Edited version of your private ruling

Authorisation Number: 1012444319626

Ruling

Subject: Income Tax: Capital Allowances - Tax break

Question 1

Is the Plant, including the shed, the asset and the ancillary equipment a single depreciating asset for the purpose of Subdivision 40-B of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

If the answer to Question 1 is 'yes', was the investment commitment time for the purpose of section 41-25 of the ITAA 1997 when construction of the asset commenced, being 200X?

Answer

Not required to answer

Question 3

Are the shed, the asset (both excluding and including the second-hand parts), second-hand parts and ancillary equipment multiple depreciating assets that are capable of being separately identified for the purpose of Subdivision 40-B of the ITAA 1997?

Answer

Yes

Question 4

Is a time before 30 June 2010 the time at which the taxpayer started to use the depreciating asset(s) for the purposes of section 41-30 of the ITAA 1997?

Answer

Yes

Question 5

Is any part of the shed an integral part of asset?

Answer

Yes

Question 6

Are amounts which are included in the cost of the shed eligible for the 30% deduction under subparagraph 41-15(1)(c)(i) or the 10% deduction under subparagraph 41-15(1)(c)(ii) of the ITAA 1997?

Answer

Yes

Question 7

Are amounts which are included in the first element of cost of the new asset eligible for the 30% deduction under subparagraph 41-15(1)(c)(i) or the 10% deduction under subparagraph 41-15(1)(c)(ii) of the ITAA 1997?

Answer

Yes

Question 8

Are amounts which are included in the second element of cost of the new asset eligible for the 30% deduction under subparagraph 41-15(1)(c)(i) or the 10% deduction under subparagraph 41-15(1)(c)(ii) of the ITAA 1997?

Answer

No

Question 9

Are amounts which are included in the cost of the second-hand asset eligible for the 30% deduction under subparagraph 41-15(1)(c)(i) or the 10% deduction under subparagraph 41-15(1)(c)(ii) of the ITAA 1997?

Answer

No

Question 10

Are amounts which are included in the cost of the ancillary equipment eligible for the 30% deduction under subparagraph 41-15(1)(c)(i) or the 10% deduction under subparagraph 41-15(1)(c)(ii) of the ITAA 1997?

Answer

No

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The taxpayer carries on a business in and Australian state.

The taxpayer invested in a complex, technologically advanced asset.

The taxpayer entered into a contract for new equipment for the creation of the asset in 200X.

The taxpayer entered into a contract for second-hand equipment in 200X.

The taxpayer entered into a contract with a contractor for the supply and fabrication of the shed to house the asset in 200X.

The taxpayer provided the contractor with the specifications for the shed. However, the contract specified that the contractor had complete responsibility for the works of the contract and was responsible for all materials, labour and tools. Some items (such as the supply and installation of windows) were excluded from the contract and the taxpayer incurred expenditure in relation to these items outside of the contract.

Between month 20YY and month 20YY other subsequent contracts were entered into with various other entities for the supply of ancillary equipment for the completion of the asset.

A natural disaster occurred in early 200X and destroyed the taxpayer's property.

In or around month 20YY, the construction of the shed was commenced.

The exact building design, dimensions, specification and layouts of the shed were specified by the supplier of the asset.

The shed has numerous specific design requirements and features to accommodate the asset. This is to ensure product integrity and no cross contamination. Accordingly, the layout of the shed ensures that the product flow is kept separate.

The layout and levels of the shed reflect the requirements of the asset.

The floor system in the shed has a dedicated drainage system that separates the product flow from each step in the process.

The process operates under a positive air pressure so the shed was constructed to be able to maintain the required air pressure. All seals and joins were constructed to be able to maintain greater than 20 pascals positive air pressure.

The cleaning process requires the use of chemicals, high pressure and high temperature. All internal surfaces are impermeable and washable under high pressure.

The concrete used in creating the base of the shed was of a higher MPa rating so as to support the asset's loads and ensure proper adhesion with the floor tiles that are acid and base resistant to the cleaning process required.

