(ii) the *cost of the other vessel (disregarding paragraph (3)(c)); and

(c) for the purpose of applying this Act to the other vessel, its cost is reduced (but not below zero) by the difference between:

(i) the original vessel’s termination value; and

(ii) the original vessel’s adjustable value just before the balancing adjustment event occurred.

(4) The amount included in your assessable income under paragraph (3)(b) is the amount of the excess mentioned in that paragraph. It is included in the second income year after the income year in which the *balancing adjustment event occurs.

40‑363 Roll‑over relief for interest realignment arrangements

Circumstances giving rise to roll‑over relief

(1) There is roll‑over relief if:

(a) there is a *balancing adjustment event under section 40‑295 because, in an income year, you dispose of a *depreciating asset to another entity; and

(b) the asset is a *mining, quarrying or prospecting right; and

(d) you choose to apply roll‑over relief in relation to the asset.

Choosing to apply roll‑over relief

(2) The choice must:

(a) be in writing; and

(b) be made at or before the time you lodge your *income tax return for the income year in which the *balancing adjustment event occurs, or within a longer period allowed by the Commissioner.

The effect of roll‑over relief

(3) If there is roll‑over relief under this section:

(a) section 40‑285 does not apply to the *balancing adjustment event in relation to the asset; and

(b) an amount is included in your assessable income if such an amount (the non‑realignment amount) would have been included under subsection 40‑285(1) if:

(i) paragraph (a) of this subsection did not apply; and

(ii) the *adjustable value of the *mining, quarrying or prospecting rights that you disposed of under the arrangement were taken to be the market value of the mining, quarrying or prospecting rights that you received under the arrangement; and

(i) some or all of the cost consists of a *non‑cash benefit that you provide; and

(ii) that benefit is a mining, quarrying or prospecting right that you disposed of under the arrangement;

the market value of the benefit is taken to be the adjustable value of the benefit.

(4) The amount included in your assessable income under paragraph (3)(b) is the non‑realignment amount, and it is included for the income year in which the balancing adjustment event occurred.

Meaning of interest realignment arrangement etc.

(5) An interest realignment arrangement is an *arrangement:

(a) that is entered into between entities:

(i) that are undertaking jointly, or propose to undertake jointly, a project for carrying out *mining and quarrying operations; and

(ii) that each *holds one or more *mining, quarrying or prospecting rights relating to the project; and

(b) under which those entities exchange (or agree to exchange), with the effect set out in subsection (6), parts of those rights; and

(c) that does not provide for any transfer, of a mining, quarrying or prospecting right, that does not give rise to the effect referred to in subsection (6).

Note: The parts referred to in paragraph (b) are themselves mining, quarrying or prospecting rights (see paragraph (c) of the definition of mining, quarrying or prospecting right in subsection 995‑1(1)), and are therefore not referred to elsewhere in this Act as parts of such rights.

(6) The effect referred to in paragraphs (5)(b) and (c) must be that, for each of those entities, the following are equal:

(a) the entity’s percentage interest in the project;

(b) the reserves and resources represented by the *mining, quarrying or prospecting rights that the entity *holds relating to the project, expressed as a percentage of the reserves and resources represented by all mining, quarrying or prospecting rights that any of the entities hold relating to the project.

(7) For the purposes of subsection (6):

(a) the reserves represented by a *mining, quarrying or prospecting right are taken to be the reserves, reasonably estimated using an appropriate accepted industry practice, that are expected to be extracted from the mine, *petroleum field or quarry to which the right relates; and

(b) the resources represented by a mining, quarrying or prospecting right are taken to be the resources, reasonably estimated using an appropriate accepted industry practice, that are expected to be situated in the area to which the right relates (other than those resources that are reserves referred to in paragraph (a)).

40‑364 Interest realignment adjustments

Effect of receiving interest realignment adjustment on assessable income

(1) If you receive an *interest realignment adjustment in an income year, include in your assessable income for the year an amount (the adjustment amount) equal to:

(a) the amount of the adjustment; or

(b) if the adjustment is not an amount—the *market value of the adjustment.

Effect of providing interest realignment adjustment on cost, or cost base and reduced cost base

(2) If an *interest realignment adjustment is provided by you or on your behalf:

(a) include the adjustment amount in the second element of the *cost of a *mining, quarrying or prospecting right that you acquired under the *interest realignment arrangement to which the adjustment amount relates; or

(b) if this Division does not apply to that right—include the adjustment amount in the *cost base and *reduced cost base of that right.

However, if you acquired more than one such right under the arrangement, apportion the adjustment amount between the costs, or cost bases and reduced cost bases, of those rights on a reasonable basis.

Note: Subsections 40‑77(1D) and (1E) of the Income Tax (Transitional Provisions) Act 1997 set out when this Division does not apply to the right.

Tax effects of the right to an interest realignment adjustment

(3) In calculating the *termination value of a *mining, quarrying or prospecting right that you provide under an *interest realignment arrangement, assume to be zero the *market value of any contractual right conferred by the arrangement to an *interest realignment adjustment to be received by you.

(4) In calculating the *cost of a *mining, quarrying or prospecting right that you receive under an *interest realignment arrangement, assume to be zero the *market value of any contractual right conferred by the arrangement to an *interest realignment adjustment to be provided by you.

(5) The creation of a right to an *interest realignment adjustment does not cause *CGT event D1 or CGT event D3 to happen.

(6) Your receipt of an *interest realignment adjustment does not cause *CGT event C2 to happen in relation to the right to receive the adjustment.

Meaning of interest realignment adjustment

(7) An interest realignment adjustment is an amount, or an asset (other than a *mining, quarrying or prospecting right), that:

(a) is provided under an *interest realignment arrangement to a party to the arrangement by or on behalf of another party to the arrangement; and

(b) is provided as an adjustment, to the parties’ contributions of value to the project to which the arrangement relates, that arises because information that has become available since the time the arrangement took effect indicates that the other party did not make an appropriate contribution at that time.

40‑365 Involuntary disposals

(1) You may exclude some or all of an amount that has been included in your assessable income for a *depreciating asset (the original asset) as a result of a *balancing adjustment event to the extent that you choose to treat it as an amount to be applied under subsection (5) for one or more replacement assets.

(2) You can only make this choice if you stop *holding the asset because:

(a) the original asset is lost or destroyed; or

(b) the original asset is compulsorily acquired by an *Australian government agency; or

(c) the original asset is acquired by an entity (other than an Australian government agency or a *foreign government agency) under a power of compulsory acquisition conferred by a law covered under subsection (2A); or

(d) you dispose of the original asset to an entity (other than a foreign government agency) in circumstances meeting all of these conditions:

(i) the disposal takes place after a notice was served on you by or on behalf of the entity;

(ii) the notice invited you to negotiate with the entity with a view to the entity acquiring the asset by agreement;

(iii) the notice informed you that if the negotiations were unsuccessful, the asset would be compulsorily acquired by the entity;

(iv) the compulsory acquisition would have been under a power of compulsory acquisition conferred by a law covered under subsection (2A); or

(e) you dispose of land onto which the original asset was fixed to an entity (other than a foreign government agency) in circumstances meeting all of these conditions:

(i) a mining lease was compulsorily granted over the land;

(ii) the lease significantly affected your use of the land;

(iii) the lease was in force just before the disposal;

(iv) the entity to which you dispose of the land was the lessee under the lease; or

(f) you dispose of land onto which the original asset was fixed to an entity (other than a foreign government agency) in circumstances meeting all of these conditions:

(i) a mining lease would have been compulsorily granted over the land if you had not disposed of it;

(ii) that lease would have significantly affected your use of the land;

(iii) the entity to which you dispose of the land would have been the lessee under the lease.

(2A) A law is covered under this subsection if it is:

(a) an *Australian law (other than Chapter 6A of the Corporations Act 2001); or

(b) a *foreign law (other than a foreign law corresponding to Chapter 6A of the Corporations Act 2001).

(3) You can only make this choice for a replacement asset if you incur the expenditure on the replacement asset, or you start to *hold it:

(a) no earlier than one year, or within a further period the Commissioner allows, before the *balancing adjustment event occurred; and

(b) no later than one year, or within a further period the Commissioner allows, after the end of the income year in which the balancing adjustment event occurred.

(4) You can only make this choice for a replacement asset if:

(a) at the end of the income year in which you incurred the expenditure on the asset, or you started to *hold it, you used it, or had it *installed ready for use, wholly for a *taxable purpose; and

(b) you can deduct an amount for it.

(5) For the purposes of applying this Act to the replacement asset:

(a) its *cost is reduced by the amount covered by the choice for the income year in which the asset’s *start time occurs; and

(b) if the income year is later than the one in which the asset’s *start time occurs—the sum of its *opening adjustable value for that later year and any amount included in the second element of the asset’s cost for that later year is reduced by the amount covered by the choice.

(6) If you are making the choice for 2 or more replacement assets, you apportion the amount covered by the choice between those items in proportion to their *cost.

40‑370 Balancing adjustments where there has been use of different car expense methods

(1) An amount is included in your assessable income or you can deduct an amount under this section instead of section 40‑285 if:

(a) a *balancing adjustment event occurs for a *car you *held; and

(b) you have deducted or can deduct an amount for the decline in value of the car for an income year under this Division; and

(c) you chose the “cents per kilometre” method in Subdivision 28‑C for deducting your car expenses for the car for one or more other income years.

Note 1: This means if you have only used the “log book” method since you began using the car, you calculate the assessable amount or deductible amount under section 40‑285.

Note 2: Also, if you have only used the “cents per kilometre” method since you began using the car, no amount is assessable or deductible under this section or section 40‑285.

(2) Work out the amount you include in your assessable income or the amount you can deduct in this way:

Method statement

Step 1. Subtract the *car’s *adjustable value just before the *balancing adjustment event occurred from the car’s *termination value.

Step 2. Reduce the step 1 amount by the part of the *car’s decline in value that is attributable to your using the car, or having it *installed ready for use, for purposes other than *taxable purposes. You do this by applying the formula in subsection 40‑290(2).

Step 3. Multiply the step 2 amount by the total number of days for which you deducted the decline in value of the *car under this Division.

Step 4. Divide the step 3 amount by the total number of days you *held the *car.

Step 5. The step 4 amount is a deduction if it is negative or it is included in your assessable income if it is positive.

(3) In working out the *adjustable value for the income years for which you chose the “cents per kilometre method”, assume the decline in value was calculated under this Division on the same basis as those income years when that method did not apply.

(4) In working out the reduction in step 2 for the income years for which you chose the “cents per kilometre method”, assume that:

(a) you had not chosen that method for the *car; and

(b) Division 28 (about car expenses) had not applied to the car; and

Subdivision 40‑E—Low‑value and software development pools

Guide to Subdivision 40‑E

40‑420 What this Subdivision is about

You may choose to work out the decline in value of low‑cost assets (assets costing less than $1,000) and certain other depreciating assets through a low‑value pool.

You may also choose to deduct amounts for expenditure you incur on in‑house software through a software development pool.

Table of sections

Operative provisions

40‑425 Allocating assets to a low‑value pool

40‑430 Rules for assets in low‑value pools

40‑435 Private or exempt use of assets

40‑440 How you work out the decline in value of assets in low‑value pools

40‑445 Balancing adjustment events

40‑450 Software development pools

40‑455 How to work out your deduction

40‑460 Your assessable income includes consideration for pooled software

Operative provisions

40‑425 Allocating assets to a low‑value pool

(1) You may choose to allocate a *low cost asset you *hold to a low‑value pool for the income year in which you start to use it, or have it *installed ready for use, for a *taxable purpose.

(2) A low‑cost asset is a *depreciating asset (except a *horticultural plant) whose *cost as at the end of the income year in which you start to use it, or have it *installed ready for use, for a *taxable purpose is less than $1,000.

(3) You may also choose to allocate a *low‑value asset to a low‑value pool.

(4) You cannot allocate a *depreciating asset to a low‑value pool if:

(a) its *cost does not exceed $300; and

(b) you use the asset predominantly for the *purpose of producing assessable income that is not income from carrying on a *business; and

(c) the asset is not part of a set of assets that you started to hold in that income year where the total cost of the set of assets exceeds $300; and

(d) the total cost of the asset and any other identical, or substantially identical, asset that you start to hold in that income year does not exceed $300.

