BAC318 Taxation Law: Depreciation, Deductions, and Provisions

BAC318 TAXATION LAW
Question 2
Part 1
Purchased a Mercedes Benz motor vehicle for a cost of $128,000 on 10 October 2017. The car is used
by the managing director 72% of the time for work purposes. The effective life of the car is 6 years.
On 16 May 2018 the car was crushed by a forklift. The insurance company wrote off the car and paid
the company $87,000.
Solution
In terms of Australian Income Tax Assessment Act, 1997 there are generally two methods of
depreciation that can be used by a company for the purpose of Income tax reporting generally:
(a) Prime Cost Method
(b) Declining Balance Method
In terms of Section 40-25 of the Australian Income Tax Assessment Act, 1997 depreciation is charged
on the asset from the date the asset is put to use by the company or when the asset is ready for use.
(Commonwealth Consolidated Acts, n.d.) Further, in terms of Prime cost method depreciation
(Section 40-75 of Income Tax Assessment Act, 1997) is charged by using the following formula
Cost of Asset * Days Owned /365* 100%/ Effective Life of Asset
However, under the diminishing value of method (Section 40-72 of Income Tax Assessment Act,
1997) computation of depreciation takes place in the following manner:
Pre-10th May, 2006
Opening Un-deducted Cost of Asset * Days Owned /365* 150%/ Effective Life of Asset
Post-10th May, 2006
Opening Un-deducted Cost of Asset * Days Owned /365* 200%/ Effective Life of Asset
(Commonwealth Of Australia, n.d.)
Further, in terms of Section 40-65 of the Australian Income Tax Assessment Act, 1997, an entity can
choose any method of depreciation depending on the decision of the management. Thus, any of the
above stated two methods of depreciation can be used for computation of deduction of depreciation
amount. (Commonwealth Consolidated Acts, n.d.)
In addition to above, the law allows deduction uptill the amount for which the asset has been used for
the official purpose. Accordingly, the percentage of asset used for the purpose of private consumption
shall be disallowed in terms of Section 40-25(2) of the Income Tax Assessment Act, 1997.
(Commonwealth Consolidated Acts, n.d.)
the basis of above deliberations, the computation has been carried out using both method of
depreciation here-in-below:

Prime Cost Method
Sl No Particular Amount
1 Cost of Asset 128000
2 No of Days for which asset has been held 220
3 Effective life in years of the asset 6 years
4 Decline in value (1280000*220/(365*6)*100% 12858.45
5 Proportion used for private use 28%
6 Private use value 3600.365
7 Consumption for official use (4-6) 9258.082
Diminishing Value Method
Sl No Particular Amount
1 Cost of Asset 128000
2 No of Days for which asset has been held 220
3 Effective life in years of the asset 6 years
4 Decline in value (1280000*220/(365*6)*200% 25716.89
5 Proportion used for private use 28%
6 Private use value 7200.731
7 Consumption for official use (4-6) 18516.16
On the basis of the above, it can be inferred that maximum depreciation w.r.t the car Mercedes Benz
(falling within the category of motor vehicle) which has been used both for official and private
purpose stands at AUD 18,516. Further, using diminishing balance method shall be useful for the
company as it helps to minimise the tax liability of the company.
Further, it has been considered that block concept of the asset is followed by the company and not
single one to one mapping and other asset exists in the block so the disposal of asset shall not give rise
to capital gain or loss. However, if there has been no asset other than car than the same shall be
accounted for capital loss in the books of the company and accordingly deduction for the asset shall
be available.
Part 2
$78,562 was spent on hiring additional fire equipment to fight a fire at the mine site.
Solution
In terms of Section 8-1 of the Australian Income Tax Assessment Act, 1997 general deduction is
allowed for expenses which are not capital in nature and has a nexus with the taxable income derived
from business. In layman terms, the law states that only those expenditures shall be allowed as
deduction which has been incurred for the purpose of earning taxable income unless specifically
excluded under the Act. Further, the law states that the expenditure which has been incurred for
deriving the taxable shall also be allowed as deduction even though income is not derived from such
expenditure later on. (Anon., n.d.)