Capital Allowances: depreciating asset - composite asset - open-cut mine pit haulage road

Is a haulage road in the open cut mine a 'composite item that is itself a depreciating asset' within the meaning of that term in section 40-30 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. A haulage road in the open cut mine is a 'composite item that is itself a depreciating asset' within the meaning of that term in section 40-30 of the ITAA 1997.

The taxpayer operates an open-cut mine using the conventional drill and blast, load and haul method. Mine works are developed in planned stages. Stage works are planned in location, timeframe and dimensions before the start of mining operations and are carried out over a considerable period of time.

Haulage roads are created within the current dimensions, from time to time, of the open-cut mine pit to provide access to the benches forming the floor of the pit from time to time.

Some haulage roads are periodically created and later destroyed as the area being accessed moves on in progressive open-cut benching (temporary haulage roads). These haulage roads provide access into and out of a current benched area and are created and destroyed as an incident of conducting the mining operations. Other haulage roads are not located over areas intended to be excavated and are not destroyed by the continual benching and progress of the mine (permanent haulage roads).

The creation of the haulage roads is a complex process requiring significant engineering expertise in terms of design and construction. The haulage roads are designed to take into account the particular services they provide and the natural element in which they are located. The significant features of haulage roads include a formed roadway (including ramp, switchback and intersection elements of the roadway) constructed from in-situ and other material, berms that are created as a safety barrier on the roadway, and drains. The process of constructing a haulage road involves, at minimum, excavating at precisely engineered and designed locations and angles, shaping, bringing in and depositing, compacting and bonding suitable material for a high quality driving surface for extremely heavy vehicles as well as excavating and forming drains, and placing and forming up batters.

(All references in this Interpretative Decision are to the ITAA 1997)

A composite item is one made up of various parts or elements. The haulage roads in the open-cut mine pit that allow access from time to time to one or more mine stages are a composite item as they comprise a number of elements including ramps, switchbacks, intersections, drains, and roadway berms. The formed road is the way that provides for the passage of vehicles and equipment. Consubstantial components including drains and roadway berms are integral to the use and integrity of the formed roadway and are physically and functionally integrated with the roadway itself to form the composite item 'a haulage road'.

The concept of a 'depreciating asset' requires the identification of an asset. 'Asset' is not defined in Division 40 and takes its ordinary meaning, shaped by the context in which it appears. In the context of Division 40, the meaning of 'asset' as 'a useful thing or quality; an item of property; an economic resource' given in the Macquarie Dictionary, 2001, rev. 3rd edn, The Macquarie Library Pty Ltd, NSW is appropriate. Accordingly, the haulage roads are assets for the purpose of section 40-30.

Division 40 applies to an improvement to land, whether the improvement is removable or not, as if the improvement were an asset separate from land (subsection 40-30(3)). For the purposes of Division 40, the intent is to treat these improvements as assets separate from the land they improve and not as part of that land.

'Improvement' is not defined for the purposes of Division 40 and accordingly takes its ordinary meaning in the context in which it is used. In its broadest sense, an improvement to land can consist of something done or added which has enhanced or increased the value of land ( Morrison & Ors v. Federal Commissioner of Land Tax (1914) 17 CLR 498; Brisbane City Council v. Valuer-General (Qld) (1978) 140 CLR 41). Viewed in that way, the doing or adding of any thing to land such that there is a bringing of the land into a more valuable or desirable condition, or a betterment of the land could be said to be an improvement to land.

For the purposes of Division 40 the term 'improvement' is not necessarily restricted to a qualitative character in the sense that it makes something better in some sense or more valuable. It equally applies to describe an alteration in characteristics by some form of development ( Case V108 88 ATC 694; AAT Case 4484 (1988) 19 ATR 3691) intended to be an enhancement even if this has not, in fact, made the land more valuable.

The design and construction of the haulage roads within the open-cut pit is a complex engineering undertaking. The process of forming up a haulage road is more than mere excavating and embanking or positioning of earth. The construction of the haulage roads is an improvement to land because it is effected to the land over which haulage road access is provided. On an objective consideration of the change in the characteristics of the land and its efficiency for use in providing smooth, secure and appropriately graded vehicular access to a stage or stages of the mine pit, the creation of the significant features of the haulage roads is sufficient to constitute an improvement to land for the purpose of subsection 40-30(3). Accordingly, Division 40 applies to the 'temporary' and 'permanent' haulage roads as if they were each an asset separate from the land.

