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1. Topic 6 Specific Deductions and
Capital Allowances
Specific deductions, specific non-
deductions, depreciation deduction and
capital works deduction
Chapters 11 and 12

2. Specific Deductions
Section 8-5(1) You can also deduct from your assessable
income an amount that a provision of this Act (outside
this Division) allows you to deduct.
S 8-5(2) Some provisions of this Act prevent you from
deducting an amount that you could otherwise deduct, or
limit the amount you can deduct.
S 8-5(3) An amount that you can deduct under a provision
of this Act (outside this Division) is called a specific
deduction.
For a summary list of provisions about deductions, see
section 12-5.

3. Specific Deductions
Section 8-10 - No double deductions - If 2 or more
provisions of this Act allow you deductions in
respect of the same amount (whether for the
same income year or different income years),
you can deduct only under the provision that is
most appropriate.
• The Explanatory Memorandum states that when
an expense is potentially deductible under s 8-1
– general deductions, or Division 25 – specific
deductions, the preferred option is to claim a
deduction under a specific provision.

4. Specific deductions – Division 25
• S 25-1- This Division sets out some amounts you can
deduct. Remember that the general rules about
deductions in Division 8 (which is about general
deductions) apply to this Division.
• Table of sections -
• 25-5 Tax-related expenses
• 25-7 Advice about family tax benefit
• 25-10 Repairs
• 25-15 Amount paid for lease obligation to repair
• 25-20 Lease document expenses
• 25-25 Borrowing expenses
• 25-30 Expenses of discharging a mortgage

5. Specific deductions – Division 25
• 25-35 Bad debts
• 25-40 Loss from profit-making undertaking or plan
• 25-45 Loss by theft etc
• 25-50 Payments of pensions, gratuities or retiring allowances
• 25-55 Payments to associations
• 25-60 Parliament election expenses
• 25-70 Deduction for election expenses does not extend to
entertainment
• 25-75 Rates and land taxes on premises used to produce
mutual receipts
• 25-80 Upgrading plant to meet GST obligations etc
• 25-85 Certain returns in respect of debt interests
• 25-90 Deduction relating to foreign exempt income
• 25-95 Deduction for work in progress

6. Section 25-5 - Tax-related expenses
Section 25-5(1) - You can deduct expenditure you incur to
the extent that it is for:
– (a) managing your tax affairs; or
– (b) complying with an obligation imposed on you by a
Commonwealth law, insofar as that obligation relates
to the tax affairs of an entity; or
– (c) the general interest charge under Division 1 of
Part IIA of the Taxation Administration Act 1953 ; or
– (ca) a penalty under Subdivision 162-D of the GST
Act; or
– (d) obtaining a valuation in accordance with section
30-212 or 31-15.

7. Section 25-5 - Tax-related expenses
• You buy a computer to prepare your tax returns.
The expenditure you incur in buying the
computer is capital expenditure and cannot be
deducted under this section.
• However, to the extent that you use the
computer in preparing your income tax return,
you will be able to deduct the decline in value of
your computer under Division 40. That is
because, under this subsection, the computer is
property that you are taken to use for the
purpose of producing assessable income.

8. Section 25-10 - Repairs
• 25-10(1) You can deduct expenditure you incur
for repairs to premises (or part of premises), or a
depreciating asset that you held or used solely
for the purpose of producing assessable income.
• 25-10(2) If you held or used the property only
partly for that purpose, you can deduct so much
of the expenditure as is reasonable in the
circumstances.
• 25-10(3) You cannot deduct capital expenditure
under this section.

9. Capital issues - Repairs
• Main issue- is the ‘repair’ a capital outgoing or
deductible under s 25-10
• Capital issues:
- part - v - entirety
- improvements
- initial repairs

10. PART - v - ENTIRETY
Issue - replace the entirety - a new asset, therefore a capital
expense. What is an entirety - question of fact and degree?
Function test - does it function on its own ?
Lurcott v Wakely & Wheeler -replaced wall - a part.
Lindsay v FCT - replaced an old slipway -an entirety.
Rhodesia Railways v Collector of Income Tax -replaced
sleepers - a part - a repair - the whole railway line was the
entirety.
W Thomas v FCT repairs to roof & walls plus some painting -
building was the entirety - but initial repairs - no deduction.

