Draft Taxation Ruling TR 2017/D1, which was issued on 18 January 2017, sets out the Commissioner's views on how to determine whether a composite item is itself a depreciating asset or whether the component parts are separate depreciating assets.
A "composite item" is an item made up of a number of components that are capable of separate existence. Whether a particular composite item is itself a depreciating asset, or whether one or more of its components are separate depreciating assets, is a question of fact and degree to be determined in the circumstances of the particular case.
The draft ruling states that for a component (or more than one component) of a composite item to be considered to be a depreciating asset, it is necessary that the component is (or components are) capable of being separately identified or recognised as having commercial and economic value. Purpose or function is generally a useful guide to the identification of an item.
The draft ruling lists the main principles to be taken into account in determining whether a composite item is a single depreciating asset or consists of more than one depreciating asset. These include:
- identifiable function – the depreciating asset will tend to be the item that performs a separate identifiable function, having regard to the purpose or function it serves in its business context;
- use – a depreciating asset will tend to be an item that performs a discrete function; however, the item need not be self contained or able to be used on a standalone basis;
- degree of integration – the depreciating asset will tend to be the composite item where there is a high degree of physical integration of the components;
- effect of attachment – the item, when attached to another asset having its own independent function, varies the performance of that asset; and
- system – a depreciating asset will tend to be the multiple components that are purchased as a system to function together as a whole and which are necessarily connected in their operation. However, where an element of a system is purchased or installed at a different time to the system and has a separate identifiable function, that element may be a separate depreciating asset.
The mere fact that an item cannot operate on its own and has no commercial utility unless linked or connected to another item (or items) tends to indicate that it forms part of a composite item, rather than being a separate depreciating asset. An item that is designed to be functionally interchangeable, or is used in this way, with other items may indicate there are separate depreciating assets.
Other issues considered in the draft ruling include:
- whether a modification or alteration to an existing depreciating asset can itself be a depreciating asset;
- intangible depreciating assets; and
- jointly held tangible assets.
The draft ruling contains 14 examples covering items such as industrial storage racking, a desktop computer package, a mainframe computer, a local area network, a car GPS, rail transport infrastructure, a solar power system and photographic lighting equipment.
Source: ATO, Draft Taxation Ruling TR 2017/D1, https://www.ato.gov.au/law/view/document?DocID=DTR/TR2017D1/NAT/ATO/00001.