This one is for my Quantity Surveyor friends who love to put together depreciation schedules…
The Commissioner has released a draft Taxation Ruling that considers whether a composite item is itself a depreciating asset or whether its components are separate depreciating assets.
And this is a great question. How far down do we break something down before we start claiming depreciation on it? Part, compound, element, proton, quark?
The Commissioner states that for a component of a composite assets to be considered to be a separate depreciating asset, it is necessary that the component is capable of being separately identified as having commercial and economic value.
The main principles that need to be taken into account in determining whether a composite item is a single depreciating asset are:
- Whether the depreciating asset will tend to be the item that performs a separate identifiable function;
- Whether the asset is an item that performs a discrete function;
- Whether there is a high degree of physical integration of the components;
- Whether attaching the item to another asset, varies the performance of that asset; and
- Whether the item is purchased as a system to function together as a whole and which are necessarily connected in their operation.
The draft ruling has a series of examples that use these factors. For example, the draft Ruling concludes that:
- Connected warehouse storage racks are a single depreciable asset but unconnected racks are not;
- A desktop computer package, including a monitor, keyboard and a mouse, is a single depreciable asset but an additional printer is not;
- A mainframe and 50 slave terminals is a single depreciating asset;
- A built-in GPS unit in a car is a part of the car but a portable GPS unit is not; and
- A solar system is a single depreciable asset.
However, it is worth noting that in many cases adding a new component is a separate depreciable asset and not a modification to the existing asset. For example, adding additional solar panels to a current system will see the new panels treated as a separate depreciable asset.