(5) A low‑value asset is a *depreciating asset, except a *horticultural plant, you *hold:

(a) if you have deducted or can deduct amounts for it under this Division for a previous income year—for which you used the *diminishing value method; and

(b) that has an *opening adjustable value for the current year of less than $1,000 (worked out using the diminishing value method); and

(6) A *depreciating asset:

(a) to which Division 58 (about assets previously owned by an exempt entity) applied for an entity sale situation; and

(b) for which you used the *diminishing value method; and

is also a low‑value asset.

Exception: small business entities

(7) You cannot allocate a *depreciating asset to a low‑value pool if you deduct amounts for it under Subdivision 328‑D (about capital allowances for small business entities).

Exception: medium sized businesses

(7A) You cannot allocate a *depreciating asset to a low‑value pool if the decline in value of the asset for any income year is determined by section 40‑82 (about assets costing less than $30,000).

Exception: R&D

(8) You cannot allocate a *depreciating asset to a low‑value pool if you are entitled under section 355‑100 to a *tax offset for a deduction under section 355‑305 for the asset for an income year starting before, or at the same time as, the allocation has effect.

Note: A similar rule applies if you deducted or could have deducted amounts under former 73BA of the Income Tax Assessment Act 1936 (see section 40‑430 of the Income Tax (Transitional Provisions) Act 1997).

40‑430 Rules for assets in low‑value pools

(1) Once you have made a choice to allocate a *low‑cost asset to a low‑value pool for an income year, you must allocate all low‑cost assets you start to *hold in that income year or a later one to the pool.

Note 1: This rule does not apply to low‑value assets.

Note 2: If you are a small business entity for the income year and you calculate your deductions for your depreciating assets under Subdivision 328‑D, you must deduct amounts for your depreciating assets under that Subdivision unless deductions for particular assets are specifically excluded by that Subdivision.

(2) Once you allocate any *depreciating asset to a low‑value pool, it must remain in the pool.

40‑435 Private or exempt use of assets

(1) When you allocate a *depreciating asset to a low‑value pool, you must make a reasonable estimate of the percentage (the taxable use percentage) of your use of the asset (including any past use) that will be for a *taxable purpose over:

(a) for a *low‑cost asset—its *effective life; or

(b) for a *low‑value asset—any period of its effective life that is yet to elapse at the start of the income year for which you allocate it to the pool.

(2) For the purposes of subsection (1), disregard a *taxable purpose that is the *purpose of producing assessable income:

(a) from the use of *residential premises to provide residential accommodation; but

(b) not in the course of carrying on a *business;

if, apart from subsections 40‑25(5) and 40‑27(6), section 40‑27 would reduce your deductions under subsection 40‑25(1) for the asset.

40‑440 How you work out the decline in value of assets in low‑value pools

(1) You work out the decline in value of *depreciating assets in a low‑value pool for an income year in this way:

Step 1. Work out the amount obtained by taking 183/4% of the taxable use percentage of the *cost of each *low‑cost asset you allocated to the pool for that year. Add those amounts.

Step 2. Add to the step 1 amount 183/4% of the taxable use percentage of any amounts included in the second element of the *cost for that year of:

(a) assets allocated to the pool for an earlier income year; and

(b) *low‑value assets allocated to the pool for the *current year.

Step 3. Add to the step 2 amount 371/2% of the sum of:

(a) the *closing pool balance for the previous income year; and

(b) the taxable use percentage of the *opening adjustable values of *low‑value assets, at the start of the income year, that you allocated to the pool for that year.

Step 4. The result is the decline in value of the *depreciating assets in the pool.

(2) The closing pool balance of a low‑value pool for an income year is the sum of:

(a) the *closing pool balance of the pool for the previous income year; and

(b) the taxable use percentage of the *costs of *low‑cost assets you allocated to the pool for that year; and

(c) the taxable use percentage of the *opening adjustable values of any *low‑value assets you allocated to the pool for that year as at the start of that year; and

(d) the taxable use percentage of any amounts included in the second element of the cost for the income year of:

(i) assets allocated to the pool for an earlier income year; and

(ii) low‑value assets allocated to the pool for the *current year;

less the decline in value of the *depreciating assets in the pool worked out under subsection (1).

Note: The closing pool balance may be reduced under section 40‑445 if a balancing adjustment event happens.

40‑445 Balancing adjustment events

(1) If a *balancing adjustment event happens to a *depreciating asset in a low‑value pool in an income year, the *closing pool balance for that year is reduced (but not below zero) by the taxable use percentage of the asset’s *termination value.

(2) If the sum of the *termination values, or the part of it, applicable under subsection (1) exceeds the *closing pool balance of the pool for that year, the excess is included in your assessable income.

40‑450 Software development pools

(1) You may choose to allocate amounts of expenditure you incur on *in‑house software in an income year to a software development pool if it is expenditure on developing, or having another entity develop, computer software.

Note: You cannot allocate expenditure on in‑house software to a software development pool if it is expenditure on acquiring computer software or a right to use computer software.

(2) Once you choose to create a software development pool for an income year, any amounts of the kind referred to in subsection (1) you incur after the pool is created (whether in that income year or a later one) must be allocated to a software development pool.

(3) However, an amount of expenditure on *in‑house software can only be allocated to a software development pool if you intend to use the software solely for a *taxable purpose.

(4) You must create a separate software development pool for each income year for which you incur amounts of the kind referred to in subsection (1).

40‑455 How to work out your deduction

For all the expenditure on *in‑house software in a software development pool that was incurred in a particular income year (Year 1), you get deductions in successive income years as follows:

Deductions allowed for software development pool
	Column 1	Column 2
Item	Income year	Amount of expenditure you can deduct for that year
1	Year 1	Nil
2	Year 2	30%
3	Year 3	30%
4	Year 4	30%
5	Year 5	10%

40‑460 Your assessable income includes consideration for pooled software

(1) If expenditure on *in‑house software is (or was) in your software development pool, your assessable income includes any amount you *derive as consideration in relation to the software.

(2) However, subsection (1) does not apply if subsection 40‑340(3) (roll‑over relief) applies to the change.

Subdivision 40‑F—Primary production depreciating assets

Guide to Subdivision 40‑F

40‑510 What this Subdivision is about

You can deduct amounts for capital expenditure on depreciating assets that are water facilities, horticultural plants, fodder storage assets or fencing assets.

The amount you can deduct is equal to the asset’s decline in value during an income year (as measured under this Subdivision).

Table of sections

Operative provisions

40‑515 Water facilities, horticultural plants, fodder storage assets and fencing assets

40‑520 Meaning of water facility, horticultural plant, fodder storage asset and fencing asset

40‑525 Conditions

40‑530 When declines in value start

40‑535 Meaning of horticulture and commercial horticulture

40‑540 How you work out the decline in value for water facilities

40‑545 How you work out the decline in value for horticultural plants

40‑548 How you work out the decline in value for fodder storage assets

40‑551 How you work out the decline in value for fencing assets

40‑555 Amounts you cannot deduct

40‑560 Non‑arm’s length transactions

40‑565 Extra deduction for destruction of a horticultural plant

40‑570 How this Subdivision applies to partners and partnerships

40‑575 Getting tax information if you acquire a horticultural plant

Operative provisions

40‑515 Water facilities, horticultural plants, fodder storage assets and fencing assets

(1) You can deduct an amount equal to the decline in value for an income year (as worked out under this Subdivision) of a *depreciating asset that is one of these:

(a) a *water facility;

(b) a *horticultural plant;

(d) a *fencing asset.

Note 1: Sections 40‑540, 40‑545, 40‑548 and 40‑551 show you how to work out the decline.

Note 2: Generally, only one taxpayer can deduct amounts for a depreciating asset. However, if you and another taxpayer jointly hold the asset, each of you deduct amounts for it: see section 40‑35.

Conditions

(2) However, the applicable condition in section 40‑525 must be satisfied for the *depreciating asset.

Limit on deduction

(3) You cannot deduct more in total than:

(a) for a *water facility—the amount of capital expenditure (disregarding expenditure that you cannot deduct because of section 26‑100 (about water infrastructure improvement expenditure)) incurred on the facility; or

(b) for a *horticultural plant—the amount of capital expenditure incurred on the plant; or

(d) for a *fencing asset—the amount of capital expenditure incurred on the asset.

Reduction of deduction: water facilities, fodder storage assets and fencing assets

(4) You must reduce your deduction for a *water facility, *fodder storage asset or *fencing asset for an income year by the part of the decline in value of the facility or asset that is attributable to the period (if any) in the income year when it was:

(a) not wholly used in carrying on a *primary production business on land in Australia; or

(b) not wholly used for a *taxable purpose.

(5) Paragraph (4)(a) does not apply to a *water facility if the expenditure incurred on the construction, manufacture, installation or acquisition of the water facility was incurred by an *irrigation water provider.

Meaning of irrigation water provider

(6) An irrigation water provider is an entity whose *business is primarily and principally the supply (otherwise than by using a *motor vehicle) of water to entities for use in *primary production businesses on land in Australia.

40‑520 Meaning of water facility, horticultural plant, fodder storage asset and fencing asset

(1) A water facility is:

(a) *plant or a structural improvement, or a repair of a capital nature, or an alteration, addition or extension, to plant or a structural improvement, that is primarily and principally for the purpose of conserving or conveying water; or

(b) a structural improvement, or a repair of a capital nature, or an alteration, addition or extension, to a structural improvement, that is reasonably incidental to conserving or conveying water.

Example: Examples of a water facility include a dam, tank, tank stand, bore, well, irrigation channel, pipe, pump, water tower and windmill. Examples of things reasonably incidental to conserving or conveying water include a culvert, a fence to prevent live stock entering an irrigation channel and a bridge over an irrigation channel.

(2) A horticultural plant is a live plant or fungus that is cultivated or propagated for any of its products or parts.

(3) A fodder storage asset is an asset or a structural improvement, or a repair of a capital nature, or an alteration, addition or extension, to an asset or a structural improvement, that is primarily and principally for the purpose of storing fodder.

(4) A fencing asset is:

(a) an asset or a structural improvement that is a fence; or

(b) a repair of a capital nature, or an alteration, addition or extension, to a fence.

40‑525 Conditions

Water facilities

(1) The capital expenditure you incurred on the construction, manufacture, installation or acquisition of the *water facility must have been incurred:

(a) primarily and principally for the purpose of conserving or conveying water for use in a *primary production business that you conduct on land in Australia; or

(b) for expenditure incurred by an *irrigation water provider—primarily and principally for the purpose of conserving or conveying water for use in primary production businesses conducted by other entities on land in Australia, being entities supplied with water by the irrigation water provider.

Note: If Division 250 applies to you and an asset that is a water facility:

(a) if section 250‑150 applies—the condition in this subsection is taken not to be satisfied for the facility to the extent specified under subsection 250‑150(3); or

(b) otherwise—the condition in this subsection is taken not to be satisfied for the facility.

Horticultural plants

(2) One of the conditions in this table must be satisfied:

Conditions relating to horticultural plants
Item	Condition
1	You own the horticultural plant and any holder of a lease, lesser interest or licence relating to the land does not carry on a business of *horticulture on the land
2	The horticultural plant is attached to land you hold under a lease, or a quasi‑ownership right granted by an exempt Australian government agency or an exempt foreign government agency, and: (a) the lease or quasi‑ownership right enables you to carry on a business of horticulture on the land; and (b) any holder of a lesser interest or licence relating to the land does not carry on a business of horticulture on the land.
3	You: (a) hold a licence relating to the land to which the horticultural plant is attached; and (b) carry on a business of *horticulture on the land as a result of holding the licence.

Note: If Division 250 applies to you and an asset that is a horticultural plant:

(a) if section 250‑150 applies—a condition in this subsection is taken not to be satisfied for the plant to the extent specified under subsection 250‑150(3); or

(b) otherwise—the conditions in this subsection are taken not to be satisfied for the horticultural plant.

Fodder storage assets

(3) The capital expenditure you incurred on the construction, manufacture, installation or acquisition of the *fodder storage asset must have been incurred primarily and principally for use in a *primary production business that you conduct on land in Australia.

Note: If Division 250 applies to you and an asset that is a fodder storage asset:

(a) if section 250‑150 applies—the condition in this subsection is taken not to be satisfied for the asset to the extent specified under subsection 250‑150(3); or

(b) otherwise—the condition in this subsection is taken not to be satisfied for the asset.

Fencing assets

(4) The capital expenditure you incurred on the construction, manufacture, installation or acquisition of the *fencing asset must have been incurred primarily and principally for use in a *primary production business that you conduct on land in Australia.