The asset is suspended from the walls and roof structures, which required adequate strengthening of the building structure.

The material used in the external roofing and external cladding is universal to commercial buildings in Australia.

The asset arrived in Australia in month 20YY.

The asset is made up of a number of components.

In or around the end of 20YY the asset had been constructed and was in a workable condition.

Before the 30 June 20YY, the asset was turned on and tested by the taxpayer. These tests confirmed that the asset was operational and was capable of performing its function as designed. The product could be sold as feedstock. However, this product could not be sold for as high a price as product that could be sold for human consumption. The taxpayer made the decision to obtain the relevant approvals so it could produce output that could be sold for human consumption.

The taxpayer had to get various authorities.

The Commissioning Report from the supplier of the asset was signed and dated in month 20YY.

The other authorities were obtained in or around month 20YY.

In or around month 20YY the asset was used by the taxpayer to produce output for human consumption.

The taxpayer stated that they have satisfied all other relevant conditions in Division 41 to be entitled to the investment allowance deduction, specifically:

· the general conditions in subsection 41-10(1) of the ITAA 1997 were met;

· the recognised new investment amount satisfied all the criteria in subsection 41-20(1) of the ITAA 1997; and

· that the integrity rule in subsection 41-25(2) of the ITAA 1997 did not apply.

The taxpayer is not a small business entity.

Relevant legislative provisions

Income Tax Assessment Act 1997

Division 40

section 40-30

subsection 40-45(2)

section 40-60

section 40-180

section 40-190

Division 41

paragraph 41-10(1)(b)

subparagraph 41-15(1)(c)(i)

subparagraph 41-15(1)(c)(ii)

subsection 41-15(2)

paragraph 41-20(1)(b)

paragraph 41-20(1)(e)

paragraph 41-25(1)(a)

subparagraph 41-25(1)(a)(i)

paragraph 41-25(1)(b)

paragraph 41-30(1)(a)

Division 43

paragraph 43-70(2)(e)

Reasons for decision

Question 1 and Question 3

Summary

The shed, asset, second-hand parts and ancillary equipment are separate depreciating assets for the purpose of Subdivision 40-B of the ITAA 1997.

Detailed reasoning

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 'function test' that was used as a basis of identifying a 'unit of asset' in the former asset depreciation rules can be used to determine whether a composite item is itself a depreciating asset. Taxation Ruling TR 94/11 Income tax: general investment allowance - what is a unit of property? contains some guidelines about the function test and explains how it must be applied to the particular circumstances of each case.

A composite item is itself a depreciating asset if it has a separate function and is functionally complete, in itself even though it may not be self-contained or used in isolation. The item should be capable of being separately identified or regarded.

The asset constitutes the shed and the asset. New and second-hand asset was purchased from the supplier and some ancillary equipment was purchased from other suppliers.

The asset is made up of a number of components.

The components of the asset are not used in isolation. However, they each have a discrete function within the process and they are separately identifiable. Therefore, it is considered that each of the components of the asset is a separate depreciating asset.

The shed has various functions. It houses and supports the asset and also plays a role in preventing the contamination of the products. It is separately identifiable from the components of the asset. Therefore, it is considered that the shed is a separate depreciating asset.

Question 2

Not required to answer

Question 4

Summary

The time at which the taxpayer started to use the depreciating asset(s) for the purposes of section 41-30 of the ITAA 1997 was before 30 June 20YY.

Detailed reasoning

'Used' is a word of wide import and its meaning in any particular case will depend on the context in which the word is employed and the purpose for which the thing in question has been acquired or created (see Newcastle City Council v. Royal Newcastle Hospital (1956) 96 CLR 493).

In the context of Divisions 40 and 41 of the ITAA 1997, the use of a tangible depreciating asset requires the actual use or enjoyment of the asset in such a way that it can reasonably be expected to decline in value through and over the time of that use (see Taxation Determination TD 2007/5 Income tax: does a tangible depreciating asset start to decline in value under section 40-60 of the Income Tax Assessment Act 1997 from when it is acquired if the asset is acquired for the sole purpose of using it in a business that has not commenced to be carried on?)

