ATO Interpretative Decision

ATO ID 2004/579

Income Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Does the taxpayer's waste disposal system comprising a water tank and piping, pump and hose, constitute a single depreciating asset within the meaning of that term in section 40-30 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

No. Within the meaning of a depreciating asset in section 40-30 of the ITAA 1997, the waste disposal system consists of separate depreciating assets being the piping and water tank, the pump and the hose.

Facts

The taxpayer owns a rental property. There is no council supplied sewerage system in the area and the property's soakage trenches were unable to cope with the amount of waste water produced on the property. The taxpayer purchased and installed, in compliance with council regulations, a polyethylene water tank connected by a pipe to the house, a pump and a hose from the pump to the garden. The purpose of the tank, which was installed underground, is to collect waste water to be pumped onto gardens on the property.

The piping is an underground pipe that connects the tank to the building. The pump sits in the tank and is used to pump the waste water onto the gardens.

Reasons for Decision

For the purpose of applying the capital allowance provisions in Division 40 of the ITAA 1997, whether a composite item is itself a depreciating asset or whether its components are separate depreciating assets is a question of fact and degree to be determined in the light of all of the circumstances of the particular case (subsection 40-30 (4) of the ITAA 1997).

A test used in determining that outcome is a test of function, the functional test.

The Commissioner's views as to the application of the functional test are set out in Taxation Ruling TR 94/11. Some of the factors to be considered in applying the functional test include:

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being separately identifiable

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being capable of performing its own separate function, and

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the item varies the performance of another item.

Factors such as the mechanical independence of an item, physical separability and whether an item can be separately acquired, need also to be considered in deciding whether an item may be a separate depreciating asset.

It is considered that each of the water tank and piping, and the pump and hose, is a separately identifiable unit performing its own intended discrete function. Functionally, they are separate items. The piping transfers the waste water from the rental property to the water tank. The water tank captures the waste water from the rental property. The pump acts as the mechanism of getting the waste water from the tank, and the hose transfers the water to the garden.

The pump and hose are separate items that are depreciating assets for which a decline in value deduction is allowable under section 40-25 of the ITAA 1997.

The piping and tank are functionally separate from the pump and hosing, and are not part of the same depreciating asset as the pump or hosing.

Because the piping and tank are also capital works for which a deduction is available under section 43-10 of the ITAA 1997, subsection 40-45(2) of the ITAA 1997 provides that no decline in value deduction is available for these assets under section 40-25 of the ITAA 1997.

Year of income:  Year ended 30 June 2004

Legislative References:
Income Tax Assessment Act 1997
   section 40-25
   section 40-30
   subsection 40-30(4)
   subsection 40-45(2)
   section 43-10

Related Public Rulings (including Determinations)
Taxation Ruling TR 94/11

Keywords
Depreciating assets
Structural improvement expenses

Business Line:  Small Business/Individual Taxpayers

Date of publication:  16 July 2004

ISSN: 1445-2782