ATO ID 2002/1035: Division 40: cost - depreciating asset
Date of decision: 12 July 2002
Year of income: 2000
Business line: Public Groups and International

Issue
Does the first element of the cost of depreciating assets purchased by the leasing partnership include the amount paid for the assets under the manufacture and supply agreement pursuant to paragraph 40-185(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes, the amount paid for the depreciating assets under the manufacture and supply agreement is taken to be, under Item 1 of the table in paragraph 40-185(1)(b) of the ITAA 1997, an amount paid to hold the depreciating assets.

Facts
A partnership purchased various depreciating assets under a manufacture and supply agreement. The parties to the agreement are not associated and the agreement was negotiated on an arms length basis. The purchase price under the agreement was paid by instalments over the period of the agreement. Supply of the assets to the partnership was staggered over the period of the contract as the construction, testing and delivery of each asset was completed. The final contract price instalment for an asset was made on the contracted last delivery date.

Reasons for decision
Summary: The first element of cost of a depreciating asset is: The first element of cost is worked out as at the time when a holder starts to hold an asset. A partnership will start to hold a depreciating asset at the time the asset becomes a partnership asset. For a number of special cases the first element of cost is attributed directly by subsection 40-180(2) of the ITAA 1997, regardless of the amount the holder paid or the value of the benefit it provided. None of the items in the table in subsection 40-180(2) of the ITAA 1997 applied in the present case. If the first element of cost of a depreciating asset is an amount worked out under section 40-185 of the ITAA 1997, the first element of cost is the greater of: The contract price paid by the leasing partnership pursuant to the manufacture and supply agreement is an amount that is taken to have been paid by it to hold a depreciating asset under Item 1 of the table in paragraph 40-185(1)(b) of the ITAA 1997. This item covers money paid to create a depreciating asset (e.g. labour and materials) as well as a simple purchase price. It also covers payments incidental to starting to hold the asset (e.g. stamp duty).

Legislative references: Income Tax Assessment Act 1997 subsection 40-180(2) section 40-185 paragraph 40-185(1)(a) paragraph 40-185(1)(b)
Subject references: Cost Depreciating asset Division 40 First element of cost