Edited version of your written advice

Authorisation Number: 1012731889308

Ruling

Subject: Income tax: capital allowances

Question 1

Is the asset a 'depreciating asset' under section 40-30 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Will the capital gains tax (CGT) small business concessions under Division 152 of the ITAA 1997 be available in relation to the disposal of the asset?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

You were employed in an industry and you also carried on a business.

You personally held two assets which related to the prospecting and mining of minerals.

One of the assets consisting of a lease was sold in the income year. This lease was granted for a fixed term with an option to renew for a further fixed term.

No mining occurred or was proposed during your ownership of the asset.

The asset which was sold was used by you in the course of carrying on the business.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 40-25(7)

Income Tax Assessment Act 1997 Section 40-30

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 104-235

Income Tax Assessment Act 1997 Section 118-24

Income Tax Assessment Act 1997 Section 152-10

Income Tax Assessment Act 1997 Paragraph 40-295(1)(a)

Income Tax Assessment Act 1997 Subsection 995-1

Reasons for decision

Question 1

Summary

We consider that the asset is a depreciating asset under section 40-30 of the ITAA 1997 due to paragraph 40-30(2)(a) of the ITAA 1997.

Detailed reasoning

Depreciating asset

A 'depreciating asset' is defined in subsection 40-30(1) of the ITAA 1997 as an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used except land, an item of trading stock and an intangible asset unless it is an intangible asset mentioned in subsection 40-30(2) of the ITAA 1997. Subsection 40-30(2) of the ITAA 1997 identifies particular intangible assets that are not prevented from being a depreciating asset by the general intangible asset exclusion in paragraph 40-30(1)(c) of the ITAA 1997.

Paragraph 40-30(2)(a) of the ITAA 1997 provides that intangible assets that are 'mining, quarrying or prospecting rights' are depreciating assets if they are not trading stock.

A 'mining, quarrying or prospecting right' is defined in subsection 995-1(1) of the ITAA 1997 to be:

(a) an authority, licence, permit or right under an Australian law to mine, quarry or prospect for minerals, petroleum or quarry materials; or

(b) a lease of land that allows the lessee to mine, quarry or prospect for minerals, petroleum or quarry materials on the land; or

(c) an interest in such an authority, licence, permit, right or lease.

The asset is a depreciating asset under paragraph 40-30(2)(a) of the ITAA 1997 as the asset related to the prospecting and mining of minerals.

Effective life

The effective life of a mining, quarrying or prospecting right is determined by subsection 40-95(1) of the ITAA 1997.

The Explanatory Memorandum for Division 40 of the ITAA 1997 gives commentary to the treatment of mining, quarrying or prospecting rights which are extended or renewed on an indefinite basis:

1.115 Under relevant Crown laws, mining, quarrying or prospecting rights often are issued for a fixed term, for example 21 years, but can be extended or renewed on an indefinite basis subject to any relevant conditions being met. This could lead to a conclusion that the effective life of such rights is indeterminate with the consequences that no deduction would be allowable for the cost of the right.

1.116 That would not be appropriate for those rights. Rather, their effective life is the period of time over which the right, including any reasonably assured extensions or renewals, is likely to be used by any person for the purposes of extracting the resource.

Paragraph 109 of Taxation Ruling 2012/7 states that the requirement that an asset decline in value over the time that it is used does not mean that this must occur uniformly over that time. This is confirmed by the following extract from the revised Explanatory Memorandum to the New Business Tax System (Capital Allowances) Bill 2001, discussing this requirement in the depreciating asset definition:

This does not limit depreciating assets to things that lose value steadily over their effective lives. Nor are depreciating assets limited to things that only ever decline in value. Depreciating assets may hold their vale for a time, or even increase it for a time. The test of a depreciating asset requires only that the asset lose its value overall (or down to no more than scrap value) by the end of its effective life.

It can therefore be concluded that as the asset consisted of a lease which was issued for a term, that unless renewed for another limited term, the asset would lose its value overall. It therefore follows that the asset can be expected to decline in value as it has a limited life due to the expiration date of the lease. The fact that no mining occurred or was proposed during your ownership of the asset would not alter this conclusion as it would still be expected that the asset would decline in value at the end of the term of the lease.

Conclusion

The asset is deemed to be a depreciating asset within Division 40 of the ITAA 1997 due to paragraph 40-30(2)(a) of the ITAA 1997 that specifically includes mining, quarrying and prospecting rights.

Question 2

Summary

We consider that the CGT small business concessions under Division 152 of the ITAA 1997 will not be available in relation to the disposal of the asset as any resulting capital gain will be disregarded under section 118-24 of the ITAA 1997.

Detailed reasoning

A capital gain you make may be reduced or disregarded under the CGT small business concessions in Division 152 of the ITAA 1997 if the basic conditions in section 152-10 of the ITAA 1997 are satisfied for the gain.

Paragraphs 152-10(1)(a) and (b) of the ITAA 1997 require that a CGT event happens in relation to a CGT asset of yours in an income year, and the event would (apart from Division 152 of the ITAA 1997) have resulted in the gain. In your case CGT event A1 under section 104-10 of the ITAA 1997, relating to the disposal of a CGT asset, happened when you disposed of the asset.

Section 118-24 of the ITAA 1997 applies to disregard any capital gain or capital loss you make from a CGT event that is also a balancing adjustment event that happens to a depreciating asset. A balancing adjustment event occurs for a depreciating asset if you stop holding the asset (paragraph 40-295(1)(a) of the ITAA 1997). However, section 118-24 of the ITAA 1997 does not apply to a capital gain or capital loss you make from CGT event K7 happening.

CGT event K7 under section 104-235 of the ITAA 1997 will only happen when a balancing adjustment occurs for a depreciating asset that was held for a purpose other than a taxable purpose. Subsection 40-25(7) of the ITAA 1997 provides the meaning of 'taxable purpose' which includes the purpose of producing assessable income or the purpose of exploration or prospecting.

We have determined above that the asset is a depreciating asset. You were carrying on a business and the asset was therefore held for a taxable purpose and CGT event K7 would not happen.

Accordingly, the CGT small business concessions under Division 152 of the ITAA 1997 will not be available in relation to the disposal of the asset as any resulting capital gain will be disregarded under section 118-24 of the ITAA 1997 and CGT event K7 would not happen.