ATO Interpretative Decision
ATO ID 2008/50
Income Tax
Capital Allowances: depreciating asset - improvement to land - gully damFOI status: may be released
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This document incorporates revisions made since original publication. View its history and amending notices, if applicable.
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is the taxpayer's gully dam a depreciating asset within the meaning of subsection 40-30(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes. The taxpayer's gully dam is a depreciating asset because, as an improvement to land, it is treated as an asset separate from the land and, in its particular separate state, satisfies the meaning of that term in subsection 40-30(1) of the ITAA 1997.
Facts
The taxpayer has constructed a gully dam on land which they lease to a third party who uses the land for agricultural operations.
The dam was constructed by building a wall across an existing gully and is used to impound water.
A state government authority provided the taxpayer with some guidelines for the construction of the dam. No other formal design was sought by the taxpayer. The contractor who constructed the dam for the taxpayer provided the ultimate construction design as they had constructed many similar dams in the area.
The land on which the dam was constructed was cleared several years ago and surveyed last year to determine an appropriate structure.
The materials used in construction of the dam wall were obtained from the excavation of the existing gully. If there had not been sufficient soil or clay for the construction of the dam wall from the excavation of the gully the taxpayer would have sourced more soil or clay from elsewhere on their land.
The materials used were excavated clay and its overburden (comprising soil of varying quality).
The extracted materials were separated and then reintroduced in a specific way so as to construct the dam wall.
The dam consists of:
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- a trench which, when interlocked with the impermeable clay core of the dam, provides the foundations of the dam wall in order that the dam can seal and be waterproof. The trench is excavated in the impermeable clay below the overburden
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- a spillway to manage any overflow
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- a clay core in the centre of the dam wall. This is constructed by solid compaction of clay, and
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- an embankment on either side of the clay core. This is constructed by using the lesser quality overburden in the rear of the embankment and the best soil at the front of the dam wall.
The dam will deteriorate over time because erosion, the growth of trees and water seepage will compromise the impermeable clay sealing of the dam. If tree roots grow through the structure of the dam, water then 'tracks' the roots, dragging soil and clay material with it which eventually causes the dam to fail.
The taxpayer is not carrying on a business of primary production and is not an irrigation water provider.
Reasons for Decision
(All references to legislation within this Interpretative Decision are to the ITAA 1997)
A depreciating asset is broadly defined in subsection 40-30(1) as an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used.
Land is specifically excluded in paragraph 40-30(1)(a) from being a depreciating asset, even if, in certain circumstances, it may satisfy the other requirements of the definition of a depreciating asset.
Subsection 40-30(3) requires Division 40 to be applied to an improvement to land, whether the improvement is removable or not, as if the improvement were an asset separate from land. However, for an improvement to land to also be a depreciating asset the improvement must not be 'land' for the purposes of paragraph 40-30(1)(a) (The exception of land from being a depreciating asset is limited to land within the ordinary meaning of that word, rather than in its legal meaning - where improvements to land are treated as part of land).
To determine if an improvement to land is other than land in its ordinary meaning, the improvement to land must be found to have a discrete and identifiable function separate to merely existing as the solid substance of the exposed surface of the earth.
This gully dam, constructed using specified materials, is performing a discrete and identifiable function of collecting, storing and stopping the flow of water. Therefore, it is considered that the gully dam is not land for the purposes of paragraph 40-30(1)(a). The dam has a discrete and identifiable function separate to merely existing as the exposed surface of the earth.
Having established that the taxpayer holds an improvement to land that is other than land in its ordinary meaning, it is necessary to determine if that improvement is also a 'depreciating asset' under subsection 40-30(1) - specifically, whether it has a limited effective life and can reasonably be expected to decline in value over the time it is used (see Note 1 at subsection 40-30(3)).
The requirement that an asset decline in value over the time that it is used does not mean that this must occur uniformly over time. It is sufficient that it will decline in value by the end of its effective life. While the overburden that was used as an embankment on either side of the impermeable clay could be economically maintained for an indefinite period, the same cannot be said of the clay itself. The clay that was formed to provide both the foundation for and the core of the dam wall will suffer deterioration from continual use and exposure to the elements and, therefore, the dam can reasonably be expected to decline in value over the time it is used.
The meaning of effective life is contained in section 40-100 (for the Commissioner's determination) and in section 40-105 (for self-assessment). Broadly, the effective life of the dam in this case is how long it can be used by anyone for producing assessable income, having regard to the period within which it is likely to be scrapped or abandoned.
The dam will deteriorate over time because erosion, the growth of trees and water seepage will compromise the clay sealing of the dam. It is therefore considered that the dam has a limited effective life.
As the dam is an improvement to land; has a discrete and identifiable function separate to merely being the exposed surface of the earth; has a limited effective life; and can reasonably be expected to decline in value over the time it is used, the dam is a depreciating asset for the purposes of subsection 40-30(1).
Year of income: Year ended 30 June 2008
Legislative References:
Income Tax Assessment Act 1997
section 40-25
section 40-30
subsection 40-30(1)
Paragraph 40-30(1)(a)
subsection 40-30(3)
subsection 40-45(2)
section 40-100
subsection 40-105(1)
ATO ID 2007/11
ATO ID 2007/12
Keywords
Assets
CGT asset
Capital Allowances CoE
Capital Works Deductions
Construction expenditure area
Decline in value
Depreciating assets
Effective life
Improvement to land
Date reviewed: 31 October 2014
ISSN: 1445-2782
| Date: | Version: | |
| You are here → | 20 February 2008 | Original statement |
| 17 November 2017 | Updated statement |