Edited version of your written advice

Authorisation Number: 1012999733869

Date of advice: 27 April 2016

Ruling

Subject: Application of Division 40 to a Mining, and related rights

Question 1

Is the licence acquired by the taxpayer a 'depreciating asset' under subsection 40-30(2) of the ITAA 1997 on the basis it is a 'mining, and related right'?

Answer

Yes.

Question 2

Is the taxpayer the 'holder' of the licence under section 40-40 of the ITAA 1997?

Answer

Yes.

Question 3

Is the taxpayer entitled to claim deductions for the decline in value of the licence when it is first uses the licence in accordance with section 40-40 of the ITAA 1997?

Answer

Yes.

Question 4

Is the effective life of the licence 15 years in accordance with subsection 40-95(12) of the ITAA 1997?

Answer

Yes.

Relevant facts and circumstances

• The taxpayer purchased a business.

• The business's primary purpose is reliant on the holding of a mining, and related mining rights.

• The right does not relate to a mine or proposed mine, a petroleum field or proposed petroleum field, or a quarry or proposed quarry.

• The mining, and related rights, in the form of a licence, was transferred as part of the sale.

• The licence was not trading stock of the taxpayer.

• The licence provided the holder with the right of access and use over the land upon which the business was operated.

• The licence conferred on its holder a right to carry out certain activities on the land.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 40,

Income Tax Assessment Act 1997 Subdivision 40-B,

Income Tax Assessment Act 1997 Subsection 40-25(1),

Income Tax Assessment Act 1997 Section 40-30,

Income Tax Assessment Act 1997 Subsection 40-30(1),

Income Tax Assessment Act 1997 Subsection 40-30(2),

Income Tax Assessment Act 1997 Paragraph 40-30(2)(a),

Income Tax Assessment Act 1997 Section 40-40,

Income Tax Assessment Act 1997 Section 40-60,

Income Tax Assessment Act 1997 Subsection 40-60(1),

Income Tax Assessment Act 1997 Subsection 40-60(2),

Income Tax Assessment Act 1997 Subsection 40-95(10),

Income Tax Assessment Act 1997 Subsection 40-95(12),

Income Tax Assessment Act 1997 Paragraph 40-95(12)(b) and

Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision

Question 1

A 'depreciating asset' is defined in subsection 40-30(1) of the ITAA 1997 to be:

an asset that has a limited *effective life and can reasonably be expected to decline in value over the time it is used, except:

(a) land; or

(b) an item of *trading stock; or

(c) an intangible asset, unless it is mentioned in subsection (2).

The licence is not land, nor is it trading stock of the taxpayer. The licence is however an intangible asset.

Pursuant to paragraph 40-30(2)(a) of the ITAA 1997, mining, and related rights are depreciating assets that can be depreciated over their effective life.

'Mining, and related rights' is defined in section 995-1 to mean, inter alia, 'an authority, licence, permit or right under an Australian law to mine, quarry or prospect for minerals, petroleum or quarry materials.'

An 'Australian law' is defined in section 995-1 to mean 'a Commonwealth law, a State law or a Territory law'. The PPLs are issued pursuant to an Australian law, being the Petroleum Act 1998 (Victoria) and its predecessors.

Pursuant to the licence, it is a lease that confers upon the lessee a range of exclusive rights to do a number of activities.

As the licence confers on the lessee the right to mine, quarry or prospect, the licence satisfies the definition of a 'mining, quarrying or prospecting right' pursuant to paragraph (a) of the definition of that term in section 995-1. This is notwithstanding that the actual activity that the taxpayer is carrying on is not mining, quarrying or prospecting, but another activity under the licence.

As confirmed by the Full Federal Court in Mitsui & Co (Australia) Ltd v Federal Commissioner of Taxation (2012) 205 FCR 523; 2012 ATC 20-341; (2012) 90 ATR 171, the rights conferred under a mining, quarrying or prospecting right are not separate and distinct for the purposes of Division 40. Accordingly, as the licence is a mining, and related rights, it satisfies the definition of a depreciating asset pursuant to paragraph 40-30(2)(a) of the ITAA 1997.

