ATO Interpretative Decision
ATO ID 2003/672
Income Tax
Capital Works: shipping channel - depreciating assetFOI status: may be released
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is a commercial shipping channel or any of its significant features a depreciating asset within the meaning of that term in subsection 40-30(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Each of the significant features of the shipping channel is a depreciating asset within the meaning of that term in subsection 40-30(1) of the ITAA 1997 because of their commercial obsolescence.
Facts
The taxpayer undertook a project that was generally designed to increase the commercial capacity of a shipping channel (the channel). The significant features of the channel are a 'main channel' (a body of water that connects points of the channel to each other), a 'berthing pocket' (a section of the channel immediately adjacent to a wharf that can accommodate fully laden marine craft berthed at low tide) and a 'swing basin' (a circular facility to allow marine craft to turn 180 degrees). The project was undertaken in sections with each section involving a particular aspect (for example: deepening, widening or extending) of each channel feature and was carried out over a considerable period of time.
Reasons for Decision
Composite asset
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 (subsection 40-30(4) of the ITAA 1997).
The channel comprises a number of features. While each of those features complement each other to provide the complete operation of the channel, they are, of themselves, physically separate, significant and functionally discrete. The channel, therefore, comprises a number of distinct items and is not, itself, one single item.
Improvement to land
Subsection 40-30(3) of the ITAA 1997 requires Division 40 to be applied to an improvement to land, whether the improvement is removable or not, as if the improvement was an asset separate from land. Each of the features of the channel constitutes an improvement to land because they are effected to the bed (or land) over which the water flows (see ATO ID 2003/669 on Capital works: shipping channel - structural improvement).
Depreciating asset
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. The definition specifically excludes, amongst other things, land (paragraph 40-30(1)(a)).
Land
Land is excluded from the definition of depreciating asset because it does not generally have a limited effective life. In the context of Division 40 of the ITAA 1997, it is land in its natural state or the ordinary meaning of land, rather than its legal meaning (where improvements to land are treated as part of land) that is intended to be excluded. This interpretation is supported by the requirement in subsection 40-30(3) of the ITAA 1997 to treat improvements to land separately from the land.
Limited effective life
Broadly, the meaning of effective life is explained in section 40-100 of the ITAA 1997 (for the Commissioner's determination) and in section 40-105 of the ITAA 1997 (for self assessment).
Effective life is affected by obsolescence. Commercial obsolescence is identified in Taxation Ruling 2009/4 as a factor to be considered in working out effective life. Commercial obsolescence, in particular, impacts upon the channel in this case because of the technological advancement in shipping and the encroaching urbanisation on available channel facilities. This obsolescence is, in the present case, reasonably predictable and, therefore, provides the necessary limitation to effective life to satisfy the definition of depreciating asset. In the absence of obsolescence, it is arguable that the improvements may not have a limited effective life because they are of a permanent nature (assuming they are maintained in reasonably good order and condition) and can be economically maintained in reasonably good order and condition for an indefinite period.
Decline in value
Depreciating assets are not limited to things that lose value steadily over their effective lives or that only ever decline in value. Depreciating assets may hold their value 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. In this case, the channel will lose its value when, for commercial reasons, its effective life comes to an end.
Date of decision: 22 May 2003Year of income: Year ended 30 June 2002 Year ended 30 June 2003 Year ended 30 June 2004 Year ended 30 June 2005
Legislative References:
Income Tax Assessment Act 1997
Division 40
subsection 40-30(1)
paragraph 40-30(1)(a)
subsection 40-30(3)
subsection 40-30(4)
section 40-100
section 40-105
Related Public Rulings (including Determinations)
Taxation Ruling TR 2000/18 (withdrawn)
Taxation Ruling TR 2009/4
ATO ID 2003/669
ATO ID 2003/670
ATO ID 2003/671
ATO ID 2003/673
Keywords
Depreciating assets
Capital allowances CoE
ISSN: 1445-2782
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