Private ruling: Replacement of parts of depreciating assets
Date of advice: 26 May 2016
Published: October 2016
Ruling period: Years 2014, 2015, and 2016
Date scheme commenced: 2014

Ruling: Q1: Is the Company (as head entity of a tax consolidated group) entitled to a deduction, under either section 25-10 or section 8-1 of the Income Tax Assessment Act 1997, for the costs incurred in undertaking the Works? | A1: No. The Works are not considered to be a repair to depreciating assets for the purposes of section 25-10, and in any event, the Works are considered to be of a capital nature and excluded from deductibility when incurred under section 25-10 and section 8-1. We note however that capital costs associated with modifying a depreciating asset, that is used for deriving assessable income, may (subject to satisfying all the relevant requirements) qualify for a tax deduction over time under the capital allowance provisions of the ITAA 1997 (Division 40). The applicant had not required a ruling on those provisions. | Q2: Is the Company (as head entity of a tax consolidated group) assessable, under either section 6-5 or section 15-10 of the Income Tax Assessment Act 1997, on the Fee received from the State for the Works? | A2: Yes. The Fee is considered to be ordinary income received in the course of carrying on business that is assessable under section 6-5. In the alternative, the Fee is considered to be a subsidy received in relation to carrying on a business that is assessable under section 15-10 if section 6-5 does not apply.

Relevant facts and circumstances: The ruling was based on, and the Commissioner relied on, statements made by the applicant. Under agreement with the State, the Australian resident Company was required to replace parts of its depreciating assets ('Works') which are used in carrying on its existing business for the purpose of gaining or producing assessable income. In consideration for undertaking the Works, the State pays the Company a sum not exceeding the costs incurred.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 15-10 | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 25-10