Question 2

Pursuant to subsection 40-25(1) of the ITAA 1997, a deduction equal to the decline in the value of an asset for an income year is generally available for an entity if it holds the asset during the income year. The table in section 40-40 of the ITAA 1997 identifies the holder of a depreciating asset in any particular circumstance. Item 10 of that table provides that a taxpayer holds a depreciating asset if they are the owner of the asset, or the legal owner, if there is both a legal and equitable owner. The taxpayer became the legal owner of its interest in the licence from the date of its transfer.

On the basis that the taxpayer became the legal owner of the licence, it will be the holder of the licence pursuant to item 10 of the table in section 40-40 of the ITAA 1997. No other item in the table in section 40-40 of the ITAA 1997 applies to depreciating asset.

Question 3

A depreciating asset starts to decline in value from when its start time occurs (subsection 40-60(1)). For a holder of a depreciating asset, the start time of the asset is when the holder first uses the asset, or has it installed ready for use, for any purpose (subsection 40-60(2)).

In the context of Division 40, the use of a depreciating asset requires employment of the asset in such a way that it can reasonably be expected to decline in value over the time it is so employed (see definition of 'depreciating asset' in subsection 40-30(1)).

'Used'

In Council of the City of Newcastle v. Royal Newcastle Hospital (1957) 96 CLR 493 at 515, Taylor J stated:

The word "used" is, of course, a word of wide import and its meaning in any particular case will depend to a great extent upon the context in which it is employed. The uses to which property of any description may be put are manifold and what will constitute "use" will depend to a great extent upon the purpose for which it has been acquired or created.

In the context of Subdivision 40-B, the use of a depreciating asset requires the employment 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.

The degree of physical or active use that is required to constitute use will depend to a certain extent on the nature of the asset and the purpose for which it is created or acquired. For a tangible depreciating asset, physical or active employment of the asset would generally be expected in order for an asset to be considered to be 'used'. For an intangible asset that is a depreciating asset, employment of the asset may not be physical and the asset may be considered to be 'used' in the context of passive use.

In considering the nature of the use of an intangible asset that is a depreciating asset the Commissioner is of the view that exploitation of the inherent character of the asset would generally be expected.

Exploitation of the inherent character of a mining, and related rights

The particular mining, and related rights held by the taxpayer is the licence. The licence confers upon the lessee a range of exclusive rights to do a number of activities.

Exploitation of the inherent character of the mining, and related rights would require that, at a minimum, the taxpayer use the mining, and related rights to undertake one of the activities conferred by the licence. This would provide the necessary connection between the use of the mining, and related rights and a reasonable expectation of its decline in value through that use.

The licence remained an essential part of the on-going business operation before and after its transfer. On this basis, the taxpayer meets the legal obligations imposed by exploiting the inherent character of the licence. This occurred from the time the taxpayer acquired the licence as it undertook an activity conferred by the licence. The taxpayer would not have been entitled to carry on this operation if it did not hold the licence. That is, the taxpayer could not allow the business to operate without the licence.

It is therefore considered that, for the purpose of working out when the asset starts to decline in value under section 40-60 of the ITAA 1997, the licence has been 'used' by the taxpayer from the first date the licence was used in carrying on the business operations.

Question 4

Division 40 of the ITAA 1997 broadly allows taxpayers to deduct the decline in value of a depreciating asset they hold over the assets effective life, to the extent they use the asset for a taxable purpose. The calculation of the decline in value of a depreciating asset for an income year is based, inter alia, on its effective life.

Effective life where no mine, petroleum field or quarry exists

Subsection 40-95(12) of the ITAA 1997 provides that:

The effective life of a *mining, quarrying or prospecting right, or *mining, quarrying or prospecting information, is 15 years if the right or information does not relate to:

(a) a mine or proposed mine; or

(b) a petroleum field or proposed petroleum field; or

(c) a quarry or proposed quarry.

On the basis that the licence does not relate to any of those things referred to in paragraphs 40-95(12)(a), (b) or (c), the effective life of the licence is 15 years as provided by subsection 40-95(12) of the ITAA 1997.