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Is the composite item rail transport trackwork itself a depreciating asset within the meaning of that term in section 40-30 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The rail transport trackwork is itself a depreciating asset within the meaning of that term in section 40-30 of the ITAA 1997.

The taxpayer incurred capital expenditure on constructing rail transport infrastructure, including rail transport trackwork, on which it operates a passenger rail service business. The trackwork is a composite item that consists of several components, including rails, sleepers, ballast, and the earthworks or embankments on which the ballast, sleepers and rails are laid, and integral bridges, girders, culverts and tunnels.

Whether a 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 light of all the circumstances of the particular case (subsection 40-30(4) of the ITAA 1997).

The Commissioner's views in Taxation Ruling TR 94/11 are a guide to what represents a separate unit or item, and are relevant in determining whether, as a question of fact and degree, a composite item is itself a depreciating asset. An item is generally itself a single item (rather than being a number of separate units) if it has one or more of the characteristics listed at paragraph 3 of TR 94/11. The basic test put forward in TR 94/11, on the basis of the authorities summarised therein, is a 'function test'. The ruling contains guidelines about the function test and explains how it must be applied to the particular factual circumstances of each case.

A composite item is itself a depreciating asset that has a separate function, and is functionally complete in itself, even though it may not be self-contained or isolated. The function of the thing being considered need only be separately definable or identifiable rather than be self contained or isolated, and be capable of performing its own intended discrete function. The relevant types of function that the item performs are those that are sufficiently complete, definable and identifiable so as to give the item subjected to those uses the characteristics of a single depreciating asset in respect of the taxpayer's operations.

The rail transport trackwork is formed by combining or linking a number of constituent components in a particular integrated or interdependent way. While each component contributes to the trackwork, the relevant discrete function is that of allowing travel of the rolling stock over the surface in a fixed course between source and destination points. The function can only be performed by the integration of all the components in a particular way. While the trackwork components can be physically separated and perform their own functions, they cannot operate by themselves. They are integrally linked to create a single larger item having its own discrete function in respect of the taxpayer's operations, and in such a way that they have to all exist to perform the function of rail transport trackwork. Based on this functionality the entire trackwork, rather than each of its components, is considered to be the depreciating asset.

Paragraph 14 of Taxation Ruling IT 31 supports a view that earthworks and embankments referred to as the 'top 600' or the 'permanent way' on which the rail track is laid are an integral part of the unit of trackwork.

The rail transport trackwork is a depreciating asset within the meaning of that term at section 40-30 of the ITAA 1997 because it considered that it has both a limited effective life and can reasonably be expected to decline in value over the time it is used.

When a composite item is being constructed it becomes a depreciating asset at the time that it commences to serve a functional purpose in respect of the operations being conducted. A depreciating asset in the form of rail transport trackwork comes into being when all its components have been constructed and assembled. In keeping with the policy intent that 'deductions based on effective life are intended to reflect an appropriate allowance for the diminution of economic value of an asset over its period of use' (paragraph 40 of Taxation Ruling TR 2009/4), it is necessary to delimit rail transport trackwork as a depreciating asset at the time it is first used or installed ready for use ('its start time'). The components that make up the trackwork at its start time identify the limits of that trackwork.

The Commissioner has made a determination specifying the effective life of rail transport industry assets including for rail transport trackwork. For example, for passenger rail transport trackwork the determination of effective life is 40 years (Taxation Ruling TR 2009/4).

Accordingly, the rail transport trackwork is itself a depreciating asset within the meaning of that term in section 40-30 of the ITAA 1997.