Note: If Division 250 applies to you and an asset that is a fencing asset:

(a) if section 250‑150 applies—the condition in this subsection is taken not to be satisfied for the asset to the extent specified under subsection 250‑150(3); or

(b) otherwise—the condition in this subsection is taken not to be satisfied for the asset.

40‑530 When declines in value start

(1) A *water facility, *fodder storage asset or *fencing asset starts to decline in value in the income year in which you first incur expenditure on the facility or asset.

(2) A *horticultural plant starts to decline in value in:

(a) if you are the first entity to satisfy a condition in subsection 40‑525(2) for the plant—the income year in which the first commercial season starts; or

(b) if not—the later of the income year in which you first satisfied that condition and the income year in which the first commercial season starts.

40‑535 Meaning of horticulture and commercial horticulture

(1) Horticulture includes:

(a) propagation and cultivation of a *horticultural plant in any environment (whether natural or artificial); and

(b) propagation and cultivation of seeds, bulbs, spores and similar things; and

(2) Use for commercial horticulture means use for the *purpose of producing assessable income in a *business of *horticulture.

40‑540 How you work out the decline in value for water facilities

(1) The decline in value of a *water facility for the income year in which you incurred the expenditure is the amount of capital expenditure you incurred on the construction, manufacture, installation or acquisition of the water facility.

(2) However, disregard expenditure that you cannot deduct because of section 26‑100 (about water infrastructure improvement expenditure).

40‑545 How you work out the decline in value for horticultural plants

(1) The decline in value of a *horticultural plant for the income year in which it starts to decline in value is all of the capital expenditure attributable to the establishment of the plant if its *effective life is less than 3 years.

(2) You work out the decline in value for an income year of a *horticultural plant whose *effective life is 3 years or more in this way:

where:

establishment expenditure is the amount of capital expenditure incurred that is attributable to the establishment of the *horticultural plant.

write‑off days in income year is the number of days in the income year on which you satisfied a condition in subsection 40‑525(2) for the plant and either used it for *commercial horticulture or held it ready for that use.

write‑off rate is the rate shown in this table for the *horticultural plant according to its *effective life.

Write‑off rate for horticultural plant
Item	Effective life of:	The write‑off rate is:
1	3 to fewer than 5 years	40%
2	5 to fewer than 62/3 years	27%
3	62/3 to fewer than 10 years	20%
4	10 to fewer than 13 years	17%
5	13 to fewer than 30 years	13%
6	30 years or more	7%

Limit on write‑off days

(3) Disregard your use of the *horticultural plant on a day outside the period that:

(a) starts when the plant can first be used for *commercial horticulture; and

(b) extends for the time shown in this table (depending on the plant’s *effective life).

Period after which you cannot count use of horticultural plant
Item	Effective life:	Time limit:
1	3 to fewer than 5 years	2 years and 183 days
2	5 to fewer than 62/3 years	3 years and 257 days
3	62/3 to fewer than 10 years	5 years
4	10 to fewer than 13 years	5 years and 323 days
5	13 to fewer than 30 years	7 years and 253 days
6	30 years or more	14 years and 105 days

40‑548 How you work out the decline in value for fodder storage assets

The decline in value of a *fodder storage asset for the income year in which you incurred the expenditure is the amount of capital expenditure you incurred on the construction, manufacture, installation or acquisition of the fodder storage asset.

40‑551 How you work out the decline in value for fencing assets

The decline in value of a *fencing asset for the income year in which you incurred the expenditure is the amount of capital expenditure you incurred on the construction, manufacture, installation or acquisition of the fencing asset.

40‑555 Amounts you cannot deduct

Water facilities

(1) You cannot deduct an amount for any income year for capital expenditure on the acquisition of a *water facility if any entity has deducted or can deduct an amount under this Subdivision for any income year for earlier capital expenditure on:

(a) the construction or manufacture of the facility; or

(b) a previous acquisition of the facility.

Note: A depreciating asset and a repair of a capital nature or an alteration, addition or extension to that asset that is a water facility are not the same depreciating asset for the purposes of section 40‑50 and this Subdivision: see section 40‑53.

Horticultural plants

(3) In working out your deduction under this Subdivision for a *horticultural plant, disregard expenditure incurred:

(a) in draining swamp or low‑lying land; or

(b) in clearing land.

Fodder storage assets

(4) You cannot deduct an amount for any income year for capital expenditure on the acquisition of a *fodder storage asset if any entity has deducted or can deduct an amount under this Subdivision for any income year for earlier capital expenditure on:

(a) the construction or manufacture of the asset; or

(b) a previous acquisition of the asset.

Note: A depreciating asset and a repair of a capital nature or an alteration, addition or extension to that asset that is a fodder storage asset are not the same depreciating asset for the purposes of section 40‑50 and this Subdivision: see section 40‑53.

Fencing assets

(5) You cannot deduct an amount for any income year for capital expenditure on the acquisition of a *fencing asset if any entity has deducted or can deduct an amount under this Subdivision for any income year for earlier capital expenditure on:

(a) the construction or manufacture of the fencing asset; or

(b) a previous acquisition of the fencing asset.

Note: A depreciating asset and a repair of a capital nature or an alteration, addition or extension to that asset that is a fencing asset are not the same depreciating asset for the purposes of section 40‑50 and this Subdivision: see section 40‑53.

(6) You cannot deduct an amount for any income year for capital expenditure on a *fencing asset to the extent that any entity has deducted or can deduct the amount under subsection 40‑630(1) (about landcare operations).

(7) You cannot deduct an amount for any income year for capital expenditure on a *fencing asset if the fencing asset is (or is a repair, alteration, addition or extension to):

(a) a stockyard or pen; or

(b) a portable fence.

40‑560 Non‑arm’s length transactions

If you incurred capital expenditure under an *arrangement and:

(a) there is at least one other party to the arrangement with whom you did not deal at *arm’s length; and

(b) apart from this section, the amount of the expenditure would be more than the *market value of what it was for;

the amount of expenditure you take into account under this Subdivision is that market value.

40‑565 Extra deduction for destruction of a horticultural plant

(1) You can deduct the amount worked out under subsection (2) for a *horticultural plant for an income year if its *effective life is 3 years or more and it is destroyed during the income year while you own it and use it for *commercial horticulture.

(2) Work out your deduction as follows:

Method statement

Step 1. Work out the total of the amounts you could have deducted under this Subdivision for the *horticultural plant for the period:

(a) starting when the plant could first be used for *commercial horticulture; and

(b) ending when it was destroyed;

assuming that, during that period, you satisfied a condition in section 40‑525 for the plant and used it for commercial horticulture.

Step 2. Subtract from the capital expenditure that is attributable to the establishment of the *horticultural plant:

(a) the result from step 1; and

(b) any amount you received (under an insurance policy or otherwise) for the destruction.

The remaining amount (if any) is your deduction under subsection (1).

(3) This deduction is in addition to any deduction for the income year under section 40‑545.

40‑570 How this Subdivision applies to partners and partnerships

(1) This section applies to allocate expenditure to you for the purposes of this Subdivision if you were a partner in a partnership when it incurred capital expenditure during an income year.

(2) For the purposes of this Subdivision, you are taken to have incurred during that income year:

(a) the amount of the expenditure that the partners agreed you should bear; or

(b) if there was no such agreement—the proportion of the expenditure equal to the proportion of your individual interest in the net income or partnership loss of the partnership for that income year.

(3) Disregard this Subdivision when working out the net income or partnership loss of the partnership under section 90 of the Income Tax Assessment Act 1936.

40‑575 Getting tax information if you acquire a horticultural plant

(1) If you begin to satisfy a condition in section 40‑525 for a *horticultural plant, you may give the last entity (if any) that satisfied such a condition for the plant a written notice requiring the entity to give you any or all of the following information:

(a) the amount of establishment expenditure for the plant;

(b) if the entity used the plant’s *effective life to work out the decline in value of the plant—its effective life and the day on which it could first be used for *commercial horticulture.

(2) The notice must:

(a) be given within 60 days of your beginning to satisfy that condition; and

(b) specify a period of at least 60 days within which the information must be given; and

Note: Subsections (4) and (5) explain how this subsection operates if the last owner is a partnership.

Requirement to comply with notice

(3) The entity to whom the notice is given must not intentionally refuse or fail to comply with the notice.

Penalty: 10 penalty units.

Giving the notice to a partnership

(4) If the entity to whom the notice is given is a partnership:

(a) you may give it to the partnership by giving it to any of the partners (this does not limit how else you can give it); and

(b) the obligation to comply with the notice is imposed on each of the partners (not on the partnership), but may be discharged by any of them.

(5) A partner must not intentionally refuse or fail to comply with that obligation, unless another partner has already complied with it.

Penalty: 10 penalty units.

Limits on giving a notice

(6) Only one notice can be given in relation to the same *horticultural plant.

Subdivision 40‑G—Capital expenditure of primary producers and other landholders

Guide to Subdivision 40‑G

40‑625 What this Subdivision is about

You can deduct amounts for capital expenditure you incur:

• on landcare operations; or

• on electricity connections or telephone lines.

Table of sections

Operative provisions

40‑630 Landcare operations

40‑635 Meaning of landcare operation

40‑640 Meaning of approved management plan

40‑645 Electricity and telephone lines

40‑650 Amounts you cannot deduct under this Subdivision

40‑655 Meaning of connecting power to land or upgrading the connection and metering point

40‑660 Non‑arm’s length transactions

40‑665 How this Subdivision applies to partners and partnerships

40‑670 Approval of persons as farm consultants

40‑675 Review of decisions relating to approvals

Operative provisions

40‑630 Landcare operations

(1) You can deduct capital expenditure you incur at a time in an income year on a *landcare operation for:

(a) land in Australia you use at the time for carrying on a *primary production business; or

(b) rural land in Australia you use at the time for carrying on a *business for a *taxable purpose from the use of that land (except a business of *mining and quarrying operations).

Note: If Division 250 applies to you and an asset that is land:

(a) if section 250‑150 applies—you are taken not to be using the land for the purpose of carrying on a primary production business, or a business for the purpose of producing assessable income from the use of rural land (except a business of mining and quarrying operations), to the extent specified under subsection 250‑150(3); or

(b) otherwise—you are taken not to be using the land for such a purpose.

(1A) A *rural land irrigation water provider can deduct capital expenditure it incurs at a time in an income year on a *landcare operation for:

(a) land in Australia that other entities use at the time for carrying on *primary production businesses; or

(b) rural land in Australia that other entities use at the time for carrying on *businesses for a *taxable purpose from the use of that land (except a business of *mining and quarrying operations);

being entities supplied with water by the rural land irrigation water provider.

(1B) A rural land irrigation water provider is:

(a) an *irrigation water provider; or

(b) an entity whose *business is primarily and principally the supply (otherwise than by using a *motor vehicle) of water to entities for use in carrying on *businesses (except businesses of *mining and quarrying operations) using rural land in Australia.

Exception: plant

(2) However, you cannot deduct an amount under this Subdivision for capital expenditure on *plant, except:

(a) a fence erected for a purpose described in paragraph 40‑635(1)(a) or (b); or

(b) a dam or structural improvement (except a fence) covered by paragraph (1)(c), (d), (e) or (f) of the definition of plant in section 45‑40.

(2A) In applying paragraph (2)(b) to capital expenditure incurred by a *rural land irrigation water provider on a dam or structural improvement, the requirement in paragraph 45‑40(1)(c) that the land on which the dam or structural improvement is situated be used for agricultural or pastoral operations is to be disregarded.

Exception: deduction available under Subdivision 40‑F

(2B) A *rural land irrigation water provider cannot deduct an amount under this Subdivision for capital expenditure if the entity can deduct an amount for that expenditure under Subdivision 40‑F.

Exception: deduction available under Subdivision 40‑J

(2C) You cannot deduct an amount under this Subdivision for capital expenditure if any entity can deduct an amount for that expenditure for any income year under Subdivision 40‑J.

Reduction of deduction

(3) You must reduce your deduction by a reasonable amount to reflect your use of the land in the income year after the time when you incurred the expenditure for a purpose other than the purpose of carrying on:

(a) a *primary production business; or

(b) a *business for the *purpose of producing assessable income from the use of rural land (except a business of *mining and quarrying operations).

(4) Subsection (3) does not apply to expenditure incurred by a *rural land irrigation water provider. Instead, a rural land irrigation water provider must reduce its deduction in relation to particular land by a reasonable amount to reflect an entity’s use of the land in the income year after the rural land irrigation water provider incurred the expenditure for a purpose other than a *taxable purpose.

