ATO ID 2008/93: Capital Allowances: cost of depreciating asset - instalment costs
Date of decision: 27 July 2007
Year of income: Year ended 30 June 2006
Business line: Private Groups and High Wealth Individuals

Issue
Does the taxpayer's capital expenditure incurred in supplying cable and cable support equipment to another entity in order to connect their interconnection facility to the other entity's network, form part of the first element of cost of the interconnection facility they hold, pursuant to subsection 40-180(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes. The first element of cost of the taxpayer's interconnection facility includes, pursuant to subsection 40-180(3) of the ITAA 1997, capital expenditure incurred by the taxpayer in supplying the cable and cable support equipment.

Facts
The taxpayer carries on the business of a service provider. In order to establish and expand its business it entered into an agreement with another entity to create a service capability. To create this capability, the taxpayer was required to connect its network to the other entity's network. The taxpayer incurred capital expenditure on labour and materials, including cables and cable support equipment, in order to design, build and install an interconnection facility to connect its network with the other entity's network. The interconnection facility constituted a depreciating asset held by the taxpayer. Under the agreement, both the taxpayer and the other entity have access to the interconnection facility which is established on the other entity's premises. Property in and title to the material installed in the other entity's premises is retained by the taxpayer with the exception of certain cables and cable support equipment which become the property of the other entity upon installation.

Reasons for decision
Summary: The cost of a depreciating asset consists of two elements (section 40-175 of the ITAA 1997). The first element of cost is worked out as at the time when the holder of the asset starts to hold it (section 40-180 of the ITAA 1997) while the second element of cost is worked out by the holder after that time (section 40-190 of the ITAA 1997). The relevant depreciating asset in this case is the composite item (an interconnection facility), installed at an access point, which serves the function of connecting the taxpayer's network to the other entity's network. The means by which a taxpayer may hold a depreciating asset may vary. In this case, the taxpayer holds the interconnection facility through having entered into an agreement with the other entity for the construction, installation and use of the facility. Under the terms of that agreement the taxpayer retains ownership of the interconnection facility and therefore is the holder under item 10 of the table in section 40-40 of the ITAA 1997. Subsection 40-180(3) of the ITAA 1997 includes in the first element of cost of a depreciating asset amounts the holder of the asset is taken to have paid in relation to starting to hold the asset if those amounts are directly connected with holding the asset. The taxpayer's capital expenditure in supplying the cables and cable support equipment which become the property of the other entity is incurred in the course of constructing and installing the interconnection facility. The relationship that exists between the cost of supplying cables and cable support equipment and the putting in place of the taxpayer's interconnection facility is a vital one which is not diminished by the fact that title in these materials passes to a third party upon installation. There is, therefore, a clear and direct link between the capital expenditure incurred by the taxpayer in supplying the cables and cable support equipment and the taxpayer starting to hold the interconnection facility. Accordingly, the first element of cost of the interconnection facility includes, pursuant to subsection 40-180(3) of the ITAA 1997, capital expenditure incurred by the taxpayer in supplying the cables and cable support equipment.

Legislative references: Income Tax Assessment Act 1997 section 40-40 section 40-175 section 40-180 subsection 40-180(3) section 40-190
Related ATO interpretative decisions: ATO ID 2008/91 | ATO ID 2008/92
Subject references: Cost of a depreciating asset Depreciating assets First element of cost Uniform capital allowances system