11. IMPROVEMENT
• Improvement is more than a repair, e.g. additions and
alterations
• new materials used - old materials not available - new material
has better qualities. Question of fact and degree
FCT v Western Suburbs - old "celotex" ceiling replaced with
"fibro" ceiling- not a repair - an improvement.
• Notional repairs - can you apportion the improvement between
that representing the repairs and that representing
improvements - no - see Western Suburbs case - Question is
what you did - not what you could have done.

12. INITIAL REPAIRS
• Issue - purchase an asset in a state of disrepair and "repair" it
for use.
• If the cost relates to bringing the asset into a state where it can
then be used, it is a capital cost and should be part of the initial
purchase price.
• Example: You buy an investment house to rent out. The house
needs a new roof and other repairs before it can be used. Cost
of repairs a capital expense – an initial repair.
– Law Shipping v IRC - initial repair
– Odeon Theatres v Jones - a repair
– W Thomas v FCT - initial repair

13. Bad Debts – s 25-35
• No deduction for provision - debt must be bad
- question of fact.
• Must write off debt before end of year and
debt must have been brought to account as
income.
Continuity of ownership and continuity of
business test apply to companies.
Bad debts do not arise if accounting on a cash
basis.

14. Payments to Associations – s 25-55
• Membership of a trade, business or
professional association
• limited to $42 – but $42 limit does not apply
if payment qualifies under s 8-1
• Example: membership of a professional
accounting association deductible in full if
working in the profession. Section 25-55 only
applies if retired or working in another
profession.

15. GIFTS - DIVISION 30
• Gift of $2 or more to an approved fund,
institutions, authority or body set out in the
division, is a tax deduction
• Gift can be money or property, including
trading stock (during 12 months).
• Sections 30-20 to 30-105 set out the names of
the institutions and organisations that you can
make a deductible gift to.

16. GIFTS
• Raffle tickets – not deductible as a ‘true
gift’ as an expectation of a material gain.
• Cannot make a deductible gift that results
in a loss being made – s 26-55(1).
• It may be possible to have a loss if
deductible under s 8-1 – nexus between
the gift and the earning of assessable
income.

17. PAST YEAR LOSSES - DIVISION 36
• Section 36-10 - tax loss can be carried forward
and deducted in a future years – no time limit.
Tax loss is equal to deductions, excluding
prior year tax losses less (assessable income
plus net exempt income) – a loss year.
Loss must be first offset against net exempt
income – s 36-20.
Continuity of ownership and continuity of
business test applies to companies and trusts

18. Capital Equipment – Tax Deduction
• You cannot claim a tax deduction for the cost of
a capital item – negative limb, s 8-1.
• How can you claim a tax deduction –
depreciation.
• For example: Cost of computer $2,000. Effective
life 4 years. Tax deduction 2,000/4 = $500 per
year for the next 4 years.
• Note: straight line or diminishing value.
• Terminology – depreciating asset, deduction for
a decline in value.

19. Capital allowances
• plant;
• certain mining and quarrying expenditure;
• items of intellectual property and software;
• certain primary production assets;
• spectrum licences
• Simplified depreciation rules apply for small business
taxpayers.
• The uniform capital allowance system applies to
depreciating assets that started being held:
- under a contract entered into on or after 1 July 2001;
− or started being constructed on or after that day.

20. Division 40 – Section 40-1
• 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.
• Second-hand assets can be included as
depreciating assets – market value or sale price

21. Section 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
– (c) to provide deductions for certain other capital
expenditure that is not otherwise deductible.
• Note:This Division does not apply to some depreciating
assets: see section 40-45 – capital works, IRU
(submarine cable), films

22. Reduction of deduction
• Must be for income producing purposes, but …
• Section 40-25(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).

23. Section 40-30 - What a depreciating
asset is
• Section 40-30(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
– (c) an intangible asset, unless it is mentioned
in subsection (2). e.g. goodwill not deductible

24. Depreciating Assets (cont)
• Section 40-30(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;
– (c) items of intellectual property;
– (d) in-house software;
– (e) IRUs (indefeasible rights to use an international
telecommunications submarine cable system;
– (f) spectrum licences;
– (g) datacasting transmitter licences.