40‑635 Meaning of landcare operation

(1) Landcare operation for land means:

(a) erecting a fence to separate different land classes on the land in accordance with an *approved management plan for the land; or

(b) erecting a fence on the land primarily and principally for the purpose of excluding animals from an area affected by land degradation:

(i) to prevent or limit extension or worsening of land degradation in the area; and

(ii) to help reclaim the area; or

(d) constructing drainage works on the land primarily and principally for the purpose of controlling salinity or assisting in drainage control; or

(e) an operation primarily and principally for the purpose of:

(i) eradicating or exterminating from the land animals that are pests; or

(ii) eradicating, exterminating or destroying plant growth detrimental to the land; or

(iii) preventing or fighting land degradation (except by erecting fences on the land); or

(f) a repair of a capital nature, or an alteration, addition or extension, to an asset described in paragraph (a), (b), (c) or (d) or an extension of an operation described in paragraph (e); or

(g) constructing a structural improvement, or a repair of a capital nature, or an alteration, addition or extension, to a structural improvement, that is reasonably incidental to an asset described in paragraph (c) or (d).

Note: A depreciating asset and a repair of a capital nature or an alteration, addition or extension to that asset are not the same asset for the purposes of section 40‑50 and this Subdivision: see section 40‑53.

(2) Paragraph (1)(d) does not apply to an operation draining swamp or low‑lying land.

40‑640 Meaning of approved management plan

An approved management plan for *land is a plan that:

(a) shows the different classes within the land and the location of any fencing needed to separate any of the land classes to prevent land degradation; and

(b) describes the kind of fencing and how it will prevent land degradation; and

(i) an officer of an *Australian government agency responsible for land conservation who has authority to do so; or

(ii) an individual who was at the time approved as a farm consultant under this Subdivision.

40‑645 Electricity and telephone lines

(1) You can deduct amounts for capital expenditure you incur on *connecting power to land or upgrading the connection if, when you incur the expenditure:

(a) you have an interest in the land or are a share‑farmer carrying on a *business on the land; and

(b) you or another entity intends to use some or all of the electricity to be supplied as a result of the expenditure in carrying on a business on the land for a *taxable purpose at a time when you have an interest in the land or are a share‑farmer carrying on a business on the land.

(2) You can also deduct amounts for capital expenditure you incur on a telephone line on or extending to land if, when you incurred the expenditure:

(a) a *primary production business was carried on the land; and

(b) you had an interest in the land or you were a share‑farmer carrying on a primary production business on the land.

(3) The amount you can deduct is 10% of the expenditure:

(a) for the income year in which you incur it; and

(b) for each of the next 9 income years.

Note 1: Various provisions may reduce the amount you can deduct or stop you deducting. For example, see:

Division 26 (limiting deductions generally); and
section 40‑650 (specifying expenditure you cannot deduct under this Subdivision); and
Division 245 (which may affect your entitlement to a deduction if your debts are forgiven).

Note 2: If you recoup an amount of the expenditure, the amount will be included in your assessable income. See Subdivision 20‑A.

40‑650 Amounts you cannot deduct under this Subdivision

(1) You cannot deduct amounts for capital expenditure you incur on *connecting power to land or upgrading the connection if, during the 12 months after electricity is first supplied to the land as a result of the expenditure, no electricity supplied as a result of the expenditure is used in carrying on a *business on the land for a *taxable purpose.

(2) If you deducted an amount for any income year under this Subdivision for the expenditure, your assessment for that income year may be amended under section 170 of the Income Tax Assessment Act 1936 to disallow the deduction.

(3) You cannot deduct an amount for capital expenditure you incur on *connecting power to land or upgrading the connection for:

(a) expenditure in providing water, light or power for use on, access to or communication with the site of *mining and quarrying operations; or

(b) a contribution to the cost of providing water, light or power for those operations.

(4) You cannot deduct an amount for any income year for your capital expenditure on a part of a telephone line if:

(a) any entity has deducted, or can deduct, an amount for any income year for the cost of that part under a provision of this Act (except this Subdivision); or

(b) the cost of that part has been, or must be, taken into account in working out:

(i) the amount of any entity’s deduction (including a deduction for a *depreciating asset) for any income year under a provision of this Act (except this Subdivision); or

(ii) the net income, or partnership loss, of a partnership under section 90 of the Income Tax Assessment Act 1936.

(5) However, you can deduct an amount under this Subdivision for your expenditure on a part of a telephone line even if:

(a) an entity that worked on installing that part has deducted, or can deduct, an amount relating to that part for any income year under this Act (except this Subdivision); or

(b) the cost of that part has been, or must be, taken into account:

(i) in working out the amount of such an entity’s deduction for any income year under a provision of this Act (except this Subdivision); or

(ii) under section 90 of the Income Tax Assessment Act 1936 in working out the net income, or partnership loss, of a partnership that worked on installing that part.

(6) Subsection (5) has effect whether the entity did the work itself or through one or more employees or *agents.

(7) If you can deduct, or have deducted, an amount for any income year under section 40‑645 for your expenditure:

(a) an entity cannot deduct an amount for any income year under a provision of this Act (except this Subdivision) for the expenditure; and

(b) the expenditure cannot be taken into account to work out the amount of an entity’s deduction for any income year under a provision of this Act (except this Subdivision).

(8) Subsection (7) also applies in working out the net income, or partnership loss, of a partnership under section 90 of the Income Tax Assessment Act 1936.

40‑655 Meaning of connecting power to land or upgrading the connection and metering point

(1) Each of these operations is connecting power to land or upgrading the connection:

(a) connecting a mains electricity cable to a *metering point on the land (whether or not the point from which the cable is connected is on the land);

(b) providing or installing equipment designed to measure the amount of electricity supplied through a mains electricity cable to a metering point on the land;

(c) providing or installing equipment for use directly in connection with the supply of electricity through a mains electricity cable to a metering point on the land;

(d) work to increase the amount of electricity that can be supplied through a mains electricity cable to a metering point on the land;

(e) work to modify or replace equipment designed to measure the amount of electricity supplied through a mains electricity cable to a metering point on the land, if the modification or replacement results from increasing the amount of electricity supplied to the land;

(f) work to modify or replace equipment for use directly in connection with the supply of electricity through a mains electricity cable to the land, if the modification or replacement results from increasing the amount of electricity supplied to the land;

(g) work carried out as a result of a contribution to the cost of a project consisting of the connection of mains electricity facilities to that land and other land.

(2) However, an operation described in subsection (1) done in the course of replacing or relocating mains electricity cable or equipment is connecting power to land or upgrading the connection only if done to increase the amount of electricity that can be supplied to a *metering point on the land.

(3) A metering point on land is a point where consumption of electricity supplied to the land through a mains electricity cable is measured.

40‑660 Non‑arm’s length transactions

If you incurred capital expenditure under an *arrangement and:

(a) there is at least one other party to the arrangement with whom you did not deal at *arm’s length; and

(b) apart from this section, the amount of the expenditure would be more than the *market value of what it was for;

the amount of expenditure you take into account under this Subdivision is that market value.

40‑665 How this Subdivision applies to partners and partnerships

(1) This section applies to allocate expenditure to you for the purposes of this Subdivision if you were a partner in a partnership when it incurred capital expenditure during an income year.

(2) For the purposes of this Subdivision, you are taken to have incurred during that income year:

(a) the amount of the expenditure that the partners agreed you should bear; or

(3) Disregard this Subdivision when working out the net income or partnership loss of the partnership under section 90 of the Income Tax Assessment Act 1936.

40‑670 Approval of persons as farm consultants

(1) A person may be approved in writing as a farm consultant by:

(a) the *Agriculture Secretary; or

(b) an officer of the *Agriculture Department who has been authorised in writing by the Agriculture Secretary to approve persons as farm consultants.

Note: This subsection also allows the approval of an individual as a farm consultant to be revoked. See subsection 33(3) of the Acts Interpretation Act 1901.

(2) The following matters must be taken into account when deciding whether to approve a person as a farm consultant:

(a) the person’s qualifications, experience and knowledge relating to *land conservation and farm management;

(b) the person’s standing in the professional community;

40‑675 Review of decisions relating to approvals

A person may apply to the *AAT for review of a decision (as defined in the Administrative Appeals Tribunal Act 1975):

(a) to refuse to approve the person as a farm consultant; or

(b) to revoke the approval of the person as a farm consultant.

Subdivision 40‑H—Capital expenditure that is immediately deductible

Guide to Subdivision 40‑H

40‑725 What this Subdivision is about

You get an immediate deduction for certain capital expenditure on:

• exploration or prospecting; and

• rehabilitation of mining or quarrying sites; and

• paying petroleum resource rent tax; and

• environmental protection activities.

Table of sections

Operative provisions

40‑730 Deduction for expenditure on exploration or prospecting

40‑735 Deduction for expenditure on mining site rehabilitation

40‑740 Meaning of ancillary activities and mining building site

40‑745 No deduction for certain expenditure

40‑750 Deduction for payments of petroleum resource rent tax

40‑755 Environmental protection activities

40‑760 Limits on deductions from environmental protection activities

40‑765 Non‑arm’s length transactions

Operative provisions

40‑730 Deduction for expenditure on exploration or prospecting

(1) You can deduct expenditure you incur in an income year on *exploration or prospecting for *minerals, or quarry materials, obtainable by *mining and quarrying operations if, for that expenditure, you satisfy one or more of these paragraphs:

(a) you carried on mining and quarrying operations;

(b) it would be reasonable to conclude you proposed to carry on such operations;

(c) you carried on a *business of, or a business that included, exploration or prospecting for minerals or quarry materials obtainable by such operations, and the expenditure was necessarily incurred in carrying on that business.

Note: If Division 250 applies to you and an asset that is land:

(a) if section 250‑150 applies—you cannot deduct expenditure you incur in relation to the land to the extent specified under subsection 250‑150(3); or

(b) otherwise—you cannot deduct such expenditure.

(2) However, you cannot deduct expenditure under subsection (1) if it is expenditure on:

(a) development drilling for *petroleum; or

(b) operations in the course of working a mining property, quarrying property or petroleum field.

(3) Also, you cannot deduct expenditure under subsection (1) to the extent that it forms part of the *cost of a *depreciating asset.

Definitions

(4) Exploration or prospecting includes:

(a) for mining in general, and quarrying:

(i) geological mapping, geophysical surveys, systematic search for areas containing *minerals (except *petroleum) or quarry materials, and search by drilling or other means for such minerals or materials within those areas; and

(ii) search for ore within, or near, an ore‑body or search for quarry materials by drives, shafts, cross‑cuts, winzes, rises and drilling; and

(b) for petroleum mining:

(i) geological, geophysical and geochemical surveys; and

(ii) exploration drilling and appraisal drilling; and

(c) feasibility studies to evaluate the economic feasibility of mining minerals or quarry materials once they have been discovered; and

(d) obtaining *mining, quarrying or prospecting information associated with the search for, and evaluation of, areas containing minerals or quarry materials.

(5) Minerals includes *petroleum.

(6) Petroleum means:

(a) any naturally occurring hydrocarbon or naturally occurring mixture of hydrocarbons, whether in a gaseous, liquid or solid state; or

(b) any naturally occurring mixture of:

(i) one or more hydrocarbons, whether in a gaseous, liquid or solid state; and

(ii) one or more of the following: hydrogen sulphide, nitrogen, helium or carbon dioxide;

whether or not that substance has been returned to a natural reservoir.

(7) Mining and quarrying operations means:

(a) mining operations on a mining property for extracting *minerals (except *petroleum) from their natural site; or

(b) mining operations for the purpose of obtaining petroleum; or

for the *purpose of producing assessable income.

(8) Mining, quarrying or prospecting information is geological, geophysical or technical information that:

(a) relates to the presence, absence or extent of deposits of *minerals or quarry materials in an area; or

(b) is likely to help in determining the presence, absence or extent of such deposits in an area.

40‑735 Deduction for expenditure on mining site rehabilitation

(1) You can deduct for an income year expenditure you incur in that year to the extent it is on *mining site rehabilitation of:

(a) a site on which you:

(i) carried on *mining and quarrying operations; or

(ii) conducted *exploration or prospecting; or

(iii) conducted *ancillary mining activities; or

(b) a *mining building site.

Note 1: If an amount of the expenditure is recouped, the amount may be included in your assessable income: see Subdivision 20‑A.