In considering the nature of the use of the asset, exploitation of the inherent character of the asset would be expected. This would provide the necessary connection between the use of the asset and a reasonable expectation of its decline in value through that use (see ATO ID 2003/552).

The asset was acquired for a specific purpose. Before the 30 June 20YY the asset was first used by the taxpayer for this purpose. Therefore, it is considered that the time at which the taxpayer started to use the asset for the purposes of section 41-30 of the ITAA 1997 was before 30 June 20YY.

Question 5

Summary

It is considered that part of the shed is asset.

Detailed reasoning

The shed is a depreciating asset for the purposes of section 40-30 of the ITAA 1997. However, its cost is not deductible under Division 40 of the ITAA 1997 if deductions are available under Division 43 of the ITAA 1997 (subsection 40-45(2) of the ITAA 1997). Therefore, paragraph 41-10(1)(b) of the ITAA 1997 would deny any deductions for the tax break in relation to the shed.

However, paragraph 43-70(2)(e) of the ITAA 1997 excludes expenditure on asset from being deductible under Division 43 of the ITAA 1997. Therefore, any expenditure on the shed which is expenditure on asset may be deductible under Division 40 of the ITAA 1997 and eligible for the tax break under Division 41 of the ITAA 1997.

'Asset' is defined in section 45-40 of the ITAA 1997 to take its ordinary meaning and to include certain other things. None of the inclusions are applicable to the shed. This means that for the shed to be asset it needs to be asset within the ordinary meaning of that term.

Taxation Ruling TR 1999/2 Income tax: deductibility of expenditure incurred on tailings dams or similar mining residue, waste storage or disposal facilities provides the following overview of the ordinary meaning of plant:

20. '[Plant]' in its ordinary sense…includes whatever apparatus is used by a business man for carrying on his business, - not his stock-in-trade which he buys or makes for sale; but all goods and chattels, fixed or moveable, live or dead, which he keeps for permanent employment in his business': Lindley LJ in Yarmouth v France (1887) 19 QBD 647 at 658.'

21. However, if an item merely provides the setting in which the income producing activities are conducted, it does not qualify as plant (J. Lyons & Co Ltd v. The Attorney-General [1944] 1 All ER 477 at 479). A permanent structure may be plant if 'it fulfils the function of plant in the trader's operations' (IRC v. Barclay Curle & Co. Ltd [1969] 1 All ER 732).

Generally, buildings will not qualify as plant as they typically only provide the setting for the taxpayer's operations rather than have a positive function in the business. However, there will be instances where buildings will be plant. Jordan CJ said in Australian Gas Light Co v. Valuer-General (1940) 40 SR (NSW) 126 at 139:

Plant is a very general expression which in certain contexts may be capable of including permanent fixed things such as buildings, but is evidently used in a more restricted sense in its present context.

Taxation Ruling IT 31 Investment allowance - structural improvements - plant structures provides some guidance on what buildings or parts of buildings used for manufacturing may qualify as plant in the context of the former investment allowance provisions. The basic principle outlined in IT 31 is that where buildings form an integral part of plant they may be plant. That is where the structure goes far beyond merely housing the machinery but is completely integrated with it, supporting it and making its functioning possible. To the extent that a building or structure does not have a plant function or is not integral with plant (for example, it merely houses the equipment), it is not plant.

In Wangaratta Woollen Mills Ltd v. Commissioner of Taxation (1969) 119 CLR 1; 69 ATC 4095; (1969) 1 ATR 329 (Wangaratta Woollen Mills), the High Court held that a taxpayer's dyehouse was plant because it played a part itself in the manufacturing process and was more than a convenient setting for the taxpayer's operations. McTiernan J said at 4,101:

I am of the opinion that the appellant's dyehouse is 'in the nature of a tool' in the trade and does 'play a part' itself in the manufacturing process. It is much more than a convenient setting for the appellant's business. The complex ventilation system including the cavity wall does more than clear the atmosphere. Its structure is an active tool in preventing spoiling of material, and in enabling the operatives to carry out their tasks. It would be completely unnecessary in almost every other industry and quite useless to a buyer except a dyer. The protective coating and tiling are essential in preserving the whole 'tool'.

