TR 2024/1 - Income tax: composite items - identifying

the relevant depreciating asset for capital allowances

This cover sheet is provided for information only. It does not form part of TR 2024/1 - Income
tax: composite items - identifying the relevant depreciating asset for capital allowances

There is a Compendium for this document: TR 2024/1EC .

 Taxation Ruling

TR 2024/1
Status: legally binding

Taxation Ruling
Income tax: composite items – identifying the
relevant depreciating asset for capital allowances
Relying on this Ruling
This publication (excluding appendixes) is a public ruling for the purposes of the Taxation
Administration Act 1953.
If this Ruling applies to you, and you correctly rely on it, we will apply the law to you in the way set
out in this Ruling. That is, you will not pay any more tax or penalties or interest in respect of the
matters covered by this Ruling.

Table of Contents Paragraph

What this Ruling is about 1
Ruling 6
Composite items 6
Guiding principles 7
Modifications 17
The test for a composite item and depreciating assets is not the test for a facility 23
Jointly-held tangible assets 28
Intangible depreciating assets 31
Date of effect 34
Appendix 1 – Examples 35
Example 1 – industrial storage racking 35
Example 2 – desktop computer package 38
Example 3 – mainframe computer 42
Example 4 – local area network 45
Example 5 – aircraft engine and frame in service on rotation 48
Example 6 – car global positioning system 51
Example 7 – jointly-held fibre optic cable communications system 55
Example 8 – new electricity distribution line 61
Example 9 – replacing electricity pole 67
Example 10 – upgrade of transformer 69
Example 11 – rail transport infrastructure 72
Example 12 – new railway branch line 74
Example 13 – solar power system 76
Example 14 – photographic lighting equipment 79

Taxation Ruling TR 2024/1 Page 1 of 21

 Taxation Ruling

TR 2024/1
Status: legally binding
Appendix 2 – Explanation 82
Guiding principles 83
Case law on the ‘functionality test’ 87
Case law on modifications 103
Jointly-held tangible assets 105
Intangible depreciating assets 114

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. 1
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 to the effective life of any individual component or
components. This enquiry may also be relevant when testing an asset’s eligibility for
certain immediate tax write-offs and concessions.2
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.3

1
Section 40-30 of the Income Tax Assessment Act 1997. There are exceptions to this – see
subsection 40-30(1).
2
For example, in determining whether the relevant asset’s cost is below the instant asset write-off threshold
under section 328-180.
3
Broadly, Division 40 does not apply to capital works for which a deduction is available under Division 43, or
would be available under Division 43 but for the capital works being started before a particular day or used for
a relevant purpose. See subsection 40-45(2).

Taxation Ruling TR 2024/1 Page 2 of 21

 Taxation Ruling

TR 2024/1
Status: legally binding

Ruling
Composite items
6. A ‘composite item’ is an item that is made up of a number of components that are
each capable of separate existence.4 Subsection 40-30(4) directs an objective
consideration of whether a particular composite item is itself a depreciating asset, or
whether one or more of its components are separate depreciating assets – it is a question
of fact and degree to be determined in the circumstances of the particular case.

Guiding principles
7. The following paragraphs are guidelines intended to assist in identifying the
relevant depreciating asset. No one principle is determinative. Every enquiry requires the
exercise of judgment in the prevailing factual circumstances. A composite item may be a
single depreciating asset in one taxpayer’s circumstances but not in another’s.
8. For a component (or more than one component) of a composite item to be a
depreciating asset, it is necessary that the component is (or components are) capable of
being separately identified and recognised as having commercial and economic value.
9. Purpose or ‘functionality’ is generally a useful guide to the identification of an item.5
The main principles that are taken into account in determining whether a composite item is
a single depreciating asset, or more than one depreciating asset, are:
• The depreciating asset will ordinarily be an item that performs a separate
identifiable function, having regard to the purpose it serves in its business
context.
• An item may be identified as having a discrete function, and therefore as a
depreciating asset, without necessarily being self-contained or used on a
stand alone basis.
• The greater the degree of physical or functional integration of an item
with other component parts, the more likely the depreciating asset will be
the composite item.
• When the effect of attaching an item to another item (which itself has its
own independent function) varies the function or operational performance of
that other item, the attachment is more likely to be a separate depreciating
asset.
• When various components are purchased (whether via one or multiple
transactions) to function together as a system and are necessarily
connected in their operation, the depreciating asset is usually the system
(the composite item).
10. The relevant function considered in this context is the actual function the item is to
serve in the particular taxpayer’s income-producing activity. Any theoretical function to
which the item could be put in other circumstances is irrelevant. (See Example 5 of this
Ruling.)

4
Mitsui & Co (Australia) Ltd v Commissioner of Taxation [2012] FCAFC 109 (Mitsui) at [59], per Emmett,
Bennett and Gilmour JJ.
5
Paragraph 1.15 of the Revised Explanatory Memorandum to the New Business Tax System (Capital
Allowances) Bill 2001. See also Commissioner of Taxation v Tully Co-operative Sugar Milling Association Ltd
[1983] FCA 163 (Tully); 83 ATC 4495 at [4504], per Lockhart J.

Taxation Ruling TR 2024/1 Page 3 of 21

 Taxation Ruling

TR 2024/1
Status: legally binding
11. To determine if a composite item is a single depreciating asset or more than one
depreciating asset, the relative functions of the entire item, against its components, need
to be considered in the circumstances in which they are used. (See Examples 1, 2, 6, 11
and 13 of this Ruling.)
12. A single depreciating asset is not necessarily the smallest possible component
which can be identified within a composite item. Several components or parts of a
composite item which work together with other components may be parts of a larger
functional item, particularly where those components are integrally linked. (See
Examples 1, 8 and 11 of this Ruling.)
13. An item may be considered a separate depreciating asset notwithstanding it
performs some wider or commercially more ‘complete’ function in combination or
conjunction with other items that are themselves separate depreciating assets. (See
Examples 5, 6 and 14 of this Ruling.)
14. The fact that an item cannot operate on its own and has no commercial utility
unless linked or connected to another item or items, does not preclude it from being a
separate depreciating asset. Where such items are designed to be used in a range of
settings or in conjunction with a wide range of equipment or systems and are not acquired
with other items as part of a system, this may indicate they are separate depreciating
assets. (See Examples 3, 4 and 6 of this Ruling.)
15. An absence of a fixed physical connection between separate components of a
composite item tends to indicate that each separate component is a depreciating asset.
(See Examples 5, 6 and 14 of this Ruling.)
16. Where an element of a system is purchased or installed at a different time to the
system (irrespective of its intended operation within a system) and has a separate
identifiable function, that element may be a separate depreciating asset. (See Examples 3
and 4 of this Ruling.)

