General depreciation determination - fishing nets

We have been asked for clarification of depreciation determination DEP50 (published in Tax Information Bulletin Vol 15, No 5 (May 2003) at page 18).  Two separate matters have been raised.

Background

Determination DEP50 inserted two general asset classes in the "Fishing" industry category.  The general asset classes are "Nets (fishing) bottom trawl, complete with accessories" and "Nets (fishing) other, complete with accessories".  The depreciation rate set for bottom trawl fishing nets is based on an expected useful life of 1 year.  All other nets have an expected useful life of 2 years.

There were corresponding changes to the six specific asset classes which previously covered fishing net and its associated parts.  "Nets (fishing)" was removed.  "Bridles", "Sweeps" and "Trawl Boards" were also removed and are now to be treated as "accessory" items.  The estimated useful life of "Wire (trawl)" was amended to 1 year.  A further change applies to "Lines (fishing)".  This has been deleted from the industry category and is now to be treated as an allowable deduction.

The First Query - Fishing Nets Become Unusable

17. Ordinarily fishing nets are depreciated over the expected useful life of the particular asset.  However, it may be that due to accident or other damage beyond normal wear and tear, the net is lost, damaged beyond repair, with the result that the actual life of a particular net is less than its expected useful life.  It has been suggested that actual life of nets is highly variable and may (depending on unpredictable events) be as short as a one-off use or, with regular repairs and maintenance, a year or more.  We have been asked how to account for allowable deductions for depreciation in that situation.

1. These types of situations are covered by section EG 19 of the Income Tax Act 1994 which deals with dispositions of depreciable property (other than a building).  The definition of "disposal" in section EG 19 is wide and includes any event as a consequence of which the property is irreparably damaged, or lost and not recovered.  For example, when a net is lost in one trawl through snagging or becomes unusable as a result of other circumstances.  This broad concept of "disposal" is important because, for the purposes of section EG 19, such property is deemed to have been disposed of by a taxpayer for a consideration that is less than its adjusted tax value at the time of disposition.  In that situation the loss on disposition is deductible in the income year in which the disposition occurs (rather than there being ongoing depreciation deductions claimed).

The Second Query - Allowable Deductions for Fishing Lines

17. We have also been asked to clarify the correct treatment to be applied to fishing lines.  This issue is significant for long-lining operators, whose vessels do not carry nets (and so cannot account for lines as an "accessory" item), but will also be of interest to the wider fishing industry.

1. Taxpayers operating in the fishing industry will normally be entitled to claim a tax deduction in respect of expenditure outlaid on the acquisition and use of fishing lines.  Information available to the Commissioner indicates that a long-lining operation will typically consume large quantities of line coils each year, thus supporting the treatment of lines as potentially an allowable deduction and not depreciable property (as was previously the case).  This means that the expenditure will now be allowed as an immediate deduction under section BD 2(1) as an ordinary business expense (as long as the normal tests of deductibility are met).  As such, fishing lines are not covered by the potential range of accessory items now included in the two general asset classes for fishing nets.  This will be the case for all fishing industry taxpayers and not only long-lining operators.  It is not expected that this will result in any significant change, as lines were described as an "expense" item previously.
   
   The effective timing of the deduction may, however, be subject to section EF 1 in the event that the lines have not been fully used up in deriving gross income at the end of the income year.