Private ruling: Income Tax Assessment Act 1997 Division 40
Date of advice: 11 April 2018
Published: August 2018
Ruling period: Period ending 30 June 20XX
Date scheme commenced: 1 December 20XX

Ruling: Q1: Are the sprung floors, vinyl floor covering, mirrors and ballet barres installed in leased premises depreciating assets under Division 40 of the Income Tax Assessment Act 1997 ? | A1: Yes

Relevant facts and circumstances: The company carries on a business of providing ballet lessons. The company carries on their business in leased premises. The company undertook renovations to the premises that included sprung floors, vinyl floor covering, mirrors and ballet barres. The sprung floors, vinyl floor covering, mirrors and ballet barres have been installed so they can be removed without damage to the premises.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 40 | Income Tax Assessment Act 1997 Subsection 40-30(1) | Income Tax Assessment Act 1997 Subsection 40-30(3) | Income Tax Assessment Act 1997 Subsection 40-45(2) | Income Tax Assessment Act 1997 Section 40-95 | Income Tax Assessment Act 1997 Section 43-20

Reasons for decision: Detailed Reasoning - Division 43 Deductions for capital works: Section 43-20 Income Tax Assessment Act 1997 (ITAA 1997) states that a building, or extension, an alteration or improvement to a building would be considered capital works. Subsection 40-45(2) of the ITAA 1997 states that capital works will not be deductable as depreciating assets under Division 40 ITAA 1997. | Detailed Reasoning - Are the assets an ‘improvement’?: Paragraph 44 of Taxation Ruling 1997/23 Income tax: deductions for repairs provides the Commissioner’s view that an improvement provides a greater efficiency of function in the property. It involves bringing a thing or structure into a more valuable or desirable form, state or condition than a mere repair. Some factors that point to work done to property being an improvement include whether the work will extend the property's income producing ability, significantly enhance its saleability or market value or extend the property's expected life. Here, the sprung floors, vinyl floor covering, mirrors and ballet barres have been installed in the leased building with the intention of removing them at the end of the lease period; therefore, they do not extend the property's income producing ability, enhance the property’s saleability, market value or extend the property's expected life. On these facts the assets are not considered an improvement. | Detailed Reasoning - Are the assets an ‘entirety’?: Paragraph 37 of Taxation Ruling 1997/23 states that an entirety is a term used by the courts to refer to something ‘separately identifiable as a principal item of capital equipment’, 'a physical thing which satisfies a particular notion', and 'not necessarily the whole but substantially the whole of the [property] under discussion'. Property is more likely to be an entirety if: ● the property is separately identifiable as a principal item of capital equipment; or ● the thing or structure is an integral part, but only a part, of entire premises and is capable of providing a useful function without regard to any other part of the premises; or ● the thing or structure is a separate and distinct item of plant in itself from the thing or structure which it serves; or ● the thing or structure is a 'unit of property' as that expression is used in the depreciation deduction provisions of the income tax law. Examples of property that constitute an entirety are a spectators' grandstand in a football stadium, a bridge giving access to the driveway of a garage, or a factory drainage system comprising an underground system of concrete stormwater drains. Examples of property that do not constitute an entirety are the insulation and lining for a cool room, or a window in a factory. Something that is part of a building, e.g., a roof or wall, is just that and no more. The building itself is the entirety. Here, the sprung floors, vinyl floor covering, mirrors and ballet barres are for the specific use of training dancers. They provide a useful function separate to the premises and are separate and distinct from the premises by the fact that they can be removed from the premises without damage. On these facts the assets are entireties. Paragraph 33 of Taxation Ruling 1997/23 states that capital expenditure that is not deductible as a repair, and the item is not a permanent fixture, may be classified as plant (a depreciating asset) on which depreciation is allowable. | Detailed Reasoning - Division 40 Capital allowances: Subsection 40-30(3) of the ITAA 1997 states that fixtures and improvements to land, whether removable or not, are assets separate from the land. Therefore, a fixture that has a limited effective life and can reasonably be expected to decline in value over the time it is used, may be a depreciating asset. Land is specifically excluded from the definition of a depreciating asset under subsection 40-30(1) of the ITAA 1997. In your case, we consider that the sprung floors, vinyl floor covering, mirrors and ballet barres are depreciating assets. Taxation Ruling 2017/2 Income tax: effective life of depreciating assets (applicable from 1 July 2017) contains the Commissioner’s view on depreciating assets and industries specific to the ruling. Alternatively, the effective life of a depreciating asset may be self-assessed in accordance with section 40-95 of the ITAA 1997.