A similar stance was adopted by Kitto J in relation to the matter of buildings as plant in Broken Hill Proprietary Co Ltd v. FCT (1967) 120 CLR 240; (1969) 1 ATR 40; (1968) 15 ATD 43. His Honour said:

I am of the opinion that most of the structures that the appellant has erected on sites set free by demolitions are in the nature of plant. I do not exclude buildings simply because they are places where operations are carried on. I do exclude those which merely provide shelter for persons as they work and for their equipment but I regard as plant the buildings which are more than convenient housing for working equipment and (considered as a whole), ie without treating as separate subjects for consideration the iron roofing and cladding of buildings where the main structural members are specially adapted to the needs of the processes to be carried on inside) play a part themselves in the manufacturing processes.

It is considered that part of the shed is asset. The structure (excluding the external walls and roofing) is more than a convenient setting for the business operations. The internal structure of the shed has a positive function in the business and forms an integral part of the asset. It is an essential part of the efficient and economic operation of the taxpayer's business and is specially adapted to the needs of the processes carried on inside the shed.

Like the dyehouse in Wangaratta Woollen Mills, the designing of the shed suitable for conducting the process entailed consideration of several unusual factors. Accordingly, the shed has numerous specific design requirements and features to accommodate this. Like the dyehouse, the structure of the shed is a tool in preventing the spoilage of the product.

Certification could not have been obtained unless the product of each step in the process was segregated. This is to ensure product integrity and no cross contamination. Accordingly, the layout of the shed ensures that the product flow is kept separate.

The supplier of the asset specified the exact building design, dimensions, specification and layouts. The layout and levels of the shed reflect the requirements of the asset.

The floor system in the shed has a dedicated drainage system that separates the product flow from each step in the process.

The process operates under a positive air pressure so the shed was constructed to be able to maintain the required air pressure. All seals and joins were constructed to be able to maintain greater than 20 pascals positive air pressure.

The cleaning process requires the use of chemicals, high pressure and high temperature. The floor comprises tiles that are acid resistant so they can withstand the cleaning process and will adhere to the concrete base. All internal surfaces of the shed are impermeable and washable under high pressure.

The concrete base required strengthening to support the weight of the equipment and to ensure proper adhesion with the tiles.

The asset is suspended from the walls and roof structures, which required adequate strengthening of the building structure.

However, the external roofing material and external cladding do nothing more than exclude the elements and are not integral with the asset. Therefore, the proportion of the cost of the shed which is attributable to the external roofing and external cladding will not form part of the cost of asset.

Paragraph 14 of IT 31 makes it clear that the cost of general site preparation, such as land levelling, does not form part of the cost of the asset. Therefore, any costs of preparing the site for the shed would also not form part of the cost of asset.

However, it is considered that the remainder of the construction cost of the shed does form part of the cost of asset and will, therefore, form part of the first element of cost of the shed under section 40-180 of the ITAA 1997.

Question 6

Summary

The amounts which are included in the first element of cost of the shed are eligible for the 30% deduction under subparagraph 41-15(1)(c)(i) of the ITAA 1997.

Detailed reasoning

Under paragraph 41-25(1)(a) of the ITAA 1997 the investment commitment time for an amount included in the first element of cost of a depreciating asset is the time at which the taxpayer:

· enters into a contract to acquire the asset;

· starts to construct the asset; or

· starts to hold the asset in some other way.

Taxation Ruling IT 2142 Investment allowance - unit of property - construction and acquisition - incurring of expenditure provides guidelines on how to determine whether a unit of property has been 'constructed' or 'acquired' in the context of the former investment allowance provisions.