Modifications
17. A modification or alteration to an existing depreciating asset can itself be a
separate depreciating asset. Such modifications can be of varying degrees. (See
Examples 6, 8 and 12 of this Ruling.)
18. Where:
• an addition or attachment substantially alters a depreciating asset (the
original depreciating asset)
• the original depreciating asset continues to perform its function, and
• the addition or attachment serves its own function,
the addition or attachment is likely to be a separate depreciating asset from the original
depreciating asset when working out deductions for decline in value under Division 40.
19. A modification which restructures or adds new components to an existing
depreciating asset will result in the asset being merged into a new depreciating asset
where the new depreciating asset has a different purpose or performs a different function
from the original depreciating asset.6

6
See section 40-125. You are taken to have stopped holding the existing depreciating asset and started
holding the new (merged) depreciating asset.

Taxation Ruling TR 2024/1 Page 4 of 21

 Taxation Ruling

TR 2024/1
Status: legally binding
20. By contrast, restorations and minor alterations that do not change the overall
function of the existing depreciating asset will not be considered separate depreciating
assets. Where expenditure on restoring a depreciating asset to its original condition
constitutes a repair, no separate depreciating asset is created and the cost is unchanged
for the purposes of calculating the existing depreciating asset’s decline in value
deductions. 7 (See Example 9 of this Ruling.)
21. Work undertaken that goes beyond what is required to restore the asset to its
original state may constitute a capital improvement. Capital improvements will not
necessarily create a new depreciating asset. The principles in this Ruling are applied in
determining whether a new depreciating asset has been created.8
22. Modifications to certain components of an existing depreciating asset to allow it to
perform additional tasks or improve its efficiency will not necessarily be considered a
separate depreciating asset. (See Examples 1 and 10 of this Ruling.)

The test for a composite item and depreciating assets is not the test for a facility
23. Relief from the characterisation of assessable income amounts of a managed
investment trust (MIT) as ‘non-concessional MIT income’ may be available in certain
circumstances where there is a ‘facility’ to which the relevant amount relates.9
24. Although the factual enquiry in relation to a composite item and depreciating assets
and a facility require similar considerations, these considerations might, and are expected
to, sometimes lead to different outcomes. It is necessary to consider the statutory context
and purpose for the relevant enquiry.
25. A facility, which is considered in the context of whether a concessional withholding
rate applies to payments in respect of particular investments, is identified in connection to
the land on which the facility is located and the broader function it performs. Physical and
functional connection are major considerations in determining which assets form part of
the same facility.10
26. By contrast, the enquiry in relation to a composite item and depreciating assets is
concerned with unitisation of components for depreciation purposes to ensure deductions
over the effective life of the relevant asset reflect the diminution in its economic value over
the period it is used. It is likely to be more focused on the function of a collection of
components at a granular level.
27. In testing whether modifications or enhancements to a depreciating asset or facility
in fact constitute a new depreciating asset or facility, again the Commissioner expects that
different conclusions may sometimes arise given the different enquiries. For example, a
collection of components that is both a facility and a composite item that is a depreciating
asset may have a distinct but interconnected extension added. Depending on the
circumstances, this extension might be sufficiently separate (physically and temporally) to

7
See section 40-215.
8
This Ruling does not consider what constitutes a repair or capital improvement. Taxation Ruling TR 97/23
Income tax: deductions for repairs sets out the circumstances in which a deduction for repairs is available
under section 25-10. Expenditure incurred, not in relation to a section 25-10 repair, which is merely an
improvement of the asset and not the creation of a new asset, is included in the second element of the cost of
the depreciating asset – see section 40-190.
9
See subsection 12-437(5), section 12-439 and section 12-440 of Schedule 1 to the Taxation Administration
Act 1953.
10
The Commissioner’s views on the meaning of ‘facility’ in the context of the non-concessional MIT income
rules are set out in Law Companion Ruling LCR 2020/2 Non-concessional MIT income. See paragraphs 152
to 170 of that Ruling. Note, other factors may also be relevant with no one factor considered in isolation
being determinative.

Taxation Ruling TR 2024/1 Page 5 of 21

 Taxation Ruling

TR 2024/1
Status: legally binding
constitute a new depreciating asset, while being considered an extension to an existing
facility.

Jointly-held tangible assets

28. Section 40-35 applies in circumstances where a depreciating asset (the underlying
asset) that you hold is also held by one or more other entities. ‘Your interest in the
underlying asset’ is treated as if it were the relevant depreciating asset for the purposes of
Division 40.11
29. ‘Your interest in the underlying asset’ is not defined. It is to be read broadly to
include both joint holding of the entirety of an asset and separate ownership of component
parts of a composite item. Section 40-35 applies when working out the deductions for the
share of the decline in value in both cases.
30. Where a composite item is the underlying depreciating asset, the amount that you
can deduct for your share of the decline in value of that asset over an income year is
based on the cost of:
• the component (or components) that you hold in the composite item, or
• your interest in the otherwise undivided composite item. (See Example 7 of
this Ruling.)

