Edited version of private advice

Authorisation Number: 1051622011519

Date of advice: 19 December 2019

Ruling

Subject: Income tax - capital allowances - characterisation of an asset as a single depreciating asset

Question

Is the mining equipment (consisting of anumber of modules) a single depreciating asset for the purposes of Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Relevant facts and circumstances

The taxpayer's mining process comprises a number of sub-elements, one of which is a piece of mining equipment.

The mining equipment comprises a number of modules. These modules include the main frame structure and other modules.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 subsection 40-30(1)

Income Tax Assessment Act 1997 subsection 40-30(4)

Reasons for decision

Summary

The mining equipment is considered to be a single depreciating asset under section 40-30 of the ITAA 1997.

Detailed reasoning

Division 40 of the ITAA 1997 provides a deduction for the decline in value of depreciating assets based on their effective life.

Subsection 40-30(1) of the ITAA 1997 states that a depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used.

Subsection 40-30(4) of the ITAA 1997 provides that whether a particular 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 the light of all the circumstances of the particular case.

A composite item is an item that is made up of a number of components that are capable of separate existence. The mining equipment is made up of a number of individual modules, and is therefore considered to be a composite item.

Draft Taxation Ruling 2017/D1 Income tax: composite items and identifying the depreciating asset for the purposes of working out capital allowances (TR 2017/D1) lists the main principles that are taken into account in determining whether a composite item is a single depreciating asset, or more than one depreciating asset for the purposes of Division 40 of the ITAA 1997. These are:

a)    'Identifiable': the depreciating asset will tend to be the item that performs a separate identifiable function, having regard to the purpose or function it serves in its business context.

b)    'Use': a depreciating asset will tend to be an item that performs a discrete function. However, the item need not be self-contained or able to be used on a stand-alone basis.

c)    'Degree of integration': the depreciating asset will tend to be the composite item where there is a high degree of physical integration of the components.

d)    'Effect of attachment': the item, when attached to another asset having its own independent function, varies the performance of that asset.

e)    'System': a depreciating asset will tend to be the multiple components that are purchased as a system to function together as a whole and which are necessarily connected in their operation.

With respect to the mining equipment, the individual modules cannot function in isolation, are highly integrated and are not designed to be interchangeable with other systems. Individual modules are not considered to have commercial or economic value in isolation.

The mining equipment will operate as part of the mining process when the modules are all attached in sequence.

Applying the principles in TR 2017/D1 to the above factors, it is considered that the mining equipment, consisting of all modules, constitutes a single depreciating asset under section 40-30 of the ITAA 1997.