ATO Interpretative Decision
ATO ID 2004/938 (Withdrawn)
Income TaxCapital Allowances: hold - leased depreciating assets - attached to land
FOI status: may be released
This ATO ID is withdrawn. Guidance on this issue can be found in Guide to depreciating assets 2016 (NAT 1996, PDF 623KB)This document has changed over time. View its history.
Status of this decision: Withdrawn
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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.
Does the taxpayer hold, under item 6 of the table in section 40-40 of the Income Tax Assessment Act 1997 (ITAA 1997), existing depreciating assets attached to land where they lease both the assets and the land from the landowner under similar but separate arrangements?
Yes. The taxpayer does hold the existing depreciating assets attached to the land under item 6 of the table in section 40-40 of the ITAA 1997 because they have possession of and a right to acquire the assets and it is reasonable to expect they will exercise that right to become the holder of the assets under item 10 of the table in section 40-40.
The essential features of the arrangement are:
- The taxpayer entered into, with the landowner, a long term lease of land.
- Attached to the land were various existing depreciating assets.
- The assets were used by the landowner in the course of an existing business operation.
- The taxpayer also entered into, with the landowner, a similar but separate long term lease of the existing depreciating assets (asset lease).
- On expiry or termination of the asset lease, the taxpayer was required to return to the landowner the existing assets or their replacement in a state and condition commensurate with the commencement of the lease.
- The taxpayer had a right to acquire all of the existing depreciating assets. The right arose on entering into the asset lease but was only exercisable at the earlier of the end of the asset's remaining useful life or when the parties otherwise agreed that the existing assets had become redundant or obsolete.
- On exercising their right to acquire the existing assets, the taxpayer must remove the assets. The taxpayer may then sell them and retain the proceeds.
- The taxpayer must replace the depreciating assets they remove.
Reasons for decision
Section 40-25 of the ITAA 1997 provides to a holder of a depreciating asset an annual deduction for the decline in value of the asset as worked out under Division 40 of the ITAA 1997. Division 40 applies to the existing depreciating assets as if they were assets separate from the land (subsection 40-30(3) of the ITAA 1997).
The table in section 40-40 of the ITAA 1997 identifies a holder of a depreciating asset in any particular circumstance. The default rule is that the holder of a depreciating asset is the asset's owner (item 10 of the table in section 40-40 of the ITAA 1997).
Item 6 of the table in section 40-40 of the ITAA 1997 specifies that where one entity otherwise holds a depreciating asset but:
- a second entity possesses, or has an immediate right to possess, the asset, and
- the second entity has a right, the exercise of which would make them the holder of the asset, and
- it is reasonable to expect the second entity will become the holder of the asset by exercising their right or that the asset will be disposed of at the direction and for the benefit of the second entity,
the second entity is the holder of the depreciating asset to the exclusion of the first entity.
The taxpayer satisfies the first requirement of possession by the actual possession and use of the existing assets they have under the terms of the asset lease.
The taxpayer satisfies the second requirement of having a present right to hold the existing assets by the immediate and continuing right to acquire those assets even though there is a minimum period before which that right can be exercised. On exercising their right, the taxpayer would become the legal owner of the existing assets. This would make the taxpayer the holder of the assets under item 10 of the table in section 40-40 of the ITAA 1997.
The taxpayer satisfies the third requirement of it being reasonable to expect that they will become the holder of the existing assets by exercising their right for reasons directly associated with the operational efficiency of the facility and the taxpayer's specific obligations under the asset lease in respect of the state and condition of the assets. In particular, on an objective analysis of the particular facts, it is reasonable to expect that:
- each existing depreciating asset will wear out or become redundant or obsolete within the asset lease period, and
- each existing depreciating asset will, during the asset lease period, be required to perform its existing function and, therefore, will need to be replaced during that period, and
- each existing depreciating asset will need to be removed to allow the replacement asset to be installed, and
- the only mechanism by which the taxpayer can remove an existing depreciating asset is for them to exercise their right to acquire it.
As the taxpayer satisfies all of the requirements of item 6 of the table in section 40-40 of the ITAA 1997, they are regarded as the holder of the existing depreciating assets subject to the asset lease.Date of decision: 23 September 2004
Year of income: Year ended 30 June 2002
ATO ID 2001/314
Capital Allowances CoE
Decline in value
Hold a depreciating asset
Uniform capital allowances system