Intangible depreciating assets

31. The only intangible assets that are capable of being ‘depreciating assets’ are those
intangible assets specifically listed in subsection 40-30(2) that are not trading stock.
32. While an intangible asset may consist of a number of rights, those individual rights
cannot themselves be depreciating assets unless they are capable of separate existence
and listed in subsection 40-30(2). The question of whether the intangible asset is a
composite item requires consideration of the legal character of the item, and any
underlying individual rights. This will be by reference to a relevant statute where this is how
the intangible asset has been created.
33. Section 40-35, which relates to jointly-held depreciating assets, can apply to
intangible depreciating assets listed in subsection 40-30(2). However, in relation to an
intangible depreciating asset that is a ‘mining, quarrying or prospecting right’ by virtue of
being an interest in an authority, licence, permit, right or lease (and not the authority,
licence, permit or right itself), section 40-35 has no application. That is, your interest in the
authority, licence, permit, right or lease is the relevant depreciating asset by operation of
subsection 40-30(2)(a) and paragraph (c) of the subsection 995-1(1) definition of ‘mining,
quarrying or prospecting right’.

11
Subsection 40-35(3) lists other provisions which treat your interest in the underlying asset as if it were the
depreciating asset.

Taxation Ruling TR 2024/1 Page 6 of 21

 Taxation Ruling

TR 2024/1
Status: legally binding
Date of effect
34. This Ruling applies to years of income commencing both before and after its date
of issue. However, this Ruling will not apply to taxpayers to the extent that it conflicts with
the terms of a settlement of a dispute agreed to before the date of issue of this Ruling (see
paragraphs 75 and 76 of Taxation Ruling TR 2006/10 Public Rulings).

Commissioner of Taxation
31 January 2024

Taxation Ruling TR 2024/1 Page 7 of 21

 Taxation Ruling

TR 2024/1
Status: not legally binding

Appendix 1 – Examples
This Appendix provides examples which illustrate the principles in the Ruling.
Identifying the relevant depreciating asset or assets will depend on the facts and
circumstances of each case. Consequently, the conclusions reached in the following
examples are not necessarily determinative of the Commissioner’s views on cases with
similar, but different, facts.

Example 1 – industrial storage racking

35. The Warehouse Corporation purchases storage racks for use in its warehouse.
Multiple racks make up a single row. Each row of racks is physically separate from each
other row and is capable of storing goods independently of any other row. The racks within
each row rely on other racks within that row for their structural stability and therefore their
ability to perform their storage function.
36. As each row is functionally complete in itself, it is a separate depreciating asset.
However, each rack within a row is not functionally complete in itself; the racks merely
form part of the row. Any new rows that are acquired will be separate depreciating assets.
37. If an existing row is merely lengthened by the addition of new racks, no new
depreciating asset has been created. The addition of extra racks that require structural
support from the existing row is a modification to an existing asset, and that cost is
included in the second element of the existing row’s cost under section 40-190.

Example 2 – desktop computer package

38. Alyona buys a desktop computer package which consists of a desktop computer,
monitor, wireless keyboard and mouse. This package of items is a single depreciating
asset. Notwithstanding that the items are easily separated, and may have been acquired
from different suppliers, they were purchased to provide a single, integrated system
intended to function as a whole.
39. However, if the items were acquired as replacements to an existing desktop
computer package, each item would be a separate depreciating asset. For example, if
Alyona upgrades the monitor in 2 years this would constitute a separate depreciating
asset. The monitor is separately identifiable and can be relatively easily used in different
computer systems or with other devices.
40. The acquisition of an item that is physically incorporated into a computer (or
element of a computer system) becomes part of the computer upon installation and is not
a separate depreciating asset. The item’s cost is included in the second element of the
cost of the computer system under section 40-190. Examples include processors, memory
and hard drives. The additions form part of the existing physical asset (the computer) and
the lack of separation outweighs the fact that the improvements:
• serve to vary the performance of the computer
• were acquired separately from the computer, and
• could potentially be incorporated in a wide range of computers and other
electronic equipment.
41. If Alyona acquires a printer to be used with the computer, it will be a separate
depreciating asset. A printer performs a separate function, is capable of independent

Taxation Ruling TR 2024/1 Page 8 of 21

 Taxation Ruling

TR 2024/1
Status: not legally binding
existence and easily interchangeable. This would be the case regardless of whether the
printer was purchased as part of the desktop computer package or separately.

Example 3 – mainframe computer

42. Vitaly designs and installs a new mainframe computer system with 50 dependent
terminals that are only functional when connected to the mainframe because they lack a
base unit or a separate central processing unit. The terminals receive data from, and
transmit data to, any compatible controlling unit to which they are connected. Twelve
months later Vitaly expands the system by purchasing another 20 terminals off-the-shelf
which are easily connected to any compatible mainframe computer system, including
Vitaly’s existing system.
43. The initial system consisting of the mainframe and 50 terminals is a single
depreciating asset because:
• The terminals do not have a separate function. They have no independent
processing ability and are reliant upon the mainframe for their functionality.
• The terminals were acquired at the same time as a functionally complete
system to work together in that manner.
44. While the 20 new terminals are similarly dependent upon the mainframe for their
functionality, they do have a separate existence and are not part of the system as originally
acquired. The separate acquisition of the additional terminals, and their adaptability to
work with a wide range of controllers, are factors sufficient to treat each new terminal as a
separate depreciating asset.

Example 4 – local area network

45. Nazar sets up a local area network (LAN) which links a server to 10 computers.
Users on each of the computers can access a shared database on the server, but these
computers can also operate independently (that is, without being connected to the server).
When operating independently, the computers in the LAN run on their own software and
can be connected directly to a printer.
46. The LAN, as a whole, is not a separate depreciating asset. Each computer has a
separate identifiable function and is a separate depreciating asset because each computer
can operate independently. Their connection to the LAN, although increasing each
computer’s functionality, does not cause them to be collectively subsumed into a different
larger asset.
47. The server has its own identifiable function to enable database sharing and is a
separate depreciating asset to the computers.