The taxpayer entered in a contract with a contractor in 200X for the supply and fabrication of the shed. The contract specified that the contractor had complete responsibility for the works of the contract and was responsible for all materials, labour and tools. Some items (such as the supply and installation of windows) were excluded from the contract and the taxpayer incurred expenditure in relation to these items outside of the contract.

Paragraph 10 of IT 2142 states that, where construction of a unit of property is partly done by the taxpayer and partly by others, the taxpayer will be taken to construct the unit of property if the taxpayer takes the predominant role in the construction. Otherwise, the taxpayer is taken to have acquired the unit of property.

The taxpayer may have provided the contractor with the design and specifications of the shed. However, under the contract, the contractor was responsible for the construction, materials, hiring of labour, etc. Therefore, the construction carried out by the contractor cannot be said to be under the control of the taxpayer.

The other works carried out may have been under the control of the taxpayer. However, based on the relative costs, it is considered that the contractor took the predominant role in the construction of the shed.

Therefore, for the purposes of determining the investment commitment time under paragraph 41-25(1)(a) of the ITAA 1997, the taxpayer is considered to have acquired the shed.

To the extent that the construction costs of the shed form part of the cost of asset, they form part of the first element of cost of the shed.

Under subparagraph 41-25(1)(a)(i) of the ITAA 1997 the investment commitment time for an amount included in the first element of cost of a depreciating asset is the time at which the taxpayer enters into the contract to acquire the asset. Therefore, the investment commitment time for amounts included in the first element of cost of the shed is month 200X.

Under paragraph 41-30(1)(a) of the ITAA 1997 the first use time for an amount included in the first element of a depreciating asset's cost is the time at which the taxpayer starts to use the asset, or has it installed ready for use. As the taxpayer first used the asset before the 30 June 20YY, the first use time for amounts included in the first element of cost of the shed is before the 30 June 20YY.

For a deduction to be worked out using the rate of 30%, subparagraph 41-15(1)(c)(i) of the ITAA 1997 requires that the conditions in subsection 41-15(2) of the ITAA 1997 be met. Subsection 41-15(2) of the ITAA 1997 requires that the investment commitment time occur before 1 July 200X and the first use time occur before 1 July 20YY.

As the amounts included in the first element of cost of the shed meet the conditions in subsection 41-15(2) of the ITAA 1997 and all other conditions for the deduction are met, the deduction in relation to the amounts can be worked out at the rate of 30% under subparagraph 41-15(1)(c)(i) of the ITAA 1997.

Question 7

Summary

The amounts which are included in the first element of cost of the new asset are eligible for the 30% deduction under subparagraph 41-15(1)(c)(i) of the ITAA 1997.

Detailed reasoning

Under subparagraph 41-25(1)(a)(i) of the ITAA 1997 the investment commitment time for an amount included in the first element of cost of a depreciating asset is the time at which the taxpayer enters into the contract to acquire the asset. The new asset was purchased under a contract dated in month 200X. Therefore, the investment commitment time for amounts included in the first element of cost of the new asset is in month 200X.

Under paragraph 41-30(1)(a) of the ITAA 1997 the first use time for an amount included in the first element of a depreciating asset's cost is the time at which the taxpayer starts to use the asset, or has it installed ready for use. As the taxpayer first used the asset before the 30 June 20YY, the first use time for amounts included in the first element of cost of the new asset is before the 30 June 20YY.

For a deduction to be worked out using the rate of 30%, subparagraph 41-15(1)(c)(i) of the ITAA 1997 requires that the conditions in subsection 41-15(2) of the ITAA 1997 be met. Subsection 41-15(2) of the ITAA 1997 requires that the investment commitment time occur before 1 July 200X and the first use time occur before 1 July 20YY.

As the amounts included in the first element of cost of the new asset meet the conditions in subsection 41-15(2) of the ITAA 1997 and all other conditions for the deduction are met, the deduction in relation to the amounts can be worked out at the rate of 30% under subparagraph 41-15(1)(c)(i) of the ITAA 1997.