Note 2: If Division 250 applies to you and an asset that is land:

(a) if section 250‑150 applies—you cannot deduct expenditure you incur in relation to the land to the extent specified under subsection 250‑150(3); or

(b) otherwise—you cannot deduct such expenditure.

(2) However, a provision of this Act (except Division 8 (which is about deductions)) that expressly prevents or restricts the operation of that Division applies in the same way to this section.

(3) However, you cannot deduct expenditure under subsection (1) to the extent that it forms part of the *cost of a *depreciating asset.

(4) Mining site rehabilitation is an act of restoring or rehabilitating a site or part of a site to, or to a reasonable approximation of, the condition it was in before *mining and quarrying operations, *exploration or prospecting or *ancillary mining activities were first started on the site, whether by you or by someone else.

(5) Partly restoring or rehabilitating such a site counts as mining site rehabilitation (even if you had no intention of completing the work).

(6) For a *mining building site, the time when *ancillary mining activities were first started on the site is the earliest time when the buildings, improvements or *depreciating assets concerned were located on the site.

40‑740 Meaning of ancillary mining activities and mining building site

(1) Any of the following are ancillary mining activities:

(a) preparing a site for you to carry on *mining and quarrying operations;

(b) providing water, light or power for, access to, or communications with, a site on which you carry on, or will carry on, mining and quarrying operations;

(c) *minerals treatment of *minerals or minerals treatment of quarry materials, obtained by you in carrying on mining and quarrying operations;

(d) storing (whether before or after minerals treatment) such minerals, *petroleum or quarry materials in relation to the operation of a *depreciating asset for use primarily and principally in treating such minerals or quarry materials;

(e) liquefying natural gas obtained from mining and quarrying operations you carry on.

(2) A mining building site is a site, or a part of a site, where there are *depreciating assets that are or were necessary for you to carry on *mining and quarrying operations. However, a mining building site does not include anything covered by the definition of housing and welfare.

40‑745 No deduction for certain expenditure

Expenditure on these things is not deductible under section 40‑735:

(a) acquiring land or an interest in land or a right, power or privilege to do with land;

(b) a bond or security, however described, for performing *mining site rehabilitation;

40‑750 Deduction for payments of petroleum resource rent tax

(1) You can deduct a payment of *petroleum resource rent tax, or an *instalment of petroleum resource rent tax, that you make in an income year.

Note 1: If an amount of the expenditure is recouped, the amount may be included in your assessable income: see Subdivision 20‑A.

Note 2: If Division 250 applies to you and an asset:

(a) if section 250‑150 applies—you cannot deduct expenditure you incur in relation to the asset to the extent specified under subsection 250‑150(3); or

(b) otherwise—you cannot deduct such expenditure.

(2) You cannot deduct under subsection (1) a payment that you make under paragraph 99(c) of the Petroleum Resource Rent Tax Assessment Act 1987.

(3) These amounts are included in your assessable income for the income year in which they are refunded, credited, paid or applied:

(a) an amount the Commissioner pays you in total or partial discharge of a debt of the kind referred to in subsection 47(1) of the Petroleum Resource Rent Tax Assessment Act 1987; or

(b) an amount the Commissioner applies under subsection 47(2) of the Petroleum Resource Rent Tax Assessment Act 1987 in total or partial discharge of a liability you have.

40‑755 Environmental protection activities

(1) You can deduct expenditure you incur in an income year for the sole or dominant purpose of carrying on *environmental protection activities.

Note: If Division 250 applies to you and an asset that is land:

(a) if section 250‑150 applies—you cannot deduct expenditure you incur in relation to the land to the extent specified under subsection 250‑150(3); or

(b) otherwise—you cannot deduct such expenditure.

(2) Environmental protection activities are any of the following activities that are carried on by or for you:

(a) preventing, fighting or remedying:

(i) pollution resulting, or likely to result, from *your earning activity; or

(ii) pollution of or from the site of your earning activity; or

(iii) pollution of or from a site where an entity was carrying on any *business that you have acquired and carry on substantially unchanged as your earning activity;

(b) treating, cleaning up, removing or storing:

(i) waste resulting, or likely to result, from your earning activity; or

(ii) waste that is on or from the site of *your earning activity; or

(iii) waste that is on or from a site where an entity was carrying on any business that you have acquired and carry on substantially unchanged as your earning activity.

No other activities are environmental protection activities.

(3) Your earning activity is an activity you carried on, carry on, or propose to carry on:

(a) for the *purpose of producing assessable income for an income year (except a *net capital gain); or

(b) for the purpose of *exploration or prospecting; or

(d) for purposes that include one or more of those purposes.

(4) If *your earning activity is:

(a) leasing a site you own; or

(b) granting a *right to use a site you own or control; or

that site is taken to be the site of your earning activity.

Note: This means you can deduct your expenditure on environmental protection activities relating to the site, even if the pollution or waste is caused by another entity that uses the site.

40‑760 Limits on deductions from environmental protection activities

Expenditure you cannot deduct

(1) You cannot deduct an amount under section 40‑755 for an income year for:

(a) expenditure for acquiring land; or

(b) capital expenditure for constructing a building, structure or structural improvement; or

(c) capital expenditure for constructing an extension, alteration or improvement to a building, structure or structural improvement; or

(d) a bond or security (however described) for performing *environmental protection activities; or

(e) expenditure to the extent that you can deduct an amount for it under a provision of this Act outside this Subdivision.

Note: You may be able to deduct expenditure described in paragraph (1)(b) or (c) under Division 43 (which deals with capital works).

(2) In particular, you cannot deduct under section 40‑755 expenditure to the extent that you incur it on carrying out an activity for environmental impact assessment of your project.

(3) However, a provision of this Act (except Division 8 (which is about deductions)) that expressly prevents or restricts the operation of that Division applies in the same way to section 40‑755.

40‑765 Non‑arm’s length transactions

If you incurred capital expenditure under an *arrangement and:

(a) there is at least one other party to the arrangement with whom you did not deal at *arm’s length; and

(b) apart from this section, the amount of the expenditure would be more than the *market value of what it was for;

the amount of expenditure you take into account under this Subdivision is that market value.

Subdivision 40‑I—Capital expenditure that is deductible over time

Guide to Subdivision 40‑I

40‑825 What this Subdivision is about

You can deduct amounts for certain capital expenditure associated with projects you carry on. You deduct the amounts over the life of the project using a pool.

You can also deduct amounts for certain business related costs. You deduct these amounts over 5 years (or immediately in the case of some start‑up expenses for small businesses) if the amounts are not otherwise taken into account and are not denied a deduction.

Table of sections

Operative provisions

40‑830 Project pools

40‑832 Project pools for post‑9 May 2006 projects

40‑835 Reduction of deduction

40‑840 Meaning of project amount

40‑845 Project life

40‑855 When you start to deduct amounts for a project pool

40‑860 Meaning of mining capital expenditure

40‑865 Meaning of transport capital expenditure

40‑870 Meaning of transport facility

40‑875 Meaning of processed minerals and minerals treatment

40‑880 Business related costs

40‑885 Non‑arm’s length transactions

Operative provisions

40‑830 Project pools

(1) You can allocate *project amounts to a project pool.

(2) You can deduct amounts for *project amounts that are allocated to the project pool.

(3) You calculate your deduction for an income year for a project pool in this way:

where:

DV project pool life is:

(a) the *project life of the project; or

(b) if its project life has been recalculated—its most recently recalculated project life.

pool value is:

(a) for the first income year that a *project amount is allocated to the pool—the sum of the project amounts allocated to the pool for that year; or

(b) for a later income year—the sum of the pool’s *closing pool value for the previous income year and any project amounts allocated to the pool for the later year.

Note: The calculation is made under subsection 40‑832(3) for project amounts incurred on or after 10 May 2006 for projects that start to operate on or after that day.

(4) If, in an income year, you abandon, sell or otherwise dispose of a project for which you have a project pool, you can deduct for that year the sum of the pool’s *closing pool value for the previous income year and any *project amounts allocated to the pool for the income year.

(5) Your assessable income for that income year includes any amount you receive for the abandonment, sale or other disposal.

(6) Your assessable income for an income year includes other capital amounts that you *derive in that year in relation to a *project amount allocated to your project pool or in relation to something on which the project amount is expended.

(7) The closing pool value of a project pool for an income year is:

(a) for the first income year that a *project amount is allocated to the pool—the sum of the project amounts allocated to the pool for that year less the amount you could deduct for the pool for that year (apart from section 40‑835); or

(b) for a later income year—the sum of the pool’s *closing pool value for the previous income year and any project amounts allocated to the pool for the later year less the amount you could deduct for the pool for the later year (apart from section 40‑835).

(8) Your deduction for an income year cannot be more than the amount of the component “pool value” in the formula in subsection (3) for that year.

40‑832 Project pools for post‑9 May 2006 projects

(1) You calculate your deduction for an income year for a project pool in this way if the project pool contains only *project amounts incurred on or after 10 May 2006 for projects that start to operate on or after that day:

where:

DV project pool life has the same meaning as in subsection 40‑830(3).

pool value has the same meaning as in subsection 40‑830(3).

(2) If, in an income year, you abandon, sell or otherwise dispose of a project for which you have a project pool, you can deduct for that year the sum of the pool’s *closing pool value for the previous income year and any *project amounts allocated to the pool for the income year.

(3) Your assessable income for that income year includes any amount you receive for the abandonment, sale or other disposal.

(4) Your assessable income for an income year includes other capital amounts that you *derive in that year in relation to a *project amount allocated to your project pool or in relation to something on which the project amount is expended.

(5) Your deduction for an income year cannot be more than the amount of the component “pool value” in the formula in subsection (1) for that year.

40‑835 Reduction of deduction

You must reduce your deduction under section 40‑830 or 40‑832 for an income year by a reasonable amount for the extent (if any) to which the project operates in the year for purposes other than *taxable purposes.

Note: If Division 250 applies to you and an asset:

(a) if section 250‑150 applies—you are taken not to be using the asset for taxable purposes to the extent specified under subsection 250‑150(3); or

(b) otherwise—you are taken not to be using the asset for such purposes.

40‑840 Meaning of project amount

(1) An amount of *mining capital expenditure or *transport capital expenditure you incur is a project amount if:

(a) it does not form part of the *cost of a *depreciating asset you *hold or held; and

(b) you cannot deduct it under a provision of this Act outside this Subdivision; and

(i) for mining capital expenditure—carrying on the *mining and quarrying operations in relation to which the expenditure is incurred; or

(ii) for transport capital expenditure—carrying on the *business in relation to which the expenditure is incurred.

(2) Another amount of capital expenditure you incur is also a project amount so far as:

(a) it does not form part of the *cost of a *depreciating asset you *hold or held; and

(b) you cannot deduct it under a provision of this Act outside this Subdivision; and

(d) it is one of these:

(i) an amount paid to create or upgrade community infrastructure for a community associated with the project; or

(ii) an amount incurred for site preparation costs for depreciating assets (except, for *horticultural plants, in draining swamp or low‑lying land or in clearing land); or

(iii) an amount incurred for feasibility studies for the project; or

(iv) an amount incurred for environmental assessments for the project; or

(v) an amount incurred to obtain information associated with the project; or

(vi) an amount incurred in seeking to obtain a right to *intellectual property; or

(vii) an amount incurred for ornamental trees or shrubs.

40‑845 Project life

You work out the project life of a project by estimating how long (in years, including fractions of years) it will be from when the project starts to operate until it stops operating.

40‑855 When you start to deduct amounts for a project pool

You start to deduct amounts for a project pool for the first income year when the project starts to operate.

40‑860 Meaning of mining capital expenditure

(1) Mining capital expenditure is capital expenditure you incur:

(a) in carrying on *mining and quarrying operations; or

(b) in preparing a site for those operations; or

(d) in providing, or in contributing to the cost of providing:

(i) water, light or power for use on the site of those operations; or

(ii) access to, or communications with, the site of those operations; or

(e) on buildings for use directly in connection with operating or maintaining *plant that is primarily and principally for *treating *minerals, or quarry materials, that you obtain by carrying on such operations; or

(f) on buildings or other improvements for use directly in connection with storing minerals or quarry materials or to facilitate *minerals treatment of them (whether the storage happens before or after the treatment).