Example 5 – aircraft engine and frame in service on rotation

48. Airlease Company leases aircraft frames and engines that it owns to multiple
airlines under operating leases. Each engine that Airlease leases out is interchangeable
with each frame it owns and leases. Under the lease agreements, any of Airlease’s frames
or engines can be combined with any frames or engines leased to the airlines by Airlease
or any other leasing company.
49. Under a scheduled maintenance program, each engine is detached from its
airframe for overhaul and replaced with another engine made available by Airlease. An

Taxation Ruling TR 2024/1 Page 9 of 21

 Taxation Ruling

TR 2024/1
Status: not legally binding
inherent feature of the scheduled maintenance program is that the number of engines an
airline leases is always in excess of the number of airframes they lease.
50. An aircraft and its engine would usually be considered to be a single depreciating
asset. However, in this Example, each frame and engine is capable of having a separate
identity and the particular circumstances of use provide further context in identifying each
as a separate depreciating asset:
• Neither the engine nor the aircraft frame is physically separate or capable of
performing a function identifiable from the other. However, no particular
airframe is reliant on any particular engine for the performance of its
function. Each engine is generally available for use in whichever airframe
requires an engine on any particular occasion.
• Airlease, and the industry broadly, deal separately with engines and
airframes. The lease terms and the scheduled maintenance program
demonstrate this.
• Airlines can, and do, combine any airframe with any engine regardless of
who owns each. Airlease’s engines are not a permanent part of any
particular airframe.

Example 6 – car global positioning system

51. Orson has a parcel delivery business, including a delivery vehicle. He is
contemplating what type of global positioning system (GPS) to buy for it.
52. A car comprises many components but it is usually the whole car that is the
depreciating asset. The relevant function or purpose of the car is transportation. Where a
car has a GPS integrated in it, either from original manufacture or post-manufacture
modification, the GPS forms part of the car. While the GPS has its own function, it is
subsumed into the existing depreciating asset, being the vehicle.
53. In the case of a modification after manufacture, the expenditure on materials and
labour for the installation is an amount paid to bring the asset to its present condition and
included in the second element of the cost of the car under section 40-190.
54. If Orson purchased a portable GPS, that GPS retains its separate function to that of
the car. This is irrespective of whether he plugs the GPS into the car’s power outlet or not.
The GPS is a separate depreciating asset to the car. The GPS’s function is as a navigation
system. It was purchased separately from the car, it is removable from the car, and it may
be operated in other vehicles or independently of vehicles.

Example 7 – jointly-held fibre optic cable communications system

55. An undersea communications cable system was constructed to transmit data
between 3 countries. The system was constructed with 2 major segments, the segment
that transmits data from country A to country B (Segment 1) and the segment that
transmits data from country B to country C (Segment 2).
56. Each segment of the system consists of fibre optic cables and transmission and
receiving equipment.
57. Fibropca Co owns the fibre optic cables in Segment 1 and Segment 2 while
transmission and receiving equipment are owned by another entity.

Taxation Ruling TR 2024/1 Page 10 of 21

 Taxation Ruling

TR 2024/1
Status: not legally binding
58. Fibropca Co and the other entity have contractual relationships which bring the
complete cable system together to enable the carrying of data on the system from:
• country A to country B
• country B to country C, and
• country A to country C (via country B).
59. In this case, each of the 2 segments of the system perform the function of carrying
data between 2 countries. While the 2 segments of the system are physically connected
and commenced their function of transmitting data at the same time, the segments operate
independently of each other in the transmission of data to and from the 2 countries linked
by each cable. It does not matter that the transmission of data from country A to country C
is only achievable with the operation of both segments. Each segment of the system,
rather than the overall system or the components of each segment, is a depreciating asset
in these circumstances.12
60. While each segment is a depreciating asset, the components within each segment
are owned by different entities. For the purposes of section 40-35, Fibropca Co is a holder
of 2 depreciating assets, being its interest in Segment 1 and its interest in Segment 2.
Fibropca Co calculates its decline in value deduction for each segment based on the cost
of the fibre optic cables, plus its share of the contractual costs incurred in readying the
segment for use. Decline in value will be calculated over the effective life of the particular
segment, rather than the effective life of any particular components within the segment.

Example 8 – new electricity distribution line

61. An electricity distribution network owner builds a new distribution line connected to
existing distribution lines to supply customers who were not previously supplied by the
network.
62. The above-ground electricity distribution line incorporates conductors, cross arms,
insulators and fittings, poles made from concrete, wood, steel or a combination thereof,
and (where relevant) a pole or ground pad-mounted transformer or transformers.
63. While each item has a function or purpose at an individual item level, the relevant
function in the context of the business being conducted is the distribution of electricity to
end users who are connected to the network. This function is only able to be performed
when the system is complete. A new depreciating asset in the form of a distribution line
comes into being when all its components have been assembled.13
64. The new distribution line is, on balance, a separate asset from the existing
distribution network:
• The new distribution line is capable of being separately identified or
regarded as having a separate function from any existing distribution
infrastructure. It performs an identifiable function of distributing electricity to
a new group of customers.
• The new distribution line is planned, designed, built and developed to
operate as one system.

12
Compare Overseas Telecommunications Commission (Aust) v The Commissioner of Taxation [1989] FCA
665 (OTC); 89 ATC 5200 at [5211–5212], per Lockhart J.
13
See the example of the erection of a farm fence in Tully 83 ATC 4495 at [4504], per Lockhart J.

Taxation Ruling TR 2024/1 Page 11 of 21

 Taxation Ruling

TR 2024/1
Status: not legally binding

• Each item of the new distribution line is physically connected and

commences its function of distribution of electricity at a different time to the
original distribution lines or other elements of the distribution network.
• While it is reliant on its supply of electricity from the original distribution line
or other elements of the network, its function as a medium of distribution for
the electricity is otherwise independent of those things.
65. The fact that the new distribution line may be incapable of independent operation
without connection to an existing distribution line or other element of the network does not
outweigh the factors, leading to the characterisation of the new distribution line as a
separate asset.
66. Therefore, the new electricity distribution line is the depreciating asset at the time it
is first used or installed ready for use (its ‘start time’ 14), not the individual parts. The
components that make up the new distribution line at its start time identify the limit of that
distribution line.

