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Does the first element of the cost of depreciating assets purchased by the leasing partnership include the amount paid for the assets under the manufacture and supply agreement pursuant to paragraph 40-185(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes, the amount paid for the depreciating assets under the manufacture and supply agreement is taken to be, under Item 1 of the table in paragraph 40-185(1)(b) of the ITAA 1997, an amount paid to hold the depreciating assets.

A partnership purchased various depreciating assets under a manufacture and supply agreement. The parties to the agreement are not associated and the agreement was negotiated on an arms length basis. The purchase price under the agreement was paid by instalments over the period of the agreement. Supply of the assets to the partnership was staggered over the period of the contract as the construction, testing and delivery of each asset was completed. The final contract price instalment for an asset was made on the contracted last delivery date.

The first element of cost of a depreciating asset is: • the amount specified at the last applicable item in the table in subsection 40-180(2) of the ITAA 1997; or, if no item in that table applies, • the amount the holder is taken to have paid to hold the asset under section 40-185 of the ITAA 1997.

The first element of cost is worked out as at the time when a holder starts to hold an asset. A partnership will start to hold a depreciating asset at the time the asset becomes a partnership asset.

For a number of special cases the first element of cost is attributed directly by subsection 40-180(2) of the ITAA 1997, regardless of the amount the holder paid or the value of the benefit it provided. None of the items in the table in subsection 40-180(2) of the ITAA 1997 applied in the present case.

If the first element of cost of a depreciating asset is an amount worked out under section 40-185 of the ITAA 1997, the first element of cost is the greater of: • amounts included in assessable income because the holder started to hold a depreciating asset, or gave something to start holding it and any amount which would have been included if the holder ignored the value of any consideration given (paragraph 40-185(1)(a) of the ITAA 1997); or • the sum of all the applicable amounts set out in the table in paragraph 40-185(1)(b) of the ITAA 1997.

The contract price paid by the leasing partnership pursuant to the manufacture and supply agreement is an amount that is taken to have been paid by it to hold a depreciating asset under Item 1 of the table in paragraph 40-185(1)(b) of the ITAA 1997.

This item covers money paid to create a depreciating asset (e.g. labour and materials) as well as a simple purchase price. It also covers payments incidental to starting to hold the asset (e.g. stamp duty).