Depreciating Assets: composite item - open-cut mine pit

Does subsection 40-30(4) of the Income Tax Assessment Act 1997 (ITAA 1997) prevent the finding that the composite item 'open-cut mine pit' is not itself a depreciating asset, and that some of its components are separate depreciating assets and others are land within the meaning of paragraph 40-30(1)(a) of the ITAA 1997 and accordingly are not depreciating assets for the purpose of Division 40 of the ITAA 1997?

No. Subsection 40-30(4) of the ITAA 1997 does not prevent the finding that the composite item 'open-cut mine pit' is not itself a depreciating asset, and that some of its components are separate depreciating assets and others are land within the meaning of paragraph 40-30(1)(a) of the ITAA 1997 and accordingly are not depreciating assets for the purpose of Division 40 of the ITAA 1997.

The taxpayer operates an open-cut mine comprising various components including, from time to time; benches, batters, berms, catchberms and haulage roads.

The benches, batters, berms and catchberms are land as contemplated in paragraph 40-30(1)(a) of the ITAA 1997 and are thus excepted from being depreciating assets within the meaning of that term in section 40-30 of the ITAA 1997. The haulage roads are separate depreciating assets.

(All references to legislation 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.

Land is specifically excepted by 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 as it is not generally considered to have a limited effective life.

The open-cut mine pit is a composite item within the ordinary meaning of that expression as it comprises a number of components, some of which have operational uses in the mine operations in various ways and over widely differing periods.

Subsection 40-30(4) requires consideration of whether an asset that is a composite item is a depreciating asset or, in the alternative, whether its components include separate depreciating assets. The subsection says that the answer to the question will be a matter of fact and degree to be objectively determined in the light of all the circumstances of the particular case.

Subsection 40-30(4) is followed by examples which provide guidance in two situations, one in which different items combine to make a composite depreciating asset, the other in which different items do not combine to make a composite depreciating asset. However, the examples do not include a case where land, as contemplated by the exception in paragraph 40-30(1)(a), is among the items being considered as a possible component of a composite item.

However, assistance can be implied from Example 2 that follows subsection 40-30(4). It states that the separate components of a 'floating restaurant' are usually depreciating assets and that the usual components of a 'restaurant' are to be found as separate from the components comprising the 'ship' itself. From this, it is reasonable to consider that identical components of a restaurant on land are to be considered as separate to the building component or, relevantly, the land component to which the building attaches.

There is no basis to conclude that subsection 40-30(4) or its examples, because they lack express reference to separate components that are not in themselves capable of being depreciating assets, must be interpreted to mean that if something that can be described as a composite item is not, as a finding of fact and degree, itself a depreciating asset, then its components must be each treated as separate depreciating assets for the purposes of Division 40.

Subsection 40-30(4) is not a provision that applies or operates to mandate or deem a single particular factual outcome. Its purpose is to require the consideration, in an objective way, of a composite item as to whether the composite item or its separate components are or are not depreciating assets for the purposes of Division 40.

In accepted principles of statutory interpretation, ascertaining the meaning of words of a provision takes account of the context in which they appear and the purpose which the words were meant to serve. The legislative history can indicate the intention to which a particular provision has been directed.

Some relevant explanation is provided by paragraph 1.15 of the revised Explanatory Memorandum to the New Business Tax System (Capital Allowances) Bill 2001. This Bill introduced section 40-30.

The paragraph states that judgment is required to be exercised in the objective identification of the depreciating asset where the asset in question is a composite item. The paragraph further suggests that the 'functionality test' that was used as a basis of identifying a unit of plant in the then existing plant depreciation rules can be used in the identification process in a modified manner taking into account the differences in bases to the definitions of plant and depreciating asset. The purpose of such examination then, is not to test components of a composite asset as separate 'units' but to test the components for definable, separately identifiable and discrete function and then completeness in that function but not necessarily self-containment or isolation in that function.

In the context of a provision that seeks to define what a depreciating asset is, it is apparent that the determination or question intended to be addressed by subsection 40-30(4) is identification of the relevant item or thing to be tested as to its standing as a depreciating asset.

In particular, the operative purpose of subsection 40-30(4) is to provide practical guidance about how the determination as to whether a particular composite item is itself a single depreciating asset is to be made.

In that sense, subsection 40-30(4) does not change the law as it relates to identification of a component that is a depreciating asset. Subsection 40-30(4) does mandate an objective consideration of the relevant things that might be considered to be a composite item and its components in order to identify either the (single) thing that is a depreciating asset, or the separate (multiple) things that might themselves be depreciating assets or things other than depreciating assets (for example, things that are land).

After such consideration it is both possible and correct, in the light of all the circumstances of a particular case, to determine that a particular component of a composite item is land, and equally to determine that another particular component has sufficient discrete function to itself be a separate depreciating asset for the purpose of Division 40.

Here, the thing that might be considered to be a composite item is the whole of the open-cut mine pit. The haulage roads in that pit are themselves separate depreciating assets and the entirety of the pit cannot itself be said to be a single depreciating asset. Whether any remaining components of the pit are separate depreciating assets for the purpose of Division 40 then depends on whether they fall within the definition of a depreciating asset in subsection 40-30(1).

The benches, batters, berms and catchberms of the pit are land as contemplated in paragraph 40-30(1)(a). They are improvements to land, and so subsection 40-30(3) means that they fall to be considered as if separate from the underlying land they improved. When so considered, they are themselves land and so are excluded from being depreciating assets for the purposes of the Division. Accordingly the open-cut mine pit has components, some of which are themselves separate depreciating assets for the purpose of Division 40 and some of which are not.

There is no basis to conclude that this result is not contemplated by the principled guidance subsection 40-30(4) gives. Accordingly, the outcome described in this decision represents a construction of subsection 40-30(4) that is open to the Commissioner and required in the light of all the circumstances of this particular case.