Example 9 – replacing electricity pole

67. An electricity distribution network owner replaces a pole in a distribution line after it
was destroyed in a storm. The new pole is made from the same material and has the same
specifications as the previous one.
68. The replacement of the pole does not create a new depreciating asset separate
from the distribution line. There has been no substantial alteration to the function of the
distribution line of which the relevant pole is a part. 15 Further, the replacement pole is
physically integrated in the electricity distribution network and unable to be used for any
other purpose once installed.

Example 10 – upgrade of transformer

69. An electricity distribution network owner upgrades a pole-mounted distribution
transformer which forms part of an existing distribution line. The upgrade will enable the
distribution line to deal with higher electricity load demands.
70. The electricity distribution transformer transforms high voltage electrical current to a
usable voltage for consumers. In the context of a functional electricity distribution line,
each element of the system is physically connected to each other part of the system and
each part is reliant upon the other elements of the system (including wires, poles and
distribution transformers) for their functionality – to form a single integrated distribution
system which is intended to function as a whole. Each of the functions of the individual
parts is subsumed into the larger system when it is constructed. The overall function of the
distribution line is to transmit electricity to consumers.
71. In establishing the function of the system as an electricity distribution line, an
improvement of an element of that system will constitute an improvement to the distribution
line itself, rather than an acquisition and installation of a separate depreciating asset. The
replacement of the existing transformer with a higher load capacity transformer is an
improvement to the distribution line itself. It does not substantially change the function of
the electricity distribution line (that is, to transmit electricity to consumers) of which it is a
part for a separate depreciating asset to be created. The costs of purchasing, installing

14
Section 40-60.
15
See Tully, Case S51 85 ATC 380 and Case T33 86 ATC 293.

Taxation Ruling TR 2024/1 Page 12 of 21

 Taxation Ruling

TR 2024/1
Status: not legally binding
and connecting the transformer ready for use are included in the second element of the
cost of the distribution line.

Example 11 – rail transport infrastructure

72. A rail transport infrastructure developer incurs capital expenditure on constructing
rail transport infrastructure, including rail transport track work, on which it operates a
passenger rail service. The track work is a composite item that consists of several
components including rails, sleepers, ballast, the earthworks or embankments on which
the ballast, sleepers and rails are laid, integral bridges, girders, culverts and tunnels.
73. The rail transport track work is formed by combining or linking constituent
components in a particular integrated or interdependent way. While each component
contributes to the track work, the relevant function or purpose of the composite item is that
of enabling travel of rolling stock. The function can only be performed by the integration of
all the components in a particular way. While the track work components can be physically
separated and would otherwise be considered to perform their own functions, their
individual function is subsumed by the larger depreciating asset’s function. They are
integrally linked to create a single larger item having its own discrete function in respect of
the taxpayer’s operations, and in such a way that they have to be integrated to perform the
function of providing track work for rail transport. This includes the earthworks and
embankments referred to as the ‘permanent way’ and the track foundation. Based on this
functionality, the entire track work, rather than each of its components, is the depreciating
asset.

Example 12 – new railway branch line

74. A railway consisting of a main line has been in operation for many years. A new
branch line is planned, designed and built to provide rail transport accessibility to additional
customers.
75. The new branch line is capable of being separately identified or regarded as having
a separate function from any existing track work infrastructure. It performs an identifiable
function of supplying rail transport infrastructure for a new group of customers. While the
branch line is physically connected to the main line and provides access for rolling stock
originating from the main line, its function of providing rail infrastructure is otherwise
independent. It does not matter that the new branch line may be incapable of independent
operation without connection to a main line. The cost of the new branch line infrastructure
is claimed over that line’s effective life rather than over the effective life of the existing main
line.

Example 13 – solar power system

76. SM Co decides to invest in a solar power system. SM Co engages a contractor to
provide and install a solar power system tailored to its needs. The system consists of solar
panels, mounting frames, wiring and inverters. Each of these items has a particular
function, but all of the components are connected, integrated and interdependent in the
context of a solar power system because they function together as a whole system to
convert solar energy to consumable electricity.
77. The system was purchased and installed with the purpose or function of supplying
electricity. While each component has a function of its own, that function is subsumed and
contributes to the function or purpose of the overall system. The function can only be

Taxation Ruling TR 2024/1 Page 13 of 21

 Taxation Ruling

TR 2024/1
Status: not legally binding
derived from the integration of all the components in a particular way. Based on this
functionality, the system, rather than each of its components, is the depreciating asset in
these circumstances.
78. Twelve months later, SM Co expands the system by purchasing 2 additional solar
panels which have been specifically designed to work with the original system. They are
connected to the system that was already in operation. The addition of the 2 panels will
increase the supply of electricity from the solar power system but not substantially alter its
operational function. The additional panels are a modification to an existing depreciating
asset and their cost is included in that asset’s second element of the cost under
section 40-190.

Example 14 – photographic lighting equipment

79. Georgia is a keen photographer who purchased the following lighting equipment
and accessories to use in her photography business:
• Flash generator and flash head – these were purchased as a special
package. The generator distributes and regulates power and contains 3
power outlets. The flash head comes with its own cord so it can be plugged
into any compatible generator to produce the lighting.
• Light shaping tools – including zoom reflectors and a grid and filter hold kit.
They are lighting attachments purchased separately. Their functions are to
change the pool of light spill from the standard operating flash heads so as
to produce narrower or wider beams, or softer and harder qualities of light.
They clip onto, and work with, a range of flash heads.
• Modelling glass protector – a glass mould (like a cup) that fits over a
modelling light and flash tube to protect the light from being damaged,
especially while in transit.
80. Each of the items listed may be purchased individually and are separately
identifiable.
81. All of the items are physically detachable and compatible with other generators or
flash heads. The fact that each has no commercial utility unless linked or connected to
other items does not preclude them from being separate depreciating assets. None of the
listed items are integrated with the flash head or the generator but each have their own
independent function, which is to vary the performance of the unit they are attached to.
Accordingly, each of these listed items is a separate depreciating asset.

