Private ruling: Depreciating assets and capital gains tax concessions
Published: December 2014
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Is the asset a 'depreciating asset' under section 40-30 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Will the basic conditions for the capital gains tax (CGT) small business concessions contained in section 152-10 of the ITAA 1997 be met in relation to the disposal of the asset? | A2: Yes

Relevant facts and circumstances: You were employed in an industry and you also carried on a business. You personally held two assets which related to the prospecting and mining of minerals. One of the assets was acquired by you before 1 July 2001. This asset ended after 1 July 2001 but you then acquired a new asset that related to the same land as the old asset. This asset consisted of a lease was sold in the income year. This lease was granted for a fixed term with an option to renew for a further fixed term. No mining occurred or was proposed during your ownership of the asset. The asset which was sold was used by you in the course of carrying on a business.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 40 | Income Tax Assessment Act 1997 Section 40-30 | Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Subsection 995-1 | Income Tax (Transitional Provisions) Act 1997 Section 40-77

Reasons for decision: Detailed Reasoning - Depreciating assets: A 'depreciating asset' is defined in subsection 40-30(1) of the ITAA 1997 as an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used except land, an item of trading stock and an intangible asset unless it is an intangible asset mentioned in subsection 40-30(2) of the ITAA 1997. Subsection 40-30(2) of the ITAA 1997 identifies particular intangible assets that are not prevented from being a depreciating asset by the general intangible asset exclusion in paragraph 40-30(1)(c) of the ITAA 1997. Paragraph 40-30(2)(a) of the ITAA 1997 provides that intangible assets that are 'mining, quarrying or prospecting rights' are depreciating assets if they are not trading stock. A 'mining, quarrying or prospecting right' is defined in subsection 995-1(1) of the ITAA 1997 to be: (a) an authority, licence, permit or right under an Australian law to mine, quarry or prospect for minerals, petroleum or quarry materials; or (b) a lease of land that allows the lessee to mine, quarry or prospect for minerals, petroleum or quarry materials on the land; or (c) an interest in such an authority, licence, permit, right or lease. However, the application of Division 40 of the ITAA 1997 is affected by section 40-77 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP) 1997). Subsection 40-77(1) of the IT(TP) 1997 provides that Division 40 of the ITAA 1997 does not apply to a mining, quarrying or prospecting right that you started to hold before 1 July 2001. Additionally, subsection 40-77(1) of the IT(TP) 1997 extends the exclusion to include a mining quarrying or prospecting right (the new right) that you started to hold after 1 July 2001 provided that: • you started to hold another mining, quarrying or prospecting right before that day; and • the other right ends on or after that day; and • the new right and the other right relate to the same area, or any difference in area is not significant. In this case, you acquired the asset before 1 July 2001. On a date after 1 July 2001, you acquired a new right was over the same area of land as the original asset. Therefore, in accordance with section 40-77 of the IT(TP) 1997, the asset is not a depreciating asset under section 40-30 of the ITAA 1997. Accordingly, the asset will be subject to the CGT provisions, rather than the capital allowance provisions in Division 40 of the ITAA 1997. | Detailed Reasoning - Small business concessions: In order to be eligible for the small business CGT concessions, a number of basic conditions must be satisfied. The basic conditions for the small business CGT concessions are outlined in subsection 152-10(1) of the ITAA 1997: (a) a CGT event happens in relation to an asset that the taxpayer owns (b) the event would otherwise have resulted in a capital gain (c) one or more of the following applies (i) the taxpayer satisfies the maximum net asset value test (ii) the taxpayer is a "small business entity" for the income year (iii) the asset is an interest in an asset of a partnership which is a small business entity for the income year, and the taxpayer is a partner in that partnership, or (iv) the special conditions for passively held assets in sub-sections 152-10(1A) or 152-10(1B)are satisfied in relation to the CGT asset in the income year and (d) the asset satisfies the active asset test. In this case, a CGT event happened to an asset you owned when the remaining interest in the asset was disposed of and you made a capital gain. Additionally, you are a small business entity and the relevant asset satisfied the active asset test. Accordingly, the basic conditions contained in section 152-10 of the ITAA 1997 have been satisfied.