(2) Capital expenditure you incur on *housing and welfare in carrying on *mining and quarrying operations (except quarrying operations) is also mining capital expenditure, but only if:

(a) for residential accommodation—the accommodation is provided by you, on or adjacent to a site where you carry on those operations, for the use of:

(i) your employees, or someone else’s employees, who are employed or engaged in those operations, or in operations of yours that are connected with those operations; or

(ii) dependants of such employees; or

(b) for health, education, recreation or other similar facilities, or facilities for meals—the facilities:

(i) are on or adjacent to a site where you carry on those operations, and are principally for the benefit of the employees or dependants covered by paragraph (a); and

(ii) are not run for profit by any person, except in the case of facilities for meals (which may be run for profit); or

(c) in the case of works, including works for providing water, light, power, access or communications—the works are carried out directly in connection with the accommodation or facilities covered by this section.

(3) However, expenditure on these is not mining capital expenditure:

(a) railway lines, roads, pipelines or other facilities, for use wholly or partly for transporting *minerals or quarry materials, or their products, other than facilities used for transport wholly within the site of *mining and quarrying operations you carry on;

(b) works carried out in connection with, or buildings or other improvements constructed or acquired for use in connection with, establishing, operating or using a port facility or other facility for ships;

(d) *housing and welfare in relation to quarrying operations.

40‑865 Meaning of transport capital expenditure

(1) Transport capital expenditure is capital expenditure you incur, in carrying on a *business for a *taxable purpose, on:

(a) a *transport facility; or

(b) obtaining a right to construct or install a transport facility, or part of one, on land owned or leased by another entity or in an area referred to in subsection 960‑505(2) (about offshore areas, the Joint Petroleum Development Area and installations); or

(c) paying compensation for any damage or loss caused by constructing or installing a transport facility or part of one; or

(d) earthworks, bridges, tunnels or cuttings that are necessary for a transport facility.

(2) Transport capital expenditure also includes capital expenditure you incur, in carrying on a *business for a *taxable purpose, by way of contribution to:

(a) someone else’s capital expenditure on a *transport facility or on anything else covered by a paragraph of subsection (1); or

(b) an *exempt Australian government agency’s capital expenditure on railway rolling‑stock.

(3) Transport capital expenditure does not include expenditure on:

(a) road vehicles or ships; or

(b) railway rolling‑stock; or

(d) works for providing water, light or power, in connection with a port facility or other facility for ships;

and does not include expenditure by way of contribution to that expenditure (except expenditure by way of contribution to an *exempt Australian government agency’s capital expenditure on railway rolling‑stock).

40‑870 Meaning of transport facility

(1) A transport facility is a railway, a road, a pipe‑line, a port facility or other facility for ships, or another facility, that is used primarily and principally for transport of:

(a) *minerals or quarry materials obtained by any entity in carrying on *mining and quarrying operations; or

(b) *processed minerals produced from minerals or quarry materials.

(2) However, a facility used for these is not a transport facility:

(a) transport wholly within the site of *mining and quarrying operations;

(b) transport of *petroleum:

(i) that has been treated at a refinery; or

(ii) that forms part of a system of reticulation to consumers; or

(iii) to a particular consumer or consumers.

40‑875 Meaning of processed minerals and minerals treatment

(1) Processed minerals are any of the following:

(a) materials resulting from *minerals treatment of *minerals or quarry materials (except *petroleum);

(b) materials resulting from sintering or calcining;

(d) alumina and blister copper.

(2) Minerals treatment means:

(a) cleaning, leaching, crushing, grinding, breaking, screening, grading or sizing; or

(b) concentration by a gravity, magnetic, electrostatic or flotation process; or

(i) that is applied to *minerals, or to quarry materials, before that concentration; or

(ii) for a mineral or materials not requiring that concentration, that would, if the mineral or materials had required concentration, have been applied before the concentration;

but does not include:

(d) sintering or calcining; or

(e) producing alumina, or pellets or other agglomerated forms of iron, or processing connected with such production.

40‑880 Business related costs

Object

(1) The object of this section is to make certain *business capital expenditure deductible over 5 years, or immediately in the case of some start‑up expenses for small businesses, if:

(a) the expenditure is not otherwise taken into account; and

(b) a deduction is not denied by some other provision; and

Note: If Division 250 applies to you and an asset:

(a) if section 250‑150 applies—you cannot deduct an amount for capital expenditure you incur in relation to the asset to the extent specified under subsection 250‑150(3); or

(b) otherwise—you cannot deduct an amount for such expenditure.

Deduction

(2) You can deduct, in equal proportions over a period of 5 income years starting in the year in which you incur it, capital expenditure you incur:

(a) in relation to your *business; or

(b) in relation to a business that used to be carried on; or

(d) to liquidate or deregister a company of which you were a *member, to wind up a partnership of which you were a partner or to wind up a trust of which you were a beneficiary, that carried on a business.

(2A) However, you can deduct the capital expenditure in the income year in which you incur it if:

(a) the expenditure is incurred in relation to a business that is proposed to be carried on; and

(b) the expenditure is incurred:

(i) in obtaining advice or services relating to the proposed structure, or proposed operation of the business; or

(ii) in payment to an *Australian government agency of fees, taxes or charges relating to establishing the business or its operating structure; and

(i) you are not carrying on a *business in the income year;

(ii) you are not *connected with, or an *affiliate of, another entity that carries on a business in the income year and that is not a small business entity for the income year.

Limitations and exceptions

(3) You can only deduct the expenditure, for a *business that you carry on, used to carry on or propose to carry on, to the extent that the business is carried on, was carried on or is proposed to be carried on for a *taxable purpose.

(4) You can only deduct the expenditure, for a *business that another entity used to carry on or proposes to carry on, to the extent that:

(a) the business was carried on or is proposed to be carried on for a *taxable purpose; and

(b) the expenditure is in connection with:

(i) your deriving assessable income from the business; and

(ii) the business that was carried on or is proposed to be carried on.

(5) You cannot deduct anything under this section for an amount of expenditure you incur to the extent that:

(a) it forms part of the *cost of a *depreciating asset that you *hold, used to hold or will hold; or

(b) you can deduct an amount for it under a provision of this Act other than this section; or

(d) it is in relation to a lease or other legal or equitable right; or

(e) it would, apart from this section, be taken into account in working out:

(i) a profit that is included in your assessable income (for example, under section 6‑5 or 15‑15); or

(ii) a loss that you can deduct (for example, under section 8‑1 or 25‑40); or

(f) it could, apart from this section, be taken into account in working out the amount of a *capital gain or *capital loss from a *CGT event; or

(g) a provision of this Act other than this section would expressly make the expenditure non‑deductible if it were not of a capital nature; or

(h) a provision of this Act other than this section expressly prevents the expenditure being taken into account as described in paragraphs (a) to (f) for a reason other than the expenditure being of a capital nature; or

(i) it is expenditure of a private or domestic nature; or

(j) it is incurred in relation to gaining or producing *exempt income or *non‑assessable non‑exempt income.

(6) The exceptions in paragraphs (5)(d) and (f) do not apply to expenditure you incur to preserve (but not enhance) the value of goodwill if the expenditure you incur is in relation to a legal or equitable right and the value to you of the right is solely attributable to the effect that the right has on goodwill.

(7) You cannot deduct an amount under paragraph (2)(c) in relation to a *business proposed to be carried on unless, having regard to any relevant circumstances, it is reasonable to conclude that the business is proposed to be carried on within a reasonable time.

(8) You cannot deduct anything under this section for an amount of expenditure that, because of a market value substitution rule, was excluded from the *cost of a *depreciating asset or the *cost base or *reduced cost base of a *CGT asset.

Note: Some examples of market value substitution rules are subsection 40‑180(2) (table item 8), subsection 40‑190(3) (table item 1) and sections 40‑765 and 112‑20.

(9) You cannot deduct anything under this section for an amount of expenditure you incur:

(a) by way of returning an amount you have received (except to the extent that the amount was included in your assessable income or taken into account in working out an amount so included); or

(b) to the extent that, for another entity, the amount is a *return on or of:

(i) an *equity interest; or

(ii) a *debt interest that is an obligation of yours.

40‑885 Non‑arm’s length transactions

If you incurred capital expenditure, or received an amount, under an *arrangement and:

(a) there is at least one other party to the arrangement with whom you did not deal at *arm’s length; and

(b) apart from this section:

(i) the amount of the expenditure would be more than the *market value of what it was for; or

(ii) the amount you received would be less than the market value of what it was for;

the amount of expenditure, or the amount received, you take into account under this Subdivision is that market value.

Subdivision 40‑J—Capital expenditure for the establishment of trees in carbon sink forests

Guide to Subdivision 40‑J

40‑1000 What this Subdivision is about

You can deduct amounts for capital expenditure incurred for establishing trees that meet the requirements for constituting a carbon sink forest.

Table of sections

Operative provisions

40‑1005 Deduction for expenditure for establishing trees in carbon sink forests

40‑1010 Expenditure for establishing trees in carbon sink forests

40‑1015 Carbon sequestration by trees

40‑1020 Certain expenditure disregarded

40‑1025 Non‑arm’s length transactions

40‑1030 Extra deduction for destruction of trees in carbon sink forest

40‑1035 Getting information if you acquire a carbon sink forest

Operative provisions

40‑1005 Deduction for expenditure for establishing trees in carbon sink forests

(1) You can deduct an amount for an income year if:

(a) you or another entity incurred capital expenditure that is covered under section 40‑1010 in relation to particular trees; and

(b) you satisfy a condition in subsection (5) for the trees for at least part of the income year; and

(d) you use the land occupied by the trees for the primary and principal purpose of *carbon sequestration by the trees (see section 40‑1015); and

(e) your purposes in using the land occupied by the trees do not include any of the following:

(i) felling the trees;

(ii) using the trees for *commercial horticulture; and

(f) you do not use the land in connection with:

(i) a *managed investment scheme; or

(ii) a *forestry managed investment scheme.

(2) The amount of the deduction is worked out under this formula:

where:

establishment expenditure is the amount of expenditure mentioned in subsection (1).

write‑off days in income year is the number of days in the income year:

(a) that occur within the period:

(i) starting on the first day of the income year in which the trees are established; and

(ii) ending 14 years and 105 days after that day; and

(b) on which you use the land occupied by the trees for the primary and principal purpose of *carbon sequestration by the trees; and

write‑off rate is 7%.

(3) You cannot deduct more in total than the amount of capital expenditure incurred for establishing the trees up to the time at which they are established.

(5) The conditions are as follows:

Conditions for deduction for establishing trees in carbon sink forest
Item	Condition
1	You own the trees and any holder of a lease, lesser interest or licence relating to the land occupied by the trees does not use the land for the primary and principal purpose of *carbon sequestration by the trees.
2	The trees occupy land you hold under a lease, or a quasi‑ownership right granted by an exempt Australian government agency or an exempt foreign government agency, and: (a) the lease or quasi‑ownership right enables you to use the land for the primary and principal purpose of carbon sequestration by the trees; and (b) any holder of a lesser interest or licence relating to the land does not use the land for the primary and principal purpose of carbon sequestration by the trees.
3	You: (a) hold a licence relating to the land occupied by the trees; and (b) use the land for the primary and principal purpose of *carbon sequestration by the trees, as a result of holding the licence.

40‑1010 Expenditure for establishing trees in carbon sink forests

(1) Expenditure is covered under this section in relation to particular trees if:

(a) the trees are established in an income year; and

(b) you incur or another entity incurs the expenditure in the income year or an earlier income year for establishing the trees; and

(d) the establishing entity’s primary and principal purpose for establishing the trees is *carbon sequestration by the trees (see section 40‑1015); and

(e) the establishing entity’s purposes for establishing the trees do not include any of the following:

(i) felling the trees;

(ii) using the trees for *commercial horticulture; and

(f) the establishing entity does not incur the expenditure under:

(i) a *managed investment scheme; or

(ii) a *forestry managed investment scheme; and

(g) all of the conditions in subsection (2) are satisfied for the trees; and

(h) the establishing entity gives the Commissioner, in accordance with subsection (4), a statement that:

(i) sets out all information necessary to determine whether all of the conditions in subsection (2) are satisfied for the trees; and

(ii) is in the *approved form.

(2) The conditions are as follows:

(a) at the end of the income year, the trees occupy a continuous land area in Australia of 0.2 hectares or more;

(b) at the time the trees are established, it is more likely than not that they will:

(i) attain a crown cover of 20% or more; and

(ii) reach a height of at least 2 metres;

(i) attained, or were more likely than not to attain, a crown cover of 20% or more; and

(ii) reached, or were more likely than not to reach, a height of at least 2 metres;

(d) the establishment of the trees meets the requirements of the guidelines mentioned in subsection (3).