Taxation Ruling TR 2024/1 Page 14 of 21

 Taxation Ruling

TR 2024/1
Status: not legally binding

Appendix 2 – Explanation
This Explanation is provided as information to help you understand how the
Commissioner’s view has been reached. It does not form part of the binding public ruling.

82. The question of whether a composite item is itself a depreciating asset or if its
components are separate depreciating assets is a question of fact and degree to be
determined in the circumstances of the particular case.16 An item may be considered a
depreciating asset in one factual circumstance but not in another.

Guiding principles
83. The Revised Explanatory Memorandum 17 that accompanied the Bill to insert
subsection 40-30(4) states at paragraph 1.15:
Taxpayers will be required to exercise judgment in identifying the depreciating asset where
the asset itself is made up of different parts and components. In doing this, the functionality
test that is used as a basis of identifying a unit of plant in the existing plant depreciation
rules can be used. (Specific reference to a unit or an item is not necessary to attract the
test, as the definition of a depreciating asset is based on a life in effective use, and the
depreciating asset must be identified as having its own life in such use.) [Schedule1,
item1, subsection 40-30(4)]
84. The ‘functionality test’ referred to in the EM has its origin in judicial decisions which
considered the meaning of the phrase a ‘unit of property’ for the purposes of general
investment allowance deductions under former section 82AT of the Income Tax
Assessment Act 1936.
85. The case law concerns the phrase ‘unit of property’. However, the principles for
determining whether a composite item is one unit of property, or more than one unit, also
apply in determining whether a composite item is one depreciating asset or more than one
depreciating asset.
86. In the Full Federal Court case of Tully, Lockhart J contemplated the difficulties of
defining the meaning of ‘unit’ in the context of the functionality test. His Honour said 18:
The difficulty of identifying a “unit of property” for the purposes of the Assessment Act is that
sometimes an item may be correctly described as a “unit” when it is one of a number of
parts which upon assembly perform a subsidiary function. Sometimes each part may be
correctly described as a unit before assembly and other times after assembly. On other
occasions there may not be a unit until a number of parts have been integrated into a
complete system. Then the whole may answer the description of a unit. The possibilities
and combinations are numerous. But purpose or function must generally be a useful guide
to the identification of an item as answering the description of a unit of property in particular
cases.

Case law on the ‘functionality test’

87. Ascertaining purpose or function to identify a depreciating asset can be difficult.

16
Subsection 40-30(4).
17
Revised Explanatory Memorandum to the New Business Tax System (Capital Allowances) Bill 2001.
18
83 ATC 4495 at [4504–4505].

Taxation Ruling TR 2024/1 Page 15 of 21

 Taxation Ruling

TR 2024/1
Status: not legally binding
88. Cases such as Ready Mixed Concrete 19, Tully and Monier Colourtile 20 explain that
a separate ‘unit of property’ is one which has an identifiable, separate function. For
example, in Monier Colourtile, in determining that pallets that conveyed concrete through a
tile-making machine were separate units of property, Lee J found that21:
… The additional pallets did nothing to alter the operation of the system which produced the
tiles. The system remained exactly as it was before except that the alteration in the speed
of the machine altered the output of the machine. The system ran for the same time and in
the same way as before, but at a faster rate and produced more tiles …The 5,150 pallets
remained 5,150 individual pallets, each one performing its individual function ... The total
number of pallets, i.e. 5,150 never took on or performed a function additional to and
distinguishable from that of the individual pallets making up that total …
89. In that same case, each of several mobile radio stations and a base station were
also held to be functionally complete in themselves and therefore separate units of
property. Each had a separate independent existence. Lee J found that, even though the
base station was useless without one or more mobile stations and vice versa, this of itself
was no basis for a conclusion that the entirety was to be regarded as one unit. The base
station and each of the mobile radios had a function which was separate from each other,
in the same way that a television has a separate function, even though it cannot effectively
operate unless a television signal is being broadcast. Therefore, it can be seen that it is not
necessary for an item to be capable of independent operation in a practical or commercial
sense to qualify as a separate depreciating asset.
90. A phone system consisting of a central processing unit and 7 interactive handsets
was considered to be a single unit of property in Commissioner of Taxation v Veterinary
Medical and Surgical Supplies Ltd.22 The Court considered that the handsets were an
integral part of the phone system, with no separate function of their own. Pincus J
observed 23:
... where a system consisting of diverse elements is bought as a system intended to
function as a whole and each element interacts with at least one other, one should find unity
in the function of the whole system, at least where the elements are physically connected.
91. Pincus J gave weight to the fact that the composite item was purchased as one
functioning system and the elements of the system were physically connected. This may
explain the divergence from the decision in Monier Colourtile where the components of the
radio system were not physically connected and some components were purchased
separately to the original radio system.
92. It must also be noted, however, that even though the handsets were dependent on
the central processing unit for their operation, this factor alone did not lead to the
conclusion that the entire system was a single unit of property. The fact that an item
cannot operate without the assistance of another item does not necessarily mean that the
2 items are a single depreciating asset.
93. In Tully’s case Fitzgerald J said 24:
… there is ... a unit of property if it is capable of independent existence, not necessarily
self-contained, e.g. it may require power from an external source, not necessarily
separately used, e.g. it may be incorporated into an operating system such as a machine or
complex of machinery in a manufacturing process, but capable either of separate function,

19
Ready Mixed Concrete (Vic) Pty Ltd v Commissioner of Taxation (Cth) [1969] HCA 12.
20
Monier Colourtile Pty Ltd v Federal Commissioner of Taxation (1983) 68 FLR 111.
21
(1983) 68 FLR 111 at [118].
22
[1988] FCA 500.
23
[1988] FCA 500; 88 ATC 4642 at [4648].
24
83 ATC 4495 at [4506].

