ATO Interpretative Decision
ATO ID 2004/271
Income Tax
Capital Allowances: depreciating asset - breakwaterFOI status: may be released
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 breakwater and all of its associated infrastructure a single depreciating asset within the meaning of that term in subsection 40-30(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. The breakwater is a single depreciating asset, and separate from all of its associated infrastructure, within the meaning of that term in subsection 40-30(1) of the ITAA 1997. Various items of infrastructure may also be separate depreciating assets.
Facts
The taxpayer provides facilities and services within the water transport industry. On 30 June 1992, the taxpayer started constructing a breakwater to improve the effectiveness and efficiency of the facilities and services that it provides. The construction of the breakwater was completed on 30 June 1993.
The breakwater was constructed of multiple layers of rock and was specially designed to take into account the particular facilities and services it provides and the natural elements in which they are provided. The infrastructure attached to the breakwater included several wharves, sand pumping equipment, power lines, a road and a conveyor system.
The breakwater was specially designed to take into account particular activities within the harbour.
Reasons for Decision
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 light of all the circumstances of the particular case (subsection 40-30(4) of the ITAA 1997).
The Commissioner's views in Taxation Ruling TR 94/11 are a guide to what represents a separate unit or item, and are relevant in determining whether, as a question of fact and degree, a composite item is itself a depreciating asset. An item is generally itself a single item (rather than being a number of separate units) if it has one or more of the characteristics listed at paragraph 3 of TR 94/11. The basic test put forward in TR 94/11, on the basis of the authorities summarised therein, is a 'function test'. The ruling contains guidelines about the function test and explains how it must be applied to the particular factual circumstances of each case.
A composite item is itself a depreciating asset that has a separate function, and is functionally complete in itself, even though it may not be self-contained or isolated. The function of the thing being considered need only be separately definable or identifiable rather than be self contained or isolated, and be capable of performing its own intended discrete function. The relevant types of function that the item performs are those that are sufficiently complete, definable and identifiable so as to give the item subjected to those uses the characteristics of a single depreciating asset in respect of the taxpayer's operations.
It is considered that the breakwater is a separately identifiable item and performs its own intended discrete function. The main functions of the breakwater are to:
- •
- Protect the port from the effects of waves
- •
- Prevent siltation
- •
- Provide a stable foundation for port activities
- •
- Provide a setting that allows wharves, power lines and other infrastructure to be attached to it.
The wharves, powerlines and other items have their own discrete function. These attachments are separate from the stone breakwater and may constitute depreciating assets in their own right.
Accordingly, the breakwater is itself a depreciating asset within the meaning of that term in subsection 40-30(1) of the ITAA 1997.
Taxation Ruling
Taxation Ruling TR 94/11
Date of decision: 5 March 2004Year of income: Year ended 30 June 2002 Year ended 30 June 2003 Year ended 30 June 2004
Legislative References:
Income Tax Assessment Act 1997
subsection 40-30(1)
subsection 40-30(4)
ATO ID 2004/269
ATO ID 2004/270
Keywords
Depreciating assets
Improvement to land
Structural improvement expenses
ISSN: 1445-2782