Edited version of private advice

Authorisation Number: 1052170206089

Date of advice: 19 September 2023

Ruling

Subject: Depreciation

Question

Are the assets 'depreciating assets' pursuant to section 40-30 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

1 July 202x - 30 June 202x

The scheme commenced on:

1 July 202x

Relevant facts and circumstances

The company is an Australian resident private company.

The assets were assembled by a third party contractor. They are pre-assembled before being moved into position at their current location.

Forklifts were used to place the assets into position.

The assets rest onto a concrete slab and bolted to the ground for sturdy securement.

All assets are placed on raised floor support pedestals which results in them being 300mm above the concrete slab.

The assets are entirely portable, they can be dismantled with limited to no damage to the structure, packed away for transportation and are able to be re-installed at another location, or they can be relocated by forklift and placed on trucks for transportation without being disassembled.

The assets can also be disassembled into the relevant components similar to flat-pack furniture for ease of storage, if required.

The assets are leased to various businesses.

Relevant legislative provisions

Income Tax Assessment Act section 40-30

Income Tax Assessment Act subsection 40-30(1)

Income Tax Assessment Act subsection 40-30(2)

Income Tax Assessment Act subsection 40-30(3)

Income Tax Assessment Act subsection 40-30(4)

Income Tax Assessment Act Division 43

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 unless stated otherwise.

Subsection 40-30(1) states 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 except:

•         land; or

•         an item of trading stock; or

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

Subsection 40-30(2) states what intangible assets are depreciating assets. This subsection is not relevant to the Ruling and will not be discussed further.

Subsection 40-30(3) applies to an improvement to land, or a fixture on land, whether the improvement or fixture is removable or not, as if it were an asset separate from the land The notes to this subsection state:

Note 1:

Whether such an asset is a depreciating asset depends on whether it falls within the definition in subsection (1).

Note 2:

•         This Division does not apply to capital work for which the entity can deduct amounts under Division 43.

Subsection 40-30(4) states:

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 which can only be determined in the light of all the circumstances of the particular case.

Example 1:

A car is made up of many separate components, but usually the car is a depreciating asset rather than each component.

Example 2:

A floating restaurant consists of many separate components (like the ship itself, stoves, fridges, furniture, crockery and cutlery), but usually these components are treated as separate depreciating assets.

Application to your circumstances

Subsection 40-30(1) Depreciating assets are assets with a limited effective life that are reasonably expected to decline in value.

Broadly, the effective life of a depreciating asset is the period it can be used to produce income.

The decline in value is based on the cost and effective life of the depreciating asset, not its actual change in value. It begins at start time, when you begin to use the asset (or when you have it installed ready for use). It continues while you use the asset (or have it installed).

The assets are tangible assets, with a limited effective that can reasonably be expected to decline in value whilst they produce assessable income.

Further, the assets are not land, not an item of trading stock as the company does not sell the assets.

Therefore, the assets satisfy subsection 40-30(1).

Subsection 40-30(3)

Division 40 does not apply to capital works for which the entity can deduct amounts under Division 43.

Section 43-20 lists the capital works to which Division 43 applies. These include buildings, structural improvements and environment protection earthworks.

The assets are pre-assembled before being moved into position at their current location and they are removable.

The assets can also be dismantled, stored, transported and reassembled in another location, or they can be relocated by forklift and placed on trucks for transportation without being disassembled.

Assets can also be disassembled into the relevant components, similar to flat-pack furniture for ease of storage, if required.

The assets placed on raised floor support pedestals which results them being 300mm above the concrete slab. They are not a building, or an extension, alteration or improvement to a building. They are also not structural improvements or environmental protection earthworks.

In conclusion, the assets are not assets subjected to Division 43.

Subsection 40-30(4) separate depreciating asset or composite depreciating assets

The term 'composite item' is not expressly defined in the legislation. However, the way the legislation contrasts 'composite item' with 'its components' gives an indication of the meaning of the term. Paragraph 4 of Draft Taxation Ruling TR 2017/D1 Income tax: composite items and identifying the depreciating asset for the purposes of working out capital allowances states:

A 'composite item' is an item that is made up of a number of components that are capable of separate existence. Whether a particular composite item is itself a depreciating asset or whether one or more of its components are separate depreciating assets is a question of fact and degree to be determined in the circumstances of the particular case.

To determine the question of whether a particular composite item is itself a depreciating asset or whether its components are separate depreciating assets it is necessary to identify the composite item and its components. In the circumstances of this particular case:

•         the components are the individual items that make the assets

•         the composite item is the asset.

The relevant function considered in the present context is the actual function the items serve in the company's income producing namely, the leasing of the assets.

In this case, the assets are the composite depreciating assets that operate together. Each of their individual components do not have a separate identifiable function, it is only when they are assembled that they work together and operate as an entire item, in the context of the company's income producing activity.

Conclusion

The assets are composite depreciating assets to which Division 40 applies.