Taxation Ruling TR 2024/1 Page 16 of 21

 Taxation Ruling

TR 2024/1
Status: not legally binding
or of function in conjunction with different parts, or in a different context, from its current
user.
94. In Tully’s case, the crushing mills, juice heaters, effet vessels and other items in a
cane processing system were held to be separate units of property. The fact that the
system could not effectively process the cane unless they all operated together did not
prevent the individual items from being separate units for tax purposes. Fox J said 25:
When one looks to see whether there is a unit, one normally looks to see whether there is a
whole something. Whether there is a whole will normally be judged by the intended function
or purpose of that which is being looked at.
95. The pumping station in Tully’s case, which comprised an electric motor, starter and
other parts, was held to be a single unit of property. These parts of the station may have,
under different circumstances, been regarded as separate units. But the evidence, in this
particular case, showed that these components had become an integral part of a (larger)
whole, and therefore the pumping station was a single unit of property.
96. In Ready Mixed Concrete, it was held that a transit mixer did not form part of a total
vehicle which might be thought of as a mobile cement mixer comprising the mixer and the
truck. In describing the mixer and the truck as separate units of property, Kitto J said 26:
Notwithstanding the mode and degree of annexation, the truck and the mixer are
functionally separate and independent units of property. The function of delivery belongs to
the truck. The use of the mixer is for mixing, as a step in the production of concrete in the
condition required for pouring ...
97. It is not necessary that a depreciating asset be functionally operative provided that
the asset is capable of fulfilling an independent function.
98. This is evident where various units each perform a discrete function. For example,
in Tully’s case Lockhart J gave an example of an assembly line where he said that27:
… if five parts are installed in an assembly line and all that is needed to render the line
operative is a sixth part, but until that part is installed no part may function or operate, the
functional incompleteness does not necessarily deprive each of the five units of its
character as a “unit of eligible property” …
99. However, in Tully’s case Lockhart J also said 28:
Yet, at other times a “unit” may not come into being until all the components have been
assembled. For example, a farm fence is made up of a number of posts and rails or wires. It
is difficult to conceive of any “unit” coming into being until the fence is erected.
100. In such a case, each and every post, rail and wire serves an identical single
purpose, which is to act as a fence. No part of the fence serves a discrete function from
any other part nor achieves any outcome distinguishable from the outcome of the fence as
an entirety.
101. In BP Oil Refinery (Bulwer Island) Ltd v Commissioner of Taxation 29 one question
was whether water coils which were added to a furnace were a separate unit of property.
Jenkinson J found that the coils had a separate function within the overall plant (being the
carriage of water – albeit through the furnace to allow the water to be heated) and as such
were a ‘unit of property’. The function of the coils could be distinguished from the function
of the furnace, which was to generate heat.

25
83 ATC 4495 at [4500].
26
69 ATC 4038 at [4042].
27
83 ATC 4495 at [4504].
28
83 ATC 4495 at [4504].
29
[1992] FCA 14.

Taxation Ruling TR 2024/1 Page 17 of 21

 Taxation Ruling

TR 2024/1
Status: not legally binding
102. The issues of physical separability, mechanical independence and the
separateness of purchases are also relevant when considering whether an item has an
independent function sufficient for it to be treated as a depreciating asset. In Case M98 30 a
tractor, carry-all and ripper were each held to be separate units of property. In reaching its
decision, the Board of Review referred to the 2 attachments as separate physical objects
not mechanically designed and constructed as part of the tractor. The detachability of the
attachments was also relevant to the decision 31:
... the taxpayer might find it desirable to keep the tractor and the ripper, and to sell the
carry-all, ... and he might sell the tractor and buy a different make of tractor which he
thereupon uses with the same ripper and the same carry-all.

Case law on modifications

103. The question as to whether a modification to an existing unit can itself be a unit of
property was considered in Wangaratta Woollen Mills Ltd v Commissioner of Taxation
(Cth). 32 An electrical device which enabled the temperature of liquid to be raised was
modified so as to enable it to regulate cooling as well as heating. The modification
consisted of the addition of a few small pieces of electrical equipment to the device. Most
of the expense related to the workmanship involved in fitting the small electrical parts to
the device. The modification was not considered to involve the creation, installation or
attachment of a separate unit of property. McTiernan J, in reaching his decision, said 33:
The expenditure was on a modification to an existing unit of property ... not an addition. The
fact that a proportion of the expenditure is for workmanship and not even additional articles
compels me to find that this item of expenditure cannot be the subject of a deduction ...
104. The installation of a new power source which included an engine and fuel tanks in a
trawler was held to be a separate unit of property in Case S51 34. The installation of a more
highly-rated power source enabled the trawler to engage in deep sea fishing. Therefore,
the function of the trawler was substantially altered. The power source was, in those
circumstances, considered as essentially separate from the trawler. This case illustrates
the difference between the varying degrees of modifications, that is, one which consists of
a minor alteration (not a separate depreciating asset) and another where the expenditure
relates to an addition to an existing depreciating asset which substantially alters the
performance or function of that depreciating asset (and is a separate depreciating asset).

Jointly-held tangible assets

105. The issue of composite items also arises in relation to jointly-held assets.
Section 40-35 applies in circumstances where a depreciating asset (the underlying asset)
that you hold is also held by one or more other entities. Each holder of the asset applies
Division 40 as if their ‘interest in the underlying asset’ is the depreciating asset.
106. The issue that arises is whether the phrase ‘interest in the underlying asset’ in
subsection 40-35(1) is limited to circumstances where an entity jointly owns the entirety of
a depreciating asset with other entities, or whether it extends to circumstances where an
entity owns part or all of a discrete component of the underlying asset.

30
80 ATC 689.
31
80 ATC 689 at [690].
32
[1969] HCA 39.
33
69 ATC 4095 at [4103].
34
85 ATC 380.

