ATO ID 2008/50: Capital Allowances: depreciating asset - improvement to land - gully dam
Date of decision: 20 February 2008
Year of income: Year ended 30 June 2008
Business line: Private Groups and High Wealth Individuals

Issue
Is the taxpayer's gully dam a depreciating asset within the meaning of subsection 40-30(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes. The taxpayer's gully dam is a depreciating asset because, as an improvement to land, it is treated as an asset separate from the land and, in its particular separate state, satisfies the meaning of that term in subsection 40-30(1) of the ITAA 1997.

Facts
The taxpayer has constructed a gully dam on land which they lease to a third party who uses the land for agricultural operations. The dam was constructed by building a wall across an existing gully and is used to impound water. A state government authority provided the taxpayer with some guidelines for the construction of the dam. No other formal design was sought by the taxpayer. The contractor who constructed the dam for the taxpayer provided the ultimate construction design as they had constructed many similar dams in the area. The land on which the dam was constructed was cleared several years ago and surveyed last year to determine an appropriate structure. The materials used in construction of the dam wall were excavated clay and its overburden (comprising soil of varying quality). The materials used were obtained from the excavation of the existing gully. If there had not been sufficient soil or clay for the construction of the dam wall from the excavation of the gully the taxpayer would have sourced more soil or clay from elsewhere on their land. The extracted materials were separated and then reintroduced in a specific way so as to construct the dam wall. The dam consists of: The dam will deteriorate over time because erosion, the growth of trees and water seepage will compromise the impermeable clay sealing of the dam. If tree roots grow through the structure of the dam, water then 'tracks' the roots, dragging soil and clay material with it which eventually causes the dam to fail. The taxpayer is not carrying on a business of primary production and is not an irrigation water provider.

Reasons for decision
Summary: (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. Paragraph 40-30(1)(a) provides that land, prima facie , cannot constitute a depreciating asset. Subsection 40-30(3) operates to limit this exception by providing that an improvement to land , or a fixture on land, is to be recognised as an asset separate from the land for the purpose of applying Division 40. For an improvement to land to be a depreciating asset the improvement must not be 'land' within the ordinary meaning of that word. The term improvement to land is not defined however the concept of an improvement to land has been widely considered in case law. The principles that can be extracted from the relevant cases, when considered in the context of Division 40, provide that an improvement to land is an identifiable alteration to the land that enhances the usefulness of the land to the user. To determine if an improvement to land is other than land in its ordinary meaning, the improvement to land must be found to have a discrete and identifiable function separate to merely existing as the solid substance of the exposed surface of the earth. This gully dam, constructed using specified materials, is performing a discrete and identifiable function of collecting, storing and stopping the flow of water that enhances the usefulness of the land. Therefore, it is considered that the gully dam is not land for the purposes of paragraph 40-30(1)(a). The dam has a discrete and identifiable function separate to merely existing as the exposed surface of the earth. Having established that the taxpayer holds an improvement to land that is other than land in its ordinary meaning, it is necessary to determine if that improvement is also a 'depreciating asset' under subsection 40-30(1) - specifically, whether it has a limited effective life and can reasonably be expected to decline in value over the time it is used (see Note 1 at subsection 40-30(3)). Although an asset must decline in value over the time that it is used, it is not necessary for this to occur uniformly over time. It is sufficient that it will decline in value by the end of its effective life. While the overburden that was used as an embankment on either side of the impermeable clay could be economically maintained for an indefinite period, the same cannot be said of the clay itself. The clay that was formed to provide both the foundation for and the core of the dam wall will suffer deterioration from continual use and exposure to the elements and, therefore, the dam can reasonably be expected to decline in value over the time it is used. The meaning of effective life is contained in section 40-100 (for the Commissioner's determination) and in section 40-105 (for self-assessment). Broadly, the effective life of the dam in this case is how long it can be used by anyone for producing assessable income, having regard to the period within which it is likely to be scrapped or abandoned. The dam will deteriorate over time because erosion, the growth of trees and water seepage will compromise the clay sealing of the dam. It is therefore considered that the dam has a limited effective life. As the dam is an improvement to land; has a limited effective life; and can reasonably be expected to decline in value over the time it is used, the dam is a depreciating asset for the purposes of subsection 40-30(1).

Legislative references: Income Tax Assessment Act 1997 section 40-25 section 40-30 subsection 40-30(1) Paragraph 40-30(1)(a) subsection 40-30(3) subsection 40-45(2) section 40-100 subsection 40-105(1)
Related public rulings and determinations: TR 2012/7
Related ATO interpretative decisions: ATO ID 2007/11 (Withdrawn) | ATO ID 2007/12 (Withdrawn)
Subject references: Decline in value Depreciating assets Effective life Improvement to land