25. Effective life – intangible depreciating assets
Asset Effective Life
Standard patent 20 years
Innovation patent 8 years
Registered design 6 years
Copyright The lesser of 25 years or
the period when the
copyright ends
In-house software 2.5 years
Spectrum licence The term of the licence

26. Depreciating Assets (cont)
• Section 40-30(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).

27. Common law meaning of “plant”
• A simple test - is the asset a tool of the
taxpayer’s trade?
• Does it in any way play an active role in the
taxpayer’s trade?
• Jarrold v John Good & Sons Ltd 40 TC 681
Moveable office partitions were held to be plant
on the basis that they provided flexibility of
accommodation which was a commercial
necessity for the taxpayer.

28. Wangaratta Woollen Mills v FCT
• Function test used by the Courts to
determine the function of the asset and
the nature of the business.
• Assets used in the business such as
machinery and assets that provide the
setting within which the business is
conducted, e.g. office or building

29. Wangaratta Woollen Mills v FCT
• Could a building used as a dye house which was
used in the production process be considered
‘plant’?
• The dye house was a ‘tool of the trade’ and was
more than just bricks and mortar. It played a
major role in the production process.
• At the time of this case no depreciation
deduction under Division 43 – capital works - for
income producing buildings.

30. Section 40-40 - Meaning of hold a
depreciating asset
• Section 40-40 - 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.
– 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:
– The economic owner and not the legal owner

31. Meaning of hold a depreciating asset –
Item 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

32. Meaning of hold a depreciating asset
• 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.

33. Section 40-55 - Use of certain car
methods – page 266 Text
• 40-55 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, or the `12% of original value'
method, for the car for that year.
• Cents per kilometre – only up to 5,000 km
taken into account –70 cents/km – engine
over 2.6 cc -based on 2007-2008 rates

34. Section 40-65 - Choice of methods to
work out the decline in value
• 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 section
40-70. 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
section 40-80.

35. Section 40-70 - Diminishing value
method
Post 9 May 2006
• You work out the decline in value of a
depreciating asset for an income year using the
diminishing value method in this way:
• Base value × Days held × 200% (150%)
365 Asset's effective life
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

36. Example of Diminishing Value
• Item costs $10,000 (ignore GST) and has an effective
life of 5 years – 20% x 200% = 40%:
• Year 1 – 10,000 x 40% = $4,000 deduction
• Year 2 – written down value $6,000 x 40% = $2,400
deduction
• Year 3 – written down value $3,600 x 40% = $1,440
deduction
• Year 4 – written down value $2,160 x 40% = $864
deduction
• Year 5 – written down value $1,296 x 40% = $518
deduction, written down value at end of life = $778

37. Section 40-75 - Prime cost method
• You work out the decline in value of a
depreciating asset for an income year using the
prime cost method in this way - where:
• Asset's cost × Days held x 100%
365 Assets effective life
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 3 1/3
years, the asset would decline in value in that year by:
$3,500 × [365 - 25] x 100% = $978
365 3 1/3

38. Prime Cost
• Item costs $10,000 (ignore GST) and has an effective
life of 5 years – 20%:
• Year 1 – 10,000 x 100% /5 = $2,000
deduction
• Year 2 – written down value $8,000 = $2,000
deduction
• Year 3 – written down value $6,000 = $2,000
deduction
• Year 4 – written down value $4,000 = $2,000
deduction
• Year 5 – written down value $2,000 = $2,000
deduction, written down value at end of life = $0

39. Section 40-95 - Choice of determining
effective life
• 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.

40. Section 40-230 - Adjustment: car limit
• 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.
• $57,009 is the 2006-2007 cost limit for claiming
a deduction for a decline in value, even if the car
cost $250,000. The limit is published annually by
the Commissioner. GST on this limit.

41. Example of a Balancing Adjustment
• Item costs $10,000 (ignore GST) and has an
effective life of 5 years – 20%:
• Year 1 – 10,000 x 100% /5 = $2,000 deduction
• Year 2 – written down value $8,000 = $2,000 deduction
• Year 3 – written down value $6,000 = $2,000 deduction
• At the end of Year 4 the asset is sold for $5,000 – written
down value $4,000 = $1,000 balancing adjustment,
representing assessable income of $1,000, s 6-5.
• If it had been sold for $3,000, then a deductible loss of
$1,000, s 8-1.

