ATO Interpretative Decision

ATO ID 2005/278 (Withdrawn)

Income Tax

• This ATO ID is withdrawn due to the limited application of the facts of the arrangement, and that ATO view on this topic is contained in Guide to depreciating assets 2018.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Does the taxpayer hold the depreciating assets under item 3 in the table in section 40-40 of the Income Tax Assessment Act 1997 (Item 3) if it has constructed improvements on land that is leased by another entity?

Decision

No. The taxpayer does not hold the depreciating assets because the improvements to the land are not, for the purposes of Item 3, made by the taxpayer.

Facts

The taxpayer, an entity that carries on a construction business for a taxable purpose, entered into an arrangement with an unrelated entity to construct a facility on land held in leasehold form by the unrelated entity (the lessee entity) in return for a construction payment. The facility includes depreciating assets that constitute improvements (including fixtures) to the land.

The lessee entity uses the land in carrying on its business. Under the terms of the arrangement the taxpayer has access to the land under a license for the construction period. Under the terms of the arrangement, the improvements constructed on the land, including improvements that are depreciating assets, become the property of the lessee entity and the taxpayer thus has no right to remove any of the assets they construct on the land. The income from the arrangement is derived by the taxpayer in the ordinary course of its construction business.

Reasons for Decision

Subsection 40-25(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you can deduct the decline in value for an income year of a depreciating asset that you held for any time during the year. Therefore, an entity must hold a depreciating asset in order to obtain any entitlement to a capital allowance deduction.

The meaning of 'a depreciating asset' is defined in section 40-30 of the ITAA 1997. 'Hold' in reference to a depreciating asset has the meaning given by section 40-40 of the ITAA 1997.

For particular listed circumstances the table in section 40-40 of the ITAA 1997 identifies the holder of a depreciating asset. The primary rule is that the taxpayer holds an asset if they are the owner of it (item 10 in the table in section 40-40 of the ITAA 1997). However, there are items that identify a holder in various other circumstances even though they are not the asset's owner. Item 3 specifies that an owner of a quasi-ownership right (while it exists) will be a holder of a depreciating asset where the depreciating asset is:

an improvement to land (whether a fixture or not) subject to [the] quasi-ownership right (including any extension or renewal of such a right) made, or itself improved, by any owner of the right for the owner's own use where the owner of the right has no right to remove the asset.

Paragraph 1.41 of the Explanatory Memorandum to the New Business Tax System (Capital Allowances) Bill 2001 (Cth) explains that the table in section 40-40 of the ITAA 1997 addresses specific cases where a depreciating asset is fixed to land which is itself subject to a quasi-ownership right.

In making the construction payment to the taxpayer the lessee entity incurs capital expenditure in return for the carrying out by the taxpayer of construction works on the land. The lessee entity, and not the constructing taxpayer, receives the enduring benefit of the improvements that are depreciating assets on land it uses in its business. The lessee entity is thus the entity that has enabled itself by its payment to access the economic benefits of the constructed depreciating assets. For the purpose of Item 3, it is the lessee entity, and not the taxpayer, that has 'made' the improvements, and so holds the depreciating assets.

Amendment History

Year of income:  Year ending 30 June 2006

Legislative References:
Income Tax Assessment Act 1997
   subsection 40-25(1)
   section 40-30
   section 40-40

Related Public Rulings (including Determinations)
Taxation Ruling IT 2450

Related ATO Interpretative Decisions
ATO ID 2005/277

Other References:
Explanatory Memorandum to the New Business Tax System (Capital Allowances) Bill 2001 (Cth)

Keywords
Capital Allowances CoE
Capital expenditure
Construction costs
Decline in value
Hold a depreciating asset
Legal owner
Quasi-ownership right

Siebel/TDMS Reference Number:  4689759; 1-FIM9SQR

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  14 October 2005

ISSN: 1445-2782