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02 Nov 12 Depreciation deductions allowed in part - Re Rigoli

The AAT has allowed in part a taxpayer’s objections in relation to depreciation deductions. Although the taxpayer had kept no business records, the AAT was able, on the evidence, to calculate or make a reasonable assessment of depreciation on a number of capital items. In relation to the bulk of the capital items in question, however, the evidence did not allow any such calculation or assessment. The taxpayer therefore succeeded only to a limited extent.

The taxpayer was a member of a family partnership which carried on a business of manufacturing polystyrene and cardboard boxes used for the purposes of storing fruit and vegetables. It was not a formal partnership and it did not have a Partnership Deed. The taxpayer had lodged no income tax returns for the relevant years (there was evidence that at some point the family had purported to secede from the Commonwealth of Australia and to designate their property as a “micro nation” known as the Principality of Ponderosa). The Commissioner therefore issued default assessments for the relevant years.

The taxpayer accepted the Commissioner’s assessments of his income, but objected to the disallowance of depreciation expenses which ought to have been taken into account in assessing his taxable income in the relevant years.

The AAT found that if the taxpayer was able to prove, on the balance of probabilities, that one or more that deductions which he claimed and which were disallowed by the Commissioner should have been allowed, he would necessarily prove that the amount of the Commissioner’s assessment was excessive.

The difficulty in establishing depreciation for the capital items employed in the partnership business during the income years in question was seriously compounded by the fact that the partnership did not maintain so much as basic financial records. As the AAT pointed out, in order to calculate depreciation in any particular income year, one first needs to establish ownership of the capital item by the taxpayer at a particular point in time and the cost of acquiring that item. One also needs to know whether the item was new or used at the date of acquisition and whether it had previously been depreciated.

On the evidence, the AAT concluded that there were a number of capital items on which the Commissioner did not allow a depreciation deduction when it was possible to do so. The taxpayer therefore had, to a limited extent, established on the balance of probabilities that the Commissioner’s assessment in the income years in question was excessive. The objection decisions were set aside to that extent.

Re Rigoli and FCT [2012] AATA 757 (Senior Member Egon Fice, 1 November 2012).

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