ATO ID 2012/38: Capital Allowances: depreciating assets - grant of indefeasible right of use
Date of decision: 1 May 2012
Year of income: year ended 30 June 2011
Business line: Public Groups and International

Issue
When the taxpayer enters into an Indefeasible Right of Use (IRU) agreement giving indefeasible rights to use a telecommunications cable system held by the taxpayer, permitting traffic on that system up to the permitted right to use and so allocating that amount of capacity of the telecommunications cable system, are the depreciating assets that are held by the taxpayer and that form the cable system split into two or more separate assets for the purposes of Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997) by application of section 40-115 of the ITAA 1997?

Decision
No. When the taxpayer enters into an IRU agreement giving indefeasible rights to use of a telecommunications cable system, the depreciating assets (such as each segment of the cable system) that are held by the taxpayer and that form the cable system are not split into two or more separate assets for the purposes of Division 40 of the ITAA 1997 by section 40-115 of the ITAA 1997 or otherwise.

Facts
The taxpayer owns a telecommunications cable system. For the purposes of section 40-30 of the ITAA 1997 the telecommunications cable system is made up of separate depreciating assets. Each separate segment of the cable system, being the segment that operates to carry information from one place where information carried by the system is input to and provided by the system to the next such place in the system, is a composite item that is a separate depreciating asset whose components are not in that context separate depreciating assets. For the purposes of section 40-40 of the ITAA 1997 each depreciating asset (each segment of the cable system) is held by the taxpayer. The taxpayer enters into IRU agreements with other parties who wanted IRUs to send and receive data by means of the system, and so wanted to be able to provide traffic on the system up to the agreed amount of capacity of the telecommunications cable system. The taxpayer's holding of the depreciating assets making up the telecommunications cable system for the purposes of section 40-40 of the ITAA 1997 is unaffected by the taxpayer's grant of an IRU. The taxpayer charges each grantee of an IRU in respect of the administration and maintenance of the telecommunications cable system. The taxpayer is able to enter into further IRU agreements to provide IRUs to use the telecommunications cable system, each assuring rights to carry information and so providing some of the capacity of the cable system.

Reasons for decision
Summary: When a depreciating asset is split into two or more depreciating assets so that section 40-115 of the ITAA 1997 applies, the taxpayer no longer holds the original asset; instead the taxpayer now holds the assets into which the original asset has been split. In the context of Division 40 of the ITAA 1997, the splitting of a depreciating asset occurs when there is a change in how it is employed such that it is considered to decline in value as at least two other assets. Following the split it would reasonably be expected that future employment of the resulting assets affects a separate decline in value of the assets through and over the time of their separate use, such that the calculation of each decline would be separate (though the rates of decline of each asset might still coincide). For most tangible assets, a physical separation or division of the original asset into two or more physical assets might ordinarily be expected. However, subsection 40-115(3) of the ITAA 1997 recognises that the splitting of a depreciating asset that is an item of intellectual property can occur when you grant or assign an interest in your asset. For example, under the law governing patents a patent may be partially assigned for a place in, or a part of, the patent area (see Section 14(2) of the Patents Act 1990 ) effectively splitting the patent (previously a single depreciating asset) into the part assigned and the remainder of the patent. Where this occurs the grant or assignment of the interest amounts to a division of the original rights held in the item of intellectual property including division as to time, place and the class of acts or acts permitted. Where this occurs, subsection 40-115(3) of the ITAA 1997 has application. Although the IRU over the cable system granted by the taxpayer amounts in a sense to an economic ownership interest over some of the transmission capacity of the cable system, and the IRU is itself recognised under paragraph 40-30(2)(e) of the ITAA 1997 as a depreciating asset, it does not represent a split or division of the physical depreciating assets the taxpayer holds and whose available transmission capacity has been allocated to some extent by the grant of the IRU. The taxpayer holds each separate segment of the cable system that is operated to carry information from one place to the next in the system. These segments of the cable system have not been physically separated or divided into two or more separate assets. They are depreciating assets that decline in value over the time they are employed in the cable system, and not differently according to the period of any IRU or IRUs. The taxpayer's holding interest in the depreciating assets making up the cable system is its holding of segments of the cable system which are operated to carry information from one place to the next in the system. The taxpayer continues to use these segments of the cable system it holds by obtaining fees from the grantee in respect of use, administration and maintenance of the cable system. The taxpayer is also able to enter into further IRU agreements to provide access to capacity of the cable system. Consequently when the taxpayer enters into an IRU agreement for rights of access to some of the capacity of the cable system, the depreciating assets held by the taxpayer and that form the cable system are not split into two or more separate assets and therefore section 40-115 of the ITAA 1997 has no application in this circumstance.

Legislative references: Income Tax Assessment Act 1997 Division 40 section 40-30 Paragraph 40-30(2)(e) section 40-40 section 40-115 subsection 40-115(3)
Related ATO interpretative decisions: ATO ID 2011/1 | ATO ID 2011/2
Subject references: Depreciating assets Indefeasible right to use Uniform capital allowances system