Compare documents

Is an entire photovoltaic solar system a single depreciating asset or are each of its component parts a separate depreciating asset pursuant to the definition of that term in section 40-30 of the Income Tax Assessment Act 1997 (ITAA 1997)?

The entire photovoltaic solar system is a depreciating asset pursuant to the definition of that term in section 40-30 of the ITAA 1997.

A photovoltaic solar system (the system) comprises modules of photovoltaic cells, a roof mounting frame, various fixings, electrical wiring and conduits and inverters.

The photovoltaic cells absorb solar energy and convert it to 'direct current' (DC) which is then conveyed to the inverters to change the DC power into useable 'alternating current' (AC) power.

The photovoltaic cell modules are generally affixed to the roof of a property with a mounting frame, while the inverters may be installed at some other points within the property. All the components are connected and interface by means of electrical wiring.

A depreciating asset is, broadly defined, 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(1) of the ITAA 1997).

There seems little doubt that, as a tangible operating mechanism, the system has both a limited effective life and can reasonably be expected to decline in value over the time it is used.

For composite items, however, it is necessary to determine whether the system itself is a depreciating asset or whether its components are separate depreciating assets (subsection 40-30(4) of the ITAA 1997). In doing this, the 'functionality test' that was used as a basis of identifying a 'unit of plant ' in the former plant depreciation rules can be used. Specific reference to a 'unit' or an 'item' is not necessary to attract the test because the definition of depreciating asset is based on a life in effective use and the depreciating asset must be identifiable as having it own life in such use. Taxation Ruling TR 94/11 contains some guidelines about the functionality test and explains how it must be applied to the particular factual circumstances of each case. Of particular importance is that the function of the thing being considered need only be separately definable or identifiable rather than be self contained or isolated.

A photovoltaic solar power system is formed by combining or linking a number of constituent components in a particular integrated or interdependent way. While each component contributes to the system, the relevant function is that of the system to deliver useable power. The function can only derived from the integration of all the components in a particular way. Based on this functionality, the system, rather than each of its components, is considered to be the depreciating asset in these circumstances.