Question 8

Summary

Any amounts which are included in the second element of cost of the new asset are not eligible for the 30% deduction under subparagraph 41-15(1)(c)(i) of the ITAA 1997 or the 10% deduction under subparagraph 41-15(1)(c)(ii) of the ITAA 1997.

Detailed reasoning

Under section 40-190 of the ITAA 1997 expenditure a taxpayer is taken to have paid after they start to hold a depreciating asset and that contributes to the present condition and location of the asset is included in the asset's second element of cost.

Any amounts paid by the taxpayer under the contract with the supplier dated month 200X will form part of the first element of cost of the equipment - not the second element of cost. However, any other amounts paid by the taxpayer after they became the legal owner of the new asset and which contributed to the present condition and location of the asset (for example, quarantine fees) will form part of the second element of cost of the asset.

Under paragraph 41-25(1)(b) of the ITAA 1997 the investment commitment time for an amount included in the second element of cost of a depreciating asset is the time at which the taxpayer enters into a contract, or starts construction, for the economic benefit in relation to which the amount will become included in the second element of cost.

To be eligible for a deduction under Division 41 of the ITAA 1997, paragraph 41-20(1)(b) of the ITAA 1997 requires an amount included in the cost of a depreciating asset to have an investment commitment time occurring on or before 31 December 2009. As the taxpayer started to hold the new asset after that date, the investment commitment time for any amounts included in the second element of cost of the asset would be after 31 December 2009.

Therefore, any amounts included in the second element of cost of the new asset are not eligible for the 30% deduction under subparagraph 41-15(1)(c)(i) of the ITAA 1997 or the 10% deduction under subparagraph 41-15(1)(c)(ii) of the ITAA 1997.

Question 9

Summary

Any amounts which are included in the cost of the second-hand asset are not eligible for the 30% deduction under subparagraph 41-15(1)(c)(i) of the ITAA 1997 or the 10% deduction under subparagraph 41-15(1)(c)(ii) of the ITAA 1997.

Detailed reasoning

To be eligible for a deduction under Division 41 of the ITAA 1997, paragraph 41-20(1)(e) of the ITAA 1997 requires that, when the taxpayer first uses an asset or has it installed ready for use, it is the first time the asset has been used or installed ready for use. That is, second-hand depreciating assets are not eligible for a deduction under Division 41 of the ITAA 1997.

Therefore, amounts included in the cost of the second-hand asset are not eligible for the 30% deduction under subparagraph 41-15(1)(c)(i) of the ITAA 1997 or the 10% deduction under subparagraph 41-15(1)(c)(ii) of the ITAA 1997 of the ITAA 1997.

Question 10

Summary

Any amounts which are included in the cost of the ancillary equipment are not eligible for the 30% deduction under subparagraph 41-15(1)(c)(i) of the ITAA 1997 or the 10% deduction under subparagraph 41-15(1)(c)(ii) of the ITAA 1997.

Detailed reasoning

To be eligible for a deduction under Division 41 of the ITAA 1997, paragraph 41-20(1)(b) of the ITAA 1997 requires an amount included in the cost of a depreciating asset to have an investment commitment time occurring on or before 31 December 2009.

Under subparagraph 41-25(1)(a)(i) of the ITAA 1997, the investment commitment time for an amount included in the first element of cost of a depreciating asset is the time at which the taxpayer enters into the contract to acquire the asset.

Appendix A of the Private ruling application lists the ancillary equipment purchased and the relevant contract dates. The dates of the contracts range from month 20YY to month 20YY. Therefore, the investment commitment time for amounts included in the cost of these depreciating assets is between month 20YY and month 20YY.

As the investment commitment time for the amounts included in the cost of the ancillary equipment occurs after 31 December 2009, the amounts are not eligible for the 30% deduction under subparagraph 41-15(1)(c)(i) of the ITAA 1997 or the 10% deduction under subparagraph 41-15(1)(c)(ii) of the ITAA 1997.