42. Section 40-425 - Allocating assets to a
low-cost and low-value pool
• 40-425(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.
• 40-425(2) A low-cost asset is a depreciating asset,
except a horticultural plant (including a grapevine) 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.
• 40-425(3) You may also choose to allocate a low-value
asset to a low-value pool: Where value declined using
DV.
• Reason for pool – save on compliance costs

43. Pooled Assets
• Calculation based on Diminishing Value
method and an effective life of 4 years.
25% x 150% = 37.5%. Half of that rate is
18.75%.
• Items added to the pool as low cost or low
value during the year are depreciated at
the rate of 18.75%.
• The pool balance, at the start of the year,
is depreciated at the rate of 37.5%.

44. Low-Cost Items – less than $100
• For large taxpayers that are not in STS, all items
of plant must be written off over their effective
life. This means that even a $20 stapler had to
be included in the low cost pool.
• The ATO have adopted an administrative policy,
PS LA 2003/8 to overcome the compliance
problem. $100 the limit – after GST deducted =
$90.91 an immediate deduction pursuant to s 8-
1

45. Low-Cost Items: Immediate Write-Offs
• An immediate 100% deduction applies for
depreciating assets costing $300 or less and
used by taxpayers predominantly in deriving
non-business assessable income, s 40-80(2):
- the asset was not part of a set of assets acquired
during the year where the total cost of the set
exceeded $300; and
- the total cost of the asset and any substantially
identical item that the taxpayer started to hold in
that year did not exceed $300.

46. Black hole Expenditure – s 40-880
• 20% - deduction over 5 years
• The cost of registering a company – capital cost of
establishing the business structure
• Cost of preparing a prospectus to raise share capital
• Costs to stop carrying on your business – legal costs in
terminating employees
• Certain advertising costs
• unsatisfied contingent liabilities
• penalty interest associated with the sale of an asset
• certain improvement expenditure
• Note – interaction with CGT and cost base

47. Division 43 – Deduction for Capital
Works
• Section 43-20:
• ''Capital works'' is an umbrella term
covering a wide range of structures,
and extensions, alterations and
improvements to such structures.
• three broad categories:
(a) buildings;
(b) structural improvements;
(c) environment protection earthworks

48. Hotel and apartment buildings
- Section 43-95
• A hotel building is, broadly, a building used
mainly to operate a hotel, motel or guesthouse
where the building has at least 10 bedrooms that
are for use mainly to provide short-term traveller
accommodation.
• An apartment building is, broadly, a building
consisting of at least 10 apartments, units or
flats that are for use mainly to provide short-term
traveller accommodation. A building's status as
an apartment building is not affected if it also
has facilities such as lounge rooms and games
rooms.

49. CALCULATION OF CAPITAL WORKS
DEDUCTIONS
• Capital works deductions are calculated using
the following formula – s 43-210; 43-215:
• Construction x applicable x days used
expenditure rate 365
• The ''applicable rate'' is 2.5% or 4% depending
on:
• (a) when construction of the capital works
started; and
(b) the use to which the capital works are put

50. Example
• Construction of a block of flats is started in March 2001
under a contract entered into in July 2000. The 2.5% rate
therefore applies. The total construction expenditure is
$2m and the building is completed and first used for
income-producing purposes on 24 February 2002 (the
239th day of the 2001/02 income year).
• The taxpayer is entitled to a capital works deduction in
2001/02 of $17,260 (i.e. 126/365 × 2.5% × $2m). In each
of the following 39 years, the taxpayer is entitled to an
annual deduction of $50,000; in 2041/42, the taxpayer is
entitled to a deduction for the balance of $32,740, i.e. the
remaining undeducted construction expenditure.

51. WHAT IS CONSTRUCTION
EXPENDITURE ?
• Construction expenditure is determined on the
basis of the actual cost incurred in relation to the
construction of a building, structural
improvement, extension, etc.
• Construction expenditure includes preliminary
expenses such as architect's fees, engineering
fees, surveying fees, building fees, costs
associated with obtaining the necessary building
approvals and the cost of foundation
excavations (Taxation RulingTR 97/25)

52. Construction expenditure where
original construction cost unknown
• Where a taxpayer is completely unable to obtain
information about the actual cost of capital works, a
building cost estimate by a quantity surveyor or other
independent qualified person may be used.
• Examples of other qualified people may include clerks of
works, builders experienced in estimating construction
costs of similar building projects, supervising architects
and project organisers. However, valuers, real estate
agents, accountants and solicitors are not normally
considered to be appropriately qualified.

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