Having established that a taxpayer holds an improvement to land and thus an asset dealt with as separate from the land it is necessary to determine if that asset is also a 'depreciating asset' under subsection 40-30(1). The 'Note 1' that follows subsection 40-30(3) makes it clear that this requirement is relevant when considering an improvement to land.

A depreciating asset is broadly defined in subsection 40-30(1) as an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used.

Land is specifically excluded in paragraph 40-30(1)(a) from being a depreciating asset, even if, in certain circumstances, it may satisfy the other requirements of the definition of a depreciating asset. Given the mechanism allowing improvements to land to be treated as separate to the land for the purposes of Division 40, the exception of land from being a depreciating asset is limited to land within the ordinary meaning of that word, rather than in its legal meaning (where improvements to land are treated as part of land). Therefore, to determine if an improvement to land is other than land in its ordinary meaning, the improvement to land must be found to have a discrete and identifiable function separate to merely existing as the solid substance of the exposed surface of the earth. Based on the functionality of a haulage road discussed above, the haulage roads clearly have a discrete and identifiable function separate to merely existing as the solid substance of the exposed surface of the earth and thus are not land in its ordinary meaning.

The definition of a depreciating asset is based on a life in effective use and the depreciating asset must be identifiable as having its own life in such use. There is a requirement that the haulage roads decline in value over the time that they are used. 'Used' is a word of wide import and it is clear that the haulage roads are used in the sense of performing the discrete identifiable function of providing smooth, secure and appropriately graded vehicular access to a stage or stages of the mine pit. The requirement that an asset decline in value over the time that it is used does not mean that this must occur uniformly over time. It is sufficient that it decline in value by the end of its effective life. As a tangible item suffering deterioration in continual or recurrent use, the haulage roads have both a limited effective life and can reasonably be expected to decline in value over the time they are used. Accordingly, it is accepted that the haulage roads will ultimately decline in value in the sense required by subsection 40-30(1).

The haulage roads can have an effective life in use assessed. Broadly, the meaning of effective life is explained in section 40-100 (for the Commissioner's determination) and in section 40-105 (for self assessment). In particular, the effective life of a depreciating asset has regard to the period within which it is likely to be scrapped or abandoned.

The period the temporary haulage roads will exist and function to provide access is, in the present case, planned or reasonably predictable and therefore provides the necessary limitation to effective life to satisfy the definition of depreciating asset. The temporary haulage roads will have an expected life in use dictated by the period for which they are planned to be in use before being destroyed.

A permanent haulage road providing access to one or more stages of the pit would normally have an effective life no longer than the period of its planned use in providing access (whether for extraction activities or for site rehabilitation).

Whether a particular composite item is itself a depreciating asset within the meaning of that term in Division 40 or whether its components are separate depreciating assets is a question of fact and degree to be objectively determined in the light of all the circumstances of the particular case (subsection 40-30(4)).

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. In this circumstance, the function of a thing refers to the kind of action or activity it allows or facilitates, or what it performs, acts, serves or operates as. 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 haulage roads are formed by combining or linking a number of proximate constituent components in a particular integrated and interdependent way. These components functionally complement each other and are necessary to provide the complete operation of a haulage road. They are not, of themselves, physically separate and functionally discrete. While each component contributes to the existence or presence of the road, the relevant complete function is that of the haulage road in allowing access to a stage or stages of the mine. The function can only be derived from the integration of all the components in a particular way. The haulage roads therefore each comprise a distinct item having its own identifiable function. Based on this functionality, the haulage roads, rather than each of their components, are themselves depreciating assets in these circumstances.

As the haulage roads: are composite items that are improvements to land; have a discrete identifiable function separate to merely being the exposed surface of the earth; have a limited effective life in use; and can reasonably be expected to decline in value over the time they are used, they are themselves depreciating assets within the meaning of that term in Division 40.