(3) The *Climate Change Minister must, by legislative instrument, make guidelines about environmental and natural resource management in relation to the establishment of trees for the purposes of *carbon sequestration.

(4) The statement mentioned in paragraph (1)(h) is to be given to the Commissioner no later than:

(a) if the establishing entity lodges its *income tax return for the income year within 5 months after the end of the income year—the day the establishing entity lodges that income tax return; or

(b) otherwise—5 months after the end of the income year.

(5) However, expenditure is not covered under this section if the *Climate Change Secretary gives the Commissioner a notice under subsection (6) in relation to the trees.

(6) The *Climate Change Secretary must give the Commissioner a notice in writing under this subsection if the Climate Change Secretary is satisfied that one or more of the conditions in subsection (2) have not been satisfied for the trees.

(7) A person may apply to the *AAT for review of a decision (as defined in the Administrative Appeals Tribunal Act 1975) of the *Climate Change Secretary to give a notice under subsection (6).

(8) The Commissioner may give the *Climate Change Secretary a copy of the statement mentioned in paragraph (1)(h), for the purposes of subsections (5), (6) and (7).

40‑1015 Carbon sequestration by trees

Carbon sequestration by trees means the process by which trees absorb carbon dioxide from the atmosphere.

40‑1020 Certain expenditure disregarded

In working out a deduction under this Subdivision in relation to the establishment of trees, disregard expenditure incurred:

(a) in draining swamp or low‑lying land; or

(b) in clearing land.

40‑1025 Non‑arm’s length transactions

If an entity incurred capital expenditure under an *arrangement and:

(a) there is at least one other party to the arrangement with whom the entity did not deal at *arm’s length; and

(b) apart from this section, the amount of the expenditure would be more than the *market value of what it was for;

the amount of expenditure taken into account under this Subdivision is that market value.

40‑1030 Extra deduction for destruction of trees in carbon sink forest

(1) You can deduct the amount worked out under subsection (2) for an income year if:

(a) you or another entity incurred capital expenditure that is covered under section 40‑1010 in relation to particular trees; and

(b) you use the land occupied by the trees for the primary and principal purpose of *carbon sequestration by the trees; and

(d) you satisfy a condition in subsection 40‑1005(5) for the trees just before they are destroyed.

(2) Work out the amount of the deduction as follows:

Method statement

Step 1. Work out the total of the amounts you could have deducted under this Subdivision in relation to the trees for the period:

(a) starting on the first day of the income year in which the trees are established; and

(b) ending when the trees were destroyed;

assuming that, during that period, you satisfied a condition in the table in subsection 40‑1005(5).

Step 2. Subtract from the expenditure that is covered under section 40‑1010 in relation to the trees:

(a) the result from step 1; and

(b) any amount you received (under an insurance policy or otherwise) for the destruction.

The remaining amount (if positive) is your deduction under subsection (1).

(3) This deduction is in addition to any deduction for the income year under section 40‑1005.

40‑1035 Getting information if you acquire a carbon sink forest

(1) This section applies if:

(a) you or another entity incurred capital expenditure; and

(b) the expenditure is covered under section 40‑1010 in relation to particular trees; and

(2) You may give the last entity (if any) that satisfied a condition mentioned in subsection 40‑1005(5) for the trees a written notice requiring the entity to give you any or all of the following information:

(a) the amount of the expenditure covered under section 40‑1010 in relation to the trees;

(b) the income year in which the trees were established.

(3) The notice must:

(a) be given within 60 days of your beginning to satisfy the condition mentioned in paragraph (1)(c); and

(b) specify a period of at least 60 days within which the information must be given; and

Note: Subsections (5), (6) and (7) explain how this subsection operates if the entity to which the notice is to be given is a partnership.

Requirement to comply with notice

(4) The entity to whom the notice is given must not intentionally refuse or fail to comply with the notice.

Penalty: 10 penalty units.

Giving the notice to a partnership

(5) If the entity to whom the notice is given is a partnership:

(a) you may give it to the partnership by giving it to any of the partners (this does not limit how else you can give it); and

(b) the obligation to comply with the notice is imposed on each of the partners (not on the partnership), but may be discharged by any of them.

(6) A partner must not intentionally refuse or fail to comply with that obligation.

Penalty: 10 penalty units.

(7) Subsection (6) does not apply if another partner has already complied with that obligation.

Note: A defendant bears an evidential burden in relation to the matters in subsection (7), see subsection 13.3(3) of the Criminal Code.

Limits on giving a notice

(8) Only one notice can be given in relation to the same trees.

Subdivision 40‑K—Farm‑in farm‑out arrangements

Guide to Subdivision 40‑K

40‑1095 What this Subdivision is about

The costs and termination values of parts of interests in mining, quarrying or prospecting rights that are transferred under farm‑in farm‑out arrangements are reduced by the market value of the exploration benefits conferred under the arrangements.

Table of sections

Farm‑in farm‑out arrangements and exploration benefits

40‑1100 Meaning of farm‑in farm‑out arrangement and exploration benefit

Consequences for transferors

40‑1105 Treatment of certain exploration benefits received under farm‑in farm‑out arrangements

40‑1110 Cost of split interests resulting from farm‑in farm‑out arrangements

40‑1115 Deductions relating to receipt of exploration benefits

40‑1120 Cost base and reduced cost base of exploration benefits etc.

40‑1125 Effect of exploration benefits on the cost of mining, quarrying or prospecting information

Consequences for transferees

40‑1130 Consequences of certain exploration benefits provided under farm‑in farm‑out arrangements

Farm‑in farm‑out arrangements and exploration benefits

40‑1100 Meaning of farm‑in farm‑out arrangement and exploration benefit

(1) A farm‑in farm‑out arrangement is an *arrangement under which:

(a) an entity (the transferor) transfers, or agrees to transfer, part of the entity’s interest in a *mining, quarrying or prospecting right to another entity (the transferee); and

(b) in exchange for the transfer, the transferee provides to the transferor one or more *exploration benefits.

(2) The transferee provides an exploration benefit to the transferor if:

(a) the transferee:

(i) conducts *exploration or prospecting for *minerals, or quarry materials, obtainable by *mining and quarrying operations; or

(ii) undertakes to conduct exploration or prospecting for minerals, or quarry materials, obtainable by mining and quarrying operations; or

(iii) funds, on the transferor’s behalf, expenditure that the transferor incurs in relation to exploration or prospecting by the transferor or another entity (other than the transferee); or

(iv) undertakes to fund, on the transferor’s behalf, expenditure that the transferor incurs in relation to exploration or prospecting by the transferor or another entity (other than the transferee); and

(b) the exploration or prospecting relates to the part of the transferor’s interest in the *mining, quarrying or prospecting right that the transferor does not transfer, or agree to transfer, under the arrangement; and

(c) in a case where the transferor conducts the exploration or prospecting—expenditure incurred by the transferor relating to the exploration or prospecting is:

(i) included in the *cost of *mining, quarrying or prospecting information *held by the transferor; or

(ii) included in any other *depreciating asset, held by the transferor, for which the decline in value is provided under section 40‑80; or

(iii) expenditure, of a kind referred to in subsection 40‑730(1), that meets the requirements of subsection (3) of this section; and

(d) in a case where the transferor does not conduct the exploration or prospecting—were the transferor to conduct the exploration or prospecting, expenditure incurred by the transferor relating to the exploration or prospecting would:

(i) be included in the cost of mining, quarrying or prospecting information held by the transferor; or

(ii) be included in any other depreciating asset, held by the transferor, for which the decline in value is provided under section 40‑80; or

(iii) be expenditure, of a kind referred to in subsection 40‑730(1), that meets the requirements of subsection (3) of this section.

(3) Expenditure meets the requirements of this subsection if:

(a) for that expenditure, the transferor satisfies, or would satisfy, one or more of paragraphs 40‑730(1)(a) to (c); and

(b) the expenditure is not of a kind referred to in subsection 40‑730(2) or (3); and

Consequences for transferors

40‑1105 Treatment of certain exploration benefits received under farm‑in farm‑out arrangements

If, under a *farm‑in farm‑out arrangement, you receive an *exploration benefit in relation to the transfer of part of your interest in a *mining, quarrying or prospecting right, the *termination value of the part of the interest is reduced by the *market value of the exploration benefit.

40‑1110 Cost of split interests resulting from farm‑in farm‑out arrangements

Despite section 40‑205, if:

(a) under a *farm‑in farm‑out arrangement, you provide a part of your interest in a *mining, quarrying or prospecting right; and

(b) because of subsection 40‑115(2), this Division applies as if you had split your interest into the part you stopped *holding and the rest of your interest;

then:

(c) the first element of the *cost of the asset that consists of the part you stopped holding is a reasonable proportion of the amount you are taken to have paid under section 40‑185 for any economic benefit involved in splitting your interest; and

(d) the first element of the cost of the asset that consists of the rest of your interest is the sum of:

(i) the *adjustable value of your interest just before it was split; and

(ii) a reasonable proportion of the amount you are taken to have paid under section 40‑185 for any economic benefit involved in splitting your interest.

40‑1115 Deductions relating to receipt of exploration benefits

(1) If:

(a) under a *farm‑in farm‑out arrangement, you receive an *exploration benefit in exchange for providing a part of your interest in a *mining, quarrying or prospecting right; and

(b) because of section 40‑1105, the *termination value of the interest you provide is reduced (including reduced to nil);

you are not entitled to a deduction under a provision of this Act in relation to your expenditure consisting of the provision of that part.

(2) If:

(a) under a *farm‑in farm‑out arrangement, you receive an *exploration benefit in exchange for providing a part of your interest in a *mining, quarrying or prospecting right; and

(b) because of section 40‑1105, the *termination value of the interest you provide is reduced (including reduced to nil); and

(c) the exploration benefit consists of another party to the arrangement funding on your behalf, or undertaking to fund on your behalf, expenditure that you incur in relation to exploration or prospecting;

your entitlement (if any) to a deduction under a provision of this Act in relation to that expenditure is reduced to the same extent as the extent to which the expenditure is reasonably attributable to the exploration benefit.

40‑1120 Cost base and reduced cost base of exploration benefits etc.

If:

(a) under a *farm‑in farm‑out arrangement, you receive an *exploration benefit; and

(b) the benefit involves one or more undertakings of the kinds referred to in subparagraphs 40‑1100(2)(a)(ii) and (iv);

the first element of the *cost base and the *reduced cost base of the benefit are reduced by the *market value of the undertakings.

40‑1125 Effect of exploration benefits on the cost of mining, quarrying or prospecting information

If:

(a) you *hold a *depreciating asset that is *mining, quarrying or prospecting information; and

(b) under a *farm‑in farm‑out arrangement, you receive an *exploration benefit; and

(c) an amount or expenditure would, apart from this section, be included in the second element of the *cost of the asset;

do not include that amount or expenditure in the second element to the extent (if any) that it is reasonably attributable to the exploration benefit.

Consequences for transferees

40‑1130 Consequences of certain exploration benefits provided under farm‑in farm‑out arrangements

(1) If, under a *farm‑in farm‑out arrangement, you provide an *exploration benefit in relation to the transfer to you of part of another entity’s interest in a *mining, quarrying or prospecting right:

(a) the first element of the *cost of the part of the interest is reduced by the *market value of the exploration benefit; and

(b) if, for providing the exploration benefit, you receive a reward as a result of which an amount would, apart from this paragraph, be included in your assessable income—the entire amount of the reward is not assessable income and is not *exempt income; and

(c) subsection 40‑730(3) does not apply in relation to expenditure that you incur under the arrangement if the reduction in market value under paragraph (a) took into account your liability to incur that expenditure.

(2) A reduction under paragraph(1)(a) may be a reduction to nil.

Division 41—Additional deduction for certain new business investment

Guide to Division 41

41‑1 What this Division is about

You may be able to deduct an amount in relation to a depreciating asset for the 2008‑09, 2009‑10, 2010‑11 or 2011‑12 income year if:

(a) you can deduct an amount for the decline in value for the asset for the relevant year under Subdivision 40‑B; and

(b) you make certain new investments in respect of the asset in the period starting on 13 December 2008 and ending on 31 December 2009; and

Table of sections

Operative provisions

41‑5 Object of Division

41‑10 Entitlement to deduction for investment

41‑15 Amount of deduction

41‑20 Recognised new investment amount

41‑25 Investment commitment time

41‑30 First use time

41‑35 New investment threshold

Operative provisions

41‑5 Object of Division

The object of this Division is to provide a temporary business tax break for Australian businesses using assets in Australia, with a view to encouraging business investment and economic activity.

