The Australian Taxation Office (ATO) has released the final iteration of the Taxation Ruling (TR) 2024/1, titled “Income tax: composite items – identifying the relevant depreciating asset for capital allowances”.  This ruling provides guidance to taxpayers on determining whether a composite item should be classified as a depreciating asset or if its components should be considered separate depreciating assets for tax purposes.

Issued on 31 January 2024, TR 2024/1 is applicable for income years after and before its issue date. However, this provision shall not be applicable to taxpayers if it contradicts the terms of an agreed settlement of a dispute prior to the issuance of this ruling.

What this ruling is about

1. Division 40 of the Income Tax Assessment Act 1997 provides a deduction for the decline in value of depreciating assets based on their effective life. A ‘depreciating asset’ is an asset that has a limited effective life and that can reasonably be expected to decline in value over the time it is used.

2. All legislative references in this Ruling are to the Income Tax Assessment Act 1997 unless otherwise indicated.

3. Where an asset consists of a number of components, it is necessary to determine whether that larger asset is itself a depreciating asset or whether one or more of its components are separate depreciating assets. Identifying the relevant depreciating asset is important for working out its effective life and, therefore, the rate at which deductions can be claimed. A depreciating asset that is the composite item as a whole may have an effective life that is different from the effective life of any individual component or components. This inquiry may also be relevant when testing an asset’s eligibility for certain immediate tax write-offs and concessions.

4. This Ruling sets out the Commissioner’s views on:

• relevant principles to assist in determining whether a composite item is itself a depreciating asset or whether its components are separate depreciating assets for the purposes of Division 40 (about capital allowances); and
• whether an ‘interest in an underlying asset’ for the purposes of section 40-35 requires an entity to have an interest in all parts of a composite item that is itself a depreciating asset or whether an interest in any part of the asset is enough.

5. This Ruling does not address Division 43, which provides deductions for certain capital works expenditure.