Taxation Ruling TR 2024/1 Page 18 of 21

 Taxation Ruling

TR 2024/1
Status: not legally binding
107. The word ‘interest’ in this context is not defined and is to be construed broadly. It is
not limited to interests in the entirety of an asset. The phrase extends to the holding of a
separate part of a depreciating asset.
108. Section 15AA of the Acts Interpretation Act 1901 provides that:
In interpreting a provision of an Act, the interpretation that would best achieve the purpose
or object of the Act (whether or not that purpose or object is expressly stated in the Act) is
to be preferred to each other interpretation.
109. Similar logic was employed in the Federal Court decision of OTC. The Overseas
Telecommunications Commission had an interest in certain segments (but not others) of a
submarine cable. Different parts of segments were found to be owned by different
taxpayers, and the parts that were offshore and not in territorial waters were jointly held as
tenants in common.35 Although Lockhart J found that each segment between countries
was a single unit of property, His Honour found that the provisions did not preclude
acquisition or construction of a unit of eligible property by the taxpayer in conjunction with
other persons.
110. Although the decision in OTC related to the availability of deductions under the
former investment allowance provisions, the Commissioner considers that a similar
conclusion would be reached in the identification of depreciating assets and the joint
holding of those assets for the purposes of Division 40.
111. Further support for the application of the finding in OTC to section 40-35 is provided
in paragraph 1.58 of the Revised Explanatory Memorandum to the New Business Tax
System (Capital Allowances) Bill 2001, which provides as follows (emphasis added in
italics):
Where there is more than one holder of a depreciating asset, it is the decline in value of an
entity’s cost of that asset which is taken into account [Schedule 1, item 1, subsection 40
35(1)]. The interest in the underlying asset is dealt with as if it were the depreciating asset
itself. This rule looks to whether, under the table in section 40-40, there is more than one
entity which holds the same depreciating asset; it is not necessarily concerned with whether
there is joint tenancy or co-ownership at general law.
112. Subsection 40-35(1) therefore extends to cases where the underlying asset is a
composite item and one or more of the components are held by different entities.
113. Each entity is able to take into account the decline in value of the cost of their
interest in the single depreciating asset over the effective life of the single depreciating
asset identified pursuant to subsection 40-30(4).

Intangible depreciating assets

114. Division 40 only applies to intangible assets that are listed in subsection 40-30(2)
and are not trading stock. The question of whether an intangible asset is a composite item
requires consideration of the legal character of the item, and any underlying individual
rights. This will be by reference to the relevant statute where this is how the intangible
asset has been created.
115. Where a statute creates a bundle of rights that exist as a whole, then
subsection 40-30(4) does not permit it to be divided to the level of those individual rights.
An example of the application of this principle is the Full Federal Court case of Mitsui
where a production licence was granted under the Petroleum (Submerged Lands)
Act 1967. The Full Federal Court clarified that, in accordance with paragraph 40-30(2)(a),

35
[1989] FCA 665 at [16], per Lockhart J.

Taxation Ruling TR 2024/1 Page 19 of 21

 Taxation Ruling

TR 2024/1
Status: not legally binding
only the ‘mining, quarrying or prospecting right’ as defined in subsection 995-1(1) qualified
for treatment as a depreciating asset under Division 40. In the context of a production
licence granted under the relevant Act, the mining, quarrying or prospecting right was the
whole licence itself and not individual rights which were incidents of being a licence holder.

Taxation Ruling TR 2024/1 Page 20 of 21

 Taxation Ruling

TR 2024/1
Status: not legally binding

References
Previous draft: - Case M98 80 ATC 689
TR 2023/D2; TR 2017/D1 - Case S51 85 ATC 380
- Case T33 86 ATC 293
Related Rulings/Determinations: - Commissioner of Taxation v Tully Co-
operative Sugar Milling Association Ltd
LCR 2020/2; TR 97/23; TR 2006/10
[1983] FCA 163; 68 FLR 39; 51 ALR 751;
14 ATR 495; 83 ATC 4495
Legislative references:
- Commissioner of Taxation v Veterinary
- ITAA 1936 82AT Medical and Surgical Supplies Ltd [1988]
- ITAA 1997 25-10 FCA 500; 19 ATR 1593; 88 ATC 4642
- ITAA 1997 Div 40 - Mitsui & Co (Australia) Ltd v
- ITAA 1997 40-30 Commissioner of Taxation [2012] FCAFC
- ITAA 1997 40-30(1) 109; 205 FCR 523; 90 ATR 171; 2012
- ITAA 1997 40-30(2) ATC 20-341
- ITAA 1997 40-30(2)(a) - Monier Colourtile Pty Ltd v Federal
- ITAA 1997 40-30(4) Commissioner of Taxation (1983) 68 FLR
- ITAA 1997 40-35 111; 14 ATR 379; 83 ATC 4399
- ITAA 1997 40-35(1) - Overseas Telecommunications
- ITAA 1997 40-35(3) Commission (Aust) v. The Commissioner
- ITAA 1997 40-40 of Taxation [1989] FCA 665; 89 ATC
- ITAA 1997 40-45(2) 5200; 20 ATR 1482
- ITAA 1997 40-60 - Ready Mixed Concrete (Vic) Pty Ltd v
- ITAA 1997 40-125 Commissioner of Taxation (Cth) [1969]
- ITAA 1997 40-190 HCA 12; 118 CLR 177; 1 ATR 123; 69
- ITAA 1997 40-215 ATC 4038; 15 ATD 215
- ITAA 1997 Div 43 - Wangaratta Woollen Mills Ltd v
- ITAA 1997 328-180 Commissioner of Taxation [1969] HCA 39;
- ITAA 1997 995-1 119 CLR 1; 43 ALJR 324; 1 ATR 329; 69
- TAA 1953 12-437(5) ATC 4095
- TAA 1953 12-439
- TAA 1953 12-440 Other references:
- AIA 1901 15AA
- Revised Explanatory Memorandum to the
- Petroleum (Submerged Lands) Act 1967
New Business Tax System (Capital
Allowances) Bill 2001
Cases relied on:
- BP Oil Refinery (Bulwer Island) Ltd v
Commissioner of Taxation [1992] FCA 14;
33 FCR 594; 23 ATR 65; 92 ATC 4031

ATO references
NO: 1-9EWR6V3
ISSN: 2205-6122
BSL: PW
ATOlaw topic: Income tax ~~ Capital allowances ~~ Depreciation ~~ What is a depreciating
asset?

© AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA

You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any
way that suggests the ATO or the Commonwealth endorses you or any of your services or
products).

Taxation Ruling TR 2024/1 Page 21 of 21