41‑10 Entitlement to deduction for investment

(1) You can deduct an amount for an income year in relation to an asset if:

(a) the asset is a *depreciating asset, other than an intangible asset; and

(b) you can deduct an amount under section 40‑25 in relation to the asset for the income year; and

(d) the total of the *recognised new investment amounts for the income year in relation to the asset equals or exceeds the *new investment threshold for the income year in relation to the asset.

(2) Subsection 355‑715(2) (tax offset for assets used for R&D activities) does not apply to a deduction under subsection (1).

(3) For the purposes of paragraph (1)(b), in determining whether you can deduct the amount in relation to the asset under section 40‑25 for the income year:

(aa) disregard section 40‑90 (reduction in cost where debt is forgiven); and

(ab) disregard subsection 40‑365(5) (reduction in cost for replacement asset where involuntary disposal); and

(b) disregard Subdivision 328‑D (capital allowances for small business entities); and

Counting additional recognised new investment amounts for the purposes of meeting the threshold

(4) For the purposes of paragraph (1)(d), treat each of the following as a *recognised new investment amount for the income year in relation to the asset (the relevant asset):

(a) a recognised new investment amount for a previous income year in relation to the relevant asset;

(b) a recognised new investment amount for the income year or a previous income year in relation to another asset, if:

(i) the other asset is part of a set of assets including the relevant asset; or

(ii) the other asset is identical, or substantially identical, to the relevant asset;

(c) a recognised new investment amount for the income year or a previous income year in relation to an asset *held by another entity, if:

(i) subsection 40‑35(1) (jointly held depreciating assets) applies in relation to the relevant asset because it is your interest in an asset (the underlying asset); and

(ii) the asset held by the other entity is the other entity’s interest in the underlying asset.

41‑15 Amount of deduction

(1) The amount that you can deduct is:

(a) if the *new investment threshold for the income year in relation to the asset is $1000 (small business entities)—50% of the total of the *recognised new investment amounts for the income year in relation to the asset; or

(b) if paragraph (a) does not apply but subsection (3), (4) or (5) applies—10% of that total; or

(i) 30% of the total of the recognised new investment amounts for the income year in relation to the asset that meet the condition in subsection (2); and

(ii) 10% of the total of the other recognised new investment amounts for the income year in relation to the asset.

(2) A *recognised new investment amount meets the condition in this subsection if:

(a) the *investment commitment time for the amount occurred before 1 July 2009; and

(b) the *first use time for the amount occurred before 1 July 2010.

(3) This subsection applies if the income year is the 2011‑12 income year.

(4) This subsection applies if:

(a) you can deduct the amount because of paragraph 41‑10(4)(a); and

(b) the *new investment threshold for the income year in relation to the asset exceeds the total of the *recognised new investment amounts for the income year in relation to the asset that meet the condition in subsection (2).

(5) This subsection applies if:

(a) you can deduct the amount because of paragraph 41‑10(4)(b) or (c); and

(b) the *new investment threshold for the income year in relation to the asset exceeds the sum of:

(i) the total of the *recognised new investment amounts for the income year in relation to the asset that meet the condition in subsection (2); and

(ii) the total of the amounts treated under paragraph 41‑10(4)(b) or (c) (as the case requires) as recognised new investment amounts for the income year in relation to the asset that meet the condition in subsection (2).

41‑20 Recognised new investment amount

(1) An amount is a recognised new investment amount for the income year in relation to the asset if:

(a) either:

(i) the amount is included in the first element of the asset’s *cost (worked out in accordance with Subdivision 40‑C); or

(ii) the amount is included in the second element of the asset’s cost under paragraph 40‑190(2)(a); and

(b) the *investment commitment time for the amount occurs in the period:

(i) starting at 12.01 am, by legal time in the Australian Capital Territory, on 13 December 2008; and

(ii) ending on 31 December 2009; and

(i) no later than the end of the income year; and

(ii) no later than 31 December 2010; and

(d) at the first use time for the amount, it is reasonable to conclude that you will use the asset principally in Australia for the principal purpose of carrying on a *business; and

(e) if the amount is included in the first element of the asset’s cost—the first use time for the amount is the first time you or any other entity have used the asset, or have it installed ready for use, for any purpose; and

(f) you have not been entitled to a deduction under this Division for any previous income year in relation to the amount.

(2) Treat the requirements in paragraph (1)(d) as not being met if, at the first use time for the amount, it is reasonable to conclude that the asset will never be located in Australia.

(3) For the purposes of paragraph (1)(e), disregard any previous use of the asset that was merely for the purposes of reasonable testing or trialling.

(4) Treat the requirements in paragraph (1)(e) as not being met if the amount becomes included in the first element of the asset’s *cost at a time because of paragraph 40‑205(a) (splitting depreciating assets) or 40‑210(a) (merging depreciating assets).

(5) In determining the amount of a *recognised new investment amount, disregard:

(a) subsection 40‑90(2) (reduction in cost where debt is forgiven); and

(b) paragraph 40‑365(5)(a) (reduction in cost for replacement asset where involuntary disposal).

41‑25 Investment commitment time

(1) The investment commitment time for the amount is:

(a) if the amount is included in the first element of the asset’s *cost—the time at which you:

(i) enter into a contract under which you *hold the asset at that time, or will hold the asset at a later time; or

(ii) start to construct the asset; or

(iii) start to hold the asset in some other way; or

(b) if the amount is included in the second element of the asset’s cost—the time at which you enter into a contract, or start construction, for the economic benefit in relation to which the amount becomes, or will become, included in that element under paragraph 40‑190(2)(a).

Integrity rule

(2) Subsection (3) applies in relation to an amount if:

(a) at a time, you:

(i) enter into a contract under which you *hold an asset at that time, or will hold the asset at a later time; or

(ii) start to construct an asset; or

(iii) start to hold an asset in some other way; and

(b) at a later time, you engage in conduct that results in you:

(i) entering into a contract under which you hold the asset mentioned in paragraph (a) (or an identical or substantially similar asset) at that later time, or will hold that asset (or an identical or substantially similar asset) at an even later time; or

(ii) starting to construct an asset that is identical or substantially similar to the asset mentioned in paragraph (a); or

(iii) starting to hold the asset mentioned in paragraph (a) (or an identical or substantially similar asset) in some other way; and

(c) you engage in that conduct for the purpose, or for purposes that include the purpose, of becoming entitled to a deduction under this Division.

(3) Despite paragraph (1)(a), the investment commitment time for an amount to which that paragraph would otherwise apply is the time mentioned in paragraph (2)(a).

(3A) For the purposes of paragraph (1)(a) and subsection (2), treat yourself as having started to construct an asset at a time if you first incur expenditure in respect of the construction of the asset at that time.

(3B) For the purposes of paragraph (1)(b), treat yourself as having started construction for an economic benefit at a time if you first incur expenditure in respect of the construction for the benefit at that time.

Options

(4) To avoid doubt, for the purposes of this section, you do not enter into a contract under which you *hold an asset merely because you acquire an option to enter into such a contract.

41‑30 First use time

The first use time for the amount is:

(a) if the amount is included in the first element of the asset’s *cost—the time at which you start to use the asset, or have it *installed ready for use; or

(b) if the amount is included in the second element of the asset’s cost—the later of:

(i) the time at which it becomes included in that element under paragraph 40‑190(2)(a); or

(ii) the time mentioned in paragraph (a).

41‑35 New investment threshold

The new investment threshold for an income year (the relevant income year) in relation to an asset means:

(a) $1000 if you are a *small business entity during any of the following income years:

(i) the income year in which occurs the *investment commitment time for any *recognised new investment amount for the asset in relation to the relevant income year;

(ii) the income year in which occurs the *first use time for any such amount;

(iii) the relevant income year; or

(b) otherwise—$10,000.

Division 43—Deductions for capital works

Table of Subdivisions

Guide to Division 43

43‑A Key operative provisions

43‑B Establishing the deduction base

43‑C Your area and your construction expenditure

43‑D Deductible uses of capital works

43‑E Special rules about uses

43‑F Calculation of deduction

43‑G Undeducted construction expenditure

43‑H Balancing deduction on destruction of capital works

Guide to Division 43

43‑1 What this Division is about

You can deduct certain capital expenditure on assessable income producing buildings and other capital works. This Division sets out the rules for working out those deductions.

Table of sections

43‑2 Key concepts used in this Division

The following graphic introduces the key concepts used in this Division and shows the relationships between them.

Subdivision 43‑A—Key operative provisions

Guide to Subdivision 43‑A

43‑5 What this Subdivision is about

This Subdivision contains the key operative provisions for this Division, including all of the deduction entitlement provisions. You should read all of this Subdivision to understand how this Division works.

Table of sections

Operative provisions

43‑10 Deductions for capital works

43‑15 Amount you can deduct

43‑20 Capital works to which this Division applies

43‑25 Rate of deduction

43‑30 No deduction until construction is complete

43‑35 Requirement for registration under the Industry Research and Development Act

43‑40 Deduction for destruction of capital works

43‑45 Certain anti‑avoidance provisions

43‑50 Links and signposts to other parts of the Act

43‑55 Anti‑avoidance—arrangement etc. with tax‑exempt entity

Operative provisions

43‑10 Deductions for capital works

(1) You can deduct an amount for capital works for an income year.

(2) You can only deduct the amount if:

(a) the capital works have a *construction expenditure area; and

(b) there is a *pool of construction expenditure for that area; and

Note 1: The deduction is limited to capital works to which this Division applies, see section 43‑20.

Note 2: Amongst other things, the definition of your area ensures that only owners and certain lessees of capital works, and certain holders of quasi‑ownership rights over land on which capital works are constructed, can deduct an amount under this Division.

43‑15 Amount you can deduct

(1) The amount you can deduct is a portion of *your construction expenditure. However, it cannot exceed the amount of *undeducted construction expenditure for *your area.

Note: The limit in this subsection has 2 effects:

• It ensures that not more than 100% of your construction expenditure can be deducted.

• It imposes a time limit on the period over which your construction expenditure can be deducted. For capital works begun before 27 February 1992, that period will be 25 years if the rate of deduction is 4% or 40 years if the rate is 2.5%. For other capital works, the period will be 25 years or 40 years or some period between 25 and 40 years depending on their use.

(2) Your deduction is calculated under section 43‑210 or 43‑215.

43‑20 Capital works to which this Division applies

Buildings

(1) This Division applies to capital works being a building, or an extension, alteration or improvement to a building:

(a) begun in Australia after 21 August 1979; or

(b) begun outside Australia after 21 August 1990.

Note: Section 43‑80 explains when capital works begin.

Structural improvements

(2) This Division also applies to capital works (other than capital works referred to in subsection (1)) begun after 26 February 1992 that are structural improvements, or extensions, alterations or improvements to structural improvements, whether they are in or outside Australia.

(3) Some examples of structural improvements are:

(a) sealed roads, sealed driveways, sealed car parks, sealed airport runways, bridges, pipelines, lined road tunnels, retaining walls, fences, concrete or rock dams and artificial sports fields; and

(b) earthworks that are integral to the construction of a structural improvement (other than a structural improvement described in subsection (4)), for example, embankments, culverts and tunnels associated with a runway, road or railway.

(4) This Division does not apply to structural improvements being:

(a) earthworks that:

(i) are not integral to the installation or construction of a structure; and

(ii) are permanent (assuming they are maintained in reasonably good order and condition); and

(iii) can be economically maintained in reasonably good order and condition for an indefinite period;

for example, unlined channels, unlined basins, earth tanks and dirt tracks; or

(b) earthworks that merely create artificial landscapes, for example, grass golf course fairways and greens, gardens, and grass sports fields.

Environment protection earthworks

(5) This Division also applies to capital works being earthworks, or extensions, alterations or improvements to earthworks, if:

(a) they are constructed as a result of carrying out of *environmental protection activities; and

(b) they can be economically maintained in reasonably good order and condition for an indefinite period; and

(d) the expenditure on the capital works was incurred after 18 August 1992.

Note: This subsection allows you to deduct an amount for some earthworks that are excluded by paragraph (4)(a) if the earthworks are constructed in carrying out an environmental protection activity.

43‑25 Rate of deduction

(1)