Depreciation: Plant (Telephone cables and fittings for Computer System)

Whether telephone cables and fittings installed in a building on a permanent basis for the purpose of linking computers and servers to an Internet server company, are plant for the purposes of Division 42 (Income Tax Assessment Act 1997 (ITAA 1997))? If depreciable, whether the cables and fittings are separate units of plant or whether they form part of the computer system as an entirety.

The cables and fittings form separate units of plant and are depreciable under the ITAA 1997.

The taxpayer installs telephone cables and fittings for the purpose of linking their computers and servers to an Internet server company. The taxpayer uses the Internet to communicate with clients and conduct research. The taxpayer is the owner of the cables and fittings.

A taxpayer may deduct an amount for depreciation of a unit of plant for an income year, if in that year, they are the owner or quasi-owner of the unit of plant and use it, or have it installed ready for use, for the purpose of producing assessable income (section 42-15 (ITAA 1997)).

In addition, the cables and fittings are being used for the purpose of producing assessable income. The Internet access provides the taxpayer with the opportunity to communicate with clients, access relevant web sites and research issues. These tasks are all relevant to producing assessable income.

Moreover, the cables and fittings are plant being used for the purpose of producing assessable income and are depreciable. The cables and fittings provide more than just the setting or environment in which the income-producing activities take place. The cables and fittings provide a means or apparatus by which assessable income is produced ( Yarmouth v France (1887) 19 QBD 647).

In the depreciation provisions of the Income Tax Assessment Act 1936 (ITAA 1936), the expression 'unit of property' is used. In the ITAA 1997 (subdivision 42-A) this expression has been replaced with the expression 'unit of plant'. This change of wording was not intended to result in a change of meaning.

There is no statutory definition of the expression 'unit of property'. However, there is considerable case law and Taxation Ruling TR 94/11 (Income tax: general investment allowance - what is a unit of property?) considers the expression as used in the former investment allowance provisions. The case law and the Taxation Ruling indicate that whether a particular item is a unit of property is a question of fact and degree. However, the primary test of a 'unit of property' is one of functionality. If the item of plant has a separate discrete function and can be identified separately, it can be considered a unit of plant in its own right. (Tully Co-operative Sugar Milling Association Ltd v FC of T 83 ATC 4495; 14 ATR 495, Monier Colourtile Pty Ltd v FC of T 83 ATC 4399; 14 ATR 379)

The cables and fittings perform a discrete function: they link the computer system to the Internet server company. The items also vary the performance of the computer system by providing access to a product to which the system did not previously have access. The cables and fittings are separate units of property from the computer system and have a function distinct from the rest of the computer system even though the results of that function cannot be seen without the attachment of the computers.