Capital allowances: tax break - substantially identical assets

Are the arcade machines purchased by the taxpayer 'substantially identical' for the purposes of subparagraph 41-10(4)(b)(ii) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes, the arcade machines are substantially identical for the purposes of subparagraph 41-10(4)(b)(ii) of the ITAA 1997 because a comparison of the machines shows that despite minor or incidental differences they are the same in all essential and material respects.

The taxpayer purchased three different arcade machines for use in its business. The machines are depreciating assets under section 40-30 of the ITAA 1997.

Each machine has the same basic design, construction and method of operation. The machines are made up of the same electronic and mechanical parts. They are constructed of the same materials and have identical dimensions and weight. They are also made by the same manufacturer and are sold for essentially the same price.

The differences between them relate to the theme that is unique to each individual machine. The theme refers to the sporting or entertainment focus of the game - for example, a popular movie or television series. The machines differ in presentation because the art works, music recordings and other sound effects are designed to identify and promote each particular theme.

All legislative references are to the ITAA 1997 unless otherwise stated.

Division 41 allows an additional deduction for certain business investment in new, tangible depreciating assets and for new expenditure on existing assets - the 'tax break'.

To be eligible for the tax break, the total of the recognised new investment amounts for the income year in relation to the asset must equal or exceed the relevant new investment threshold (paragraph 41-10(1)(d)).

The general rule is that the new investment threshold is applied on an asset by asset basis, meaning that it must be met in relation to each individual asset. However, in the case of assets that are identical or substantially identical, there is an exception that allows the recognised new investment amounts to be aggregated for the purposes of meeting the new investment threshold (subparagraph 41-10(4)(b)(ii)).

The terms 'identical' and 'substantially identical' are not defined in the ITAA 1997 and accordingly take their ordinary meaning.

The Macquarie Dictionary 2001 , rev. 3rd edn, The Macquarie Library Pty ltd, NSW relevantly defines 'identical' as: corresponding exactly in nature, appearance, manner etc. the very same

and 'substantial' as: relating to the substance, matter, or material of a thing of or relating to the essence of a thing; essential, material, or important.

Applying the ordinary meaning of the word, assets will be 'identical' if they are exactly the same in all respects. The presence of the adverb 'substantially' in the expression 'substantially identical' connotes that whilst there is not exact or absolute identity between the assets, having regard to their material and essential features, they are in substance the same.

The expression 'identical, or substantially identical' is also used to describe particular assets in Division 40. In that context, paragraph 40-80(2)(d) operates to deny the immediate deduction otherwise available for certain depreciating assets costing $300 or less if the total cost of the asset and other identical or substantially identical assets exceeds $300.

The question of whether depreciating assets were substantially identical for the purposes of paragraph 40-80(2)(d) was considered in ATO Interpretative Decision ATO ID 2003/80 - 'Capital Allowances: identical or substantially identical depreciating assets'. The issue was whether three different types of window covering were substantially identical depreciating assets. The ATO ID notes that, despite the window coverings having a similar function, they were different in their construction, operation, composition and design. As these essential and material features of the assets were not the same, this supported the view that they were not substantially identical.

It is considered that the construction of the adjective 'identical' and the expression 'substantially identical' developed in the context of paragraph 40-80(2)(d) is also applicable when interpreting these words in the context of the tax break legislation.

The meaning of the expression 'substantially identical' has been considered in court cases in other legislative contexts. Under the legislation covering trade mark registration, an application to register a trade mark must be refused if it is substantially identical to another existing trade mark. Although the application of that legislation involves a comparison of words or visual representations rather than tangible assets, the principles formulated by the courts to explain what amounts to substantial identity between two trade marks are also relevant in the present context.

In Shell Co of Australia Ltd v. Esso Standard Oil (Australia) Ltd (1963) 109 CLR 407; [1963] ALR 634 ( Shell ) Windeyer J said at CLR 414; ALR 641: In considering whether marks are substantially identical they should, I think, be compared side by side, their similarities and differences noted and the importance of these assessed having regard to the essential features of the registered mark and the total impression of resemblance or dissimilarity that emerges from the comparison.

This test was applied by the Federal Court in Torpedoes Sportswear Pty Ltd v. Thorpedo Enterprises Pty Ltd (2003) 204 ALR 90; (2003) 59 IPR 318, where Bennett J said at ALR 99; IPR 327: "Identical" is relevantly defined as "corresponding exactly in nature, appearance, manner, etc" (Macquarie Dictionary, revised third edition)....The requirement of substantial identity recognises that the identity is not absolute but, as is clear from Shell, the question involves a consideration of the essential elements of the mark.

In Kowa Company LTD v. NV Organon (2005) 223 ALR 27; (2005) 66 IPR 131, Lander J observed at ALR 51; IPR 155 that applying the test articulated in Shell : ...is not a matter of adding up on one side of the ledger the similarities and on the other side the dissimilarities and deciding whether there are more similarities than dissimilarities. That would be wrong for no other reason than more weight must be put on some factors than others. But as well, in the end, it is one of the total impression which is arrived at; a "general effect of the respective wholes": Clark v Sharp [1898] 15 RPC 141 at 146.

It is considered that this line of authority supports the interpretation that to be described as substantially identical, assets must be the same in all essential and material respects. In making a judgement about whether assets are substantially the same, the material attributes or characteristics of the assets need to be identified and then compared. If these material characteristics are common to each asset, then this will support the conclusion that the assets are substantially identical. Assets can therefore be substantially identical despite having minor or incidental differences.

The arcade machines are substantially identical because a side by side comparison of their essential or material features and characteristics shows that in all significant respects, the machines are the same. The comparison highlights common elements of design, construction and operation. The machines are made up of the same electronic and mechanical parts. They are constructed of the same materials and have identical dimensions and weight. The total impression gained from the comparison is that in all significant respects the machines are the same. This impression is reinforced by the fact that the machines have the same manufacturer and are sold for essentially the same price.

The differences in the machines' visual and aural presentation are only minor or incidental in nature and do not detract from the substantial identity between the three assets. Therefore, it is considered that the arcade machines are substantially identical for the purposes of subparagraph 41-10(4)(b)(ii). Note: as the machines are substantially identical, the recognised new investment amounts in relation to the machines can be aggregated for the purposes of meeting the new investment threshold.