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

Are all of the haulage roads in the open cut mine, including those which only exist for a limited period, nevertheless one composite asset that is a single depreciating asset for the purpose of section 40-30 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. All of the haulage roads in the open cut mine, including those which only exist for a limited period, are not a composite asset that is a single depreciating asset for the purpose of section 40-30 of the ITAA 1997. The haulage roads, in existence from time to time, giving access to a mine stage or stages delimit those haulage roads as separate depreciating assets at their respective start times.

The taxpayer operates an open-cut mine. Planning of the mine is done from the bottom up, after first ascertaining the bottom economic limit of the operation. Mine works are developed and undertaken in planned stages, delineated by elevation with reference to a mining grid. Stage works are typically 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 from time to time. As mine stages are commenced, new haulage roads are created or existing haulage roads are extended, or both, to give access to works for that stage. Stages may be accessed, from time to time, by multiple haulage roads.

Some haulage roads are periodically created and later destroyed as an incident of conducting the mining operations as the area being accessed moves on in progressive open-cut benching (temporary haulage roads). 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 which requires significant engineering expertise in terms of design and construction.

The haulage roads are improvements to land for the purpose of subsection 40-30(3) and are depreciating assets as defined in section 40-30.

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

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. This definition of a 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.

Each haulage road that performs its access function in relation to a mine stage or stages can have a separate effective life in use assessed to it. 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 life of the temporary haulage roads is, in the present case, planned or reasonably predictable. The temporary haulage roads will have an expected effective life in use dictated by the period for which each is 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 in use of no longer than the period of its planned use in providing access (whether for extraction activities or for site rehabilitation).

In keeping with the 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 35 of Taxation Ruling TR 2006/5), it is necessary to delimit a haulage road as a depreciating asset at the time it is first used or installed ready for use (its 'start time'). The haulage road giving initial access to works for a mine stage or stages at its start time delimits that haulage road as a separate depreciating asset.

When a haulage road is being created it becomes a depreciating asset at the time that it starts to serve its intended functional purpose of giving access to a mine stage or stages. The haulage road's expected use at its start time, and its physical or tangible dimension or manifestation from time to time identify the limits of the haulage road that is a separate depreciating asset. The practical nature of the use of a haulage road means a haulage road depreciating asset may have a start time before the construction of the entire depreciating asset (delimited by its function in providing stage works access) is complete.

Where a haulage road's construction is commenced, or an addition to an existing haulage road is constructed, to give initial access to works for a mine stage or stages, in both cases there is the addition of a haulage road which is a new and separate depreciating asset from existing haulage road infrastructure that had served to give access to works for earlier or different stages. A new depreciating asset in the form of a haulage road comes into being when its components exist to the extent that the haulage road functions (or is ready to function) as such in relation to works for the new mine stage.

The new haulage road giving stage access is capable of being separately identified or regarded as having a separate effective life in use from any existing haulage road. It performs an identifiable function in relation to works for a mine stage or stages; it does not matter that the new haulage road may be incapable of independent operation without connection to an existing haulage road or may itself be extended or added to as later mine stages are commenced. The function of the new haulage road depreciating asset is to provide haulage road access to a stage or stages of the mine for which access first becomes available by the addition.

It is in keeping with the intent referred to above that the cost of the new haulage road depreciating asset be written off over that road's effective life rather than over the effective life of any pre-existing haulage road which may have come into being at a considerably earlier time and may have expected use over a different and longer period.

As a haulage road at its start time, and its physical or tangible dimensions or manifestation from time to time giving access to works for a mine stage or stages identifies the limits of the haulage road as a composite item that is a separate depreciating asset, all of the haulage roads in the open-cut mine pit are not collectively a single depreciating asset for the purpose of section 40-30. Note: Taxation Ruling TR 2006/5 was withdrawn on and from 1 January 2007, and replaced by Taxation Ruling TR 2006/15, which applies on and from that date. Insofar as it is relevant to this Interpretative Decision, the intent expressed in paragraph 35 of TR 2006/5 still applies and has been incorporated into TR 2006/15.