ATO ID 2012/9: Capital Allowances: holder of a depreciating asset - right to remove
Date of decision: 25 January 2012
Year of income: Year ending 30 June 2011
Business line: Public Groups and International

Issue
Does the taxpayer have a right to remove depreciating assets for the purpose of item 2 of the table in section 40-40 of the Income Tax Assessment Act 1997 (ITAA 1997) if the taxpayer has the right to remove the assets during the term of its quasi-ownership right over land, but does not have the right to remove the assets at the end of the term of the quasi-ownership right?

Decision
Yes. As the taxpayer has the right to remove the depreciating assets during the term of its quasi-ownership right and the meaning of 'right to remove' in item 2 of the table in section 40-40 of the ITAA 1997 is not limited to the right to remove assets at the end of the term of a quasi-ownership right, the taxpayer has a right to remove for the purpose of item 2 of the table in section 40-40.

Facts
The taxpayer entered into a lease of land and depreciating assets. The taxpayer's lease over the land constitutes a quasi-ownership right over the land. The depreciating assets are fixed to the land. Under the lease agreement, during the term of the lease, the taxpayer has the right to remove obsolete assets and to remove assets as the taxpayer considers necessary or desirable in the proper conduct of its business. Once assets are removed from the land, the taxpayer becomes their legal owner. The term of the lease is substantially longer than the effective life of the assets such that they will be replaced during the term of the lease. The taxpayer does not have a right to remove the assets at the end of the term of the lease for the purpose of item 2 of the table in section 40-40 of the ITAA 1997.

Reasons for decision
Summary: All legislative references are to the ITAA 1997. Division 40 provides a deduction for the decline in value of a depreciating asset a taxpayer holds to the extent the asset is used for a taxable purpose. The table in section 40-40 identifies the holder of a depreciating asset. Item 10 of the table in section 40-40 provides that a taxpayer holds a depreciating asset if they are the owner of the asset, or the legal owner, if there is both a legal and equitable owner. However, there are other items in the table which identify a holder in various other circumstances even though they are not the asset's owner. Item 2 of the table in section 40-40 provides that if a depreciating asset is fixed to land over which there is a quasi-ownership right and the owner of the right has a right to remove the asset, then the asset is held by the owner of the quasi-ownership right for as long as the right to remove the asset exists. For the purposes of Division 40, this item effectively overcomes the common law presumption that ownership of assets affixed to land rests with the owner of the land. Paragraph 1.43 of the Explanatory Memorandum to the New Business Tax System (Capital Allowances) Bill 2001 ('the EM') explains the policy intent of item 2 of the table in section 40-40: Where...a depreciating asset is fixed to land where the owner of the quasi-ownership right has a right to remove the asset, the uniform capital allowance system recognises them as the holder while the right of removal exists. Right of removal is consistent with the established legal concept, connoting a right to remove the asset for the benefit of the holder of the right, with the removed item being for their rather than the landowner's benefit. Often the right of removal will extend beyond the term of the quasi-ownership right, allowing the quasi-owner reasonable time to remove the asset; they will remain a holder of the asset until that right ends, as until then they might exercise the right and remove the asset, and so continue to hold the asset. That paragraph also contains an example (Example 1.5) of the application of item 2 of the table in section 40-40 to a taxpayer who has the right to remove fixtures while the lease subsists and for a reasonable time afterwards. Paragraph 1.43 of the EM and Example 1.5 refer to the situation where a taxpayer has a right to remove assets at the end of the term of a quasi-ownership right. However, the words 'right to remove the asset' and 'while the right to remove exists' in item 2 of the table in section 40-40 do not limit the application of the item to a situation where a taxpayer has a right to remove at the end of the term of the quasi-ownership right. It is considered that the taxpayer's right to remove in this case is consistent with the policy intent as outlined in paragraph 1.43 of the EM. The right of the taxpayer to remove obsolete assets and those which it considers necessary or desirable to remove for the proper conduct of its business is a right to remove for the benefit of the taxpayer. As the taxpayer obtains legal title to the assets that are removed, the removed assets are for the taxpayer's benefit rather than the lessor's benefit. Therefore, as the taxpayer has the right to remove the depreciating assets during the term of its quasi-ownership right and the meaning of 'right to remove' in item 2 of the table in section 40-40 is not limited to the right to remove assets at the end of the term of a quasi-ownership right, the taxpayer has a right to remove for the purpose of item 2 of the table in section 40-40.

Legislative references: Income Tax Assessment Act 1997 Division 40 section 40-40
Other references: Explanatory Memorandum to the New Business Tax System (Capital Allowances) Bill 2001
Subject references: Decline in value Economic owner Fixture on land Hold a depreciating asset Legal owner Quasi-ownership right