560 Wasting assets

Summary

This section provides a formula for the treatment of allowable expenditure in the computation of a gain or loss on the disposal of wasting assets. In general, a wasting asset is an asset which has a predictable life not exceeding 50 years but freehold land is not to be a wasting asset whatever its nature. Because a wasting asset is one whose useful life is limited so that over a period of time it gradually becomes either valueless or worth only scrap value, when such an asset is disposed of the disposal comprises only what is in substance a diminished part of the asset, the other part having been worn out by use or passage of time. Thus, if the original outlay were to continue to qualify in full, artificial losses would result on the disposal of the asset. To prevent this, it is provided that the original expenditure is to be restricted on the assumption that it wastes away at a uniform rate over the predictable life of the asset. Further outlay on the asset is similarly to be treated as wasting away over the remaining life of the asset from the time it is reflected in the value of the asset. [It should be noted, however, that under section 603 all chattels which are wasting assets are exempt from capital gains tax except where capital allowances were or could have been claimed in respect of them. It should also be noted that section 566 and Schedule 14 provide for special rules to deal with the computation of gains and losses on disposals of leases which are wasting assets.]

Works of Art

This section was amended by Section 46 of the Finance Act 2014 in relation to a weakness in the interaction between Section 560 (wasting assets and CGT) and Section 603 (wasting chattels) insofar as works of art are concerned.

Section 560 of the Taxes Consolidation Act 1997 provides that items of plant and machinery are in every case to be regarded as having a predictable life of less than 50 years, or in other words “wasting assets” for capital gains tax purposes. This is so that in computing any gain or loss on a disposal of plant or machinery, the cost of the item is treated as written off at a uniform rate to NIL at the end of its life, thus ensuring that claims for losses cannot arise.

Section 603 of the Taxes Consolidation Act 1997 also provides that an asset that is tangible movable property and a wasting asset is exempt from capital gains tax except where it is used in a trade or profession and eligible for capital allowances.

The effect of the interaction of these two provisions is that valuable works of art can be treated as items of plant in certain circumstances and therefore exempt from capital gains tax. It was not the intention that such valuable items should be exempt from capital gains tax. Accordingly, Section 46 amended the definition of wasting asset in Section 560(1)(c) to provide that the section only applies to plant (other than plant that is a work of art). Work of art is defined as including a picture, print, book, manuscript, sculpture, piece of jewellery, furniture or similar object.

Details

(1) A “wasting asset” is an asset with a predictable life not exceeding 50 years but freehold land, no matter what its nature and no matter what buildings are on it, is not to be treated as a wasting asset. A life interest in settled property is treated as a wasting asset when the expectation of life of the life tenant is 50 years or less, and life expectations are to be ascertained from actuarial tables approved by the Revenue Commissioners. In any case in which predictable expectation of life requires to be ascertained by reference to actuarial tables Income & Capital Taxes Division should be consulted.

The remainder of this guidance note deals with plant (that is not a work of art) and machinery. Plant (other than plant that is a work of art) and machinery is always treated as a wasting asset and its life is regarded as ending when it is finally unfit for further use. In estimating the life of plant and machinery, it is to be assumed that the plant and machinery will be used in the normal manner and to the normal extent throughout its life. The significance of this provision in relation to plant and machinery is limited in that the exemption of wasting chattels does not apply to assets which have qualified for capital allowance and in that the straight-line write off of expenditure provided by section 560 does not apply to such assets. “Life”, in relation to tangible movable property, is defined as useful life having regard to the purpose for which the assets were acquired or provided.

The term “the residual or scrap value” means the predictable value, if any, which a wasting asset has at the end of its predictable life.

(2) The predictable life and predictable scrap value depends on the nature of the asset (as for example its legal period of existence). Unless immediately apparent from the nature of the asset, predictable life and predictable scrap value are to be taken in relation to any disposal as they were known or ascertainable at the time the asset was acquired or provided by the person making the disposal.

(3)(a) Expenditure on the cost of a wasting asset, less the expected scrap value at the end of its life, is to be written off at a uniform daily rate. The write off expressed as a formula is —

(3)(b) Where during the period of ownership further expenditure is incurred in improving the asset which is reflected in the value of the asset at the time of disposal, that expenditure is also to be treated as written off at a uniform daily rate. The corresponding formula is —

(4) If the additional expenditure results in a new scrap value for the asset, the write off of initial outlay is modified and the revised formula reads —

(5) Any expenditure written off under the section does not qualify as a deduction under section 552 in computing chargeable gains.

Relevant Date: Finance Act 2021