Income and deductions
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The sustainable rural water use and infrastructure program (SRWUIP) is a national program investing in rural water use, management and efficiency projects, including improved knowledge, market reforms and water skills development. The program is delivered by the Department of Sustainability, Environment, Water, Population and Communities.
The law has changed to allow eligible taxpayers to choose how SRWUIP payments, matched expenditure and deductions are treated in the assessment of their income tax obligations. This change is retrospective, and applies from 1 April 2010.
This information outlines the changes, eligibility criteria, and the effect your choice of tax treatment will have on your payments.
You can choose to apply one of the following provisions:
For information about the Sustainable Rural Water Use and Infrastructure Program refer to the Department of Sustainability, Environment, Water, Population and CommunitiesExternal Link website.
If you have received a payment under a SRWUIP, you may be affected.
To be eligible to make a choice on the tax treatment of your SRWUIP payment, you must consider all of the following.
You can go to environment.gov.auExternal Link for a list of eligible programs.
Some of the eligible programs have a start and end date. When you are considering the eligibility of the program, you will need to consider the program's eligibility start and end date.
An eligible participant must meet one of the following conditions.
You and the associated entity must apply the same choice of tax treatment to the eligible payment.
Beale Avocados leased land and related water rights from a landlord to increase its avocado-growing business.
Beale Avocados agrees to upgrade channels on the land in return for a payment from their landlord. The landlord is an eligible participant, and receives an eligible payment. As the owner of the water right, the landlord also returns some of the water savings back to the Commonwealth.
The water rights leased by Beale Avocados will be proportionately reduced in relation to the landlords' water rights.
Beale Avocados employs Kevin, an earthmoving contractor, to upgrade the channels. Both Beale Avocados and Kevin can trace their payments to an eligible payment made under an eligible program.
Beale Avocados is an eligible participant because they have the leasehold right to use the channels and the water rights, which are considered to be assets of the business.
Kevin is not an eligible participant because he is acting as an agent employed to undertake the work for Beale Avocados and has no rights to the use of the channels or the water as an asset.
An eligible payment may have two components:
There are two ways you can receive an eligible payment:
An indirect payment will be eligible if both of the following apply:
Payments you receive from a state government under an eligible SRWUIP are not eligible payments.
Harriett grows irrigated cotton in northern NSW, and is a member of the Irrigation Association.
The Irrigation Association receives money under an eligible program. Most of the funding is from the Commonwealth, but the NSW Government has provided top-up funding which is not linked to the Commonwealth funding.
Harriett receives $50,000 from the Irrigation Association to undertake irrigation infrastructure development under an eligible program.
The payment is made up of two components:
As additional payments made by a state government under a SRWUIP, not linked to the Commonwealth funding, are not eligible payments, Harriet must treat the $10,000 payment as assessable income. Harriet can only consider her choices in relation to the $40,000 payment from the Commonwealth (the eligible payment).
If you received the payment directly, you have entered into an agreement or contract with the Department of Sustainability, Environment, Water, Population and Communities. Details of the payments are set out in the agreement you have with them.
If the payment is received indirectly, you have entered into an agreement or contract with an organisation which has an agreement with the Commonwealth under an eligible SRWUIP. As these agreements or contracts vary, you will need to seek advice from the organisation about whether the payment was an eligible payment from an eligible program.
The table below shows you the impact these choices will have on your payments.
Payment to acquire water right
Include payments attributed to the acquisition of the water right as capital proceeds.
This may give rise to a capital gain or loss.
If your asset was acquired before 20 September 1985, your asset is exempt from capital gains tax. This means you disregard any capital gain or loss.
Disregard any capital gain or loss that is related to the eligible payment.
Payment to fund infrastructure improvement
The payment is considered a subsidy and must be included in your assessable income.
Some expenditure can be claimed as a general deduction in the year it is incurred.
You may deduct expenditure for water infrastructure improvements over a period of time. Read Water facilities and landcare tax concessions for more information.
All eligible payments are NANE income. This means that you exclude the eligible payment when you are working out your taxable income and losses.
You can not claim any deductions for expenditure matched, or reasonably expected to be matched, to the eligible payment.
Do not include SRWUIP expenditure when working out your:
This does not apply to things like legal fees to action a transfer of water rights, or interest on money borrowed to undertake improvements, as these expenses are not reasonably matched.
If you spend money to enter into an eligible program agreement and you received, or will receive, an eligible payment, you can include this amount if you meet both of these conditions:
You may receive from the state government funding that is not linked to the Commonwealth funding to help you meet your obligations under a SRWUIP. You can't include this amount in your choice as it is not an eligible payment. This also applies to expenditure and deductions which are not reasonably matched to an eligible payment.
If you spend more money that you have received under an agreement (a cost overrun), the related expenditure and deductions would not be reasonably matched to an eligible payment. However you may be able to claim some of that expenditure either as a general deduction or a deduction for land care or water facility improvements.
If you hold the eligible payment in a bank account, and you receive interest, the interest is not reasonably matched to the payment so it must be included as income.
Harriett received a $50,000 payment to undertake irrigation infrastructure development.
$40,000 of the payment is an eligible payment. $10,000 of the payment was received from the NSW Government, so it is an ineligible payment. Harriet also spends an extra $10,000 on irrigation infrastructure.
Infrastructure development matched to eligible payment
Infrastructure development matched to the payment from the state
Additional improvement works
Total amount expended
Harriet decides to treat the $40,000 as NANE income, and cannot claim deductions for expenditure matched to this income. Harriet would report as income the $10,000 payment received from the state, and can claim allowable deductions related to the claimable expenditure ($20,000) because it is not matched to the NANE income.
You make your choice when you complete your tax return.
Once you have made your choice, you cannot change it. Your choice will apply to all eligible payments you have already received and any you may receive in the future. You need to consider the impact on all the income tax returns affected by your choice.
The choice can only be applied to eligible payments made on or after 1 April 2010. It will not apply to either of the following:
You must keep evidence of your choice for five years.
You and your associated entities must apply the same choice.
If the entity you are associated with chooses to treat an eligible payment as NANE income, and you incur expenditure matched to that eligible payment, you cannot claim deductions for the expenditure even though you did not receive the payment.
Tom is a sole trader and operates a market garden. The land and water rights are owned by the LDP Trust. Tom and his family are beneficiaries of the LDP Trust so they are associates of the trust.
The LDP Trust receives an eligible payment of $100,000 to spend on water infrastructure improvements. The trust arranges for Tom to undertake the improvements and lends him the $100,000 to do this work. The LDP Trust makes a choice to treat the eligible payment as NANE income.
The improvements undertaken by Tom will satisfy the LDP Trust's obligations, but the trust will not have incurred expenditure as the loan Tom received from the trust has to be repaid.
If the LDP Trust chooses to apply the NANE income provisions, Tom must make the same choice. This means he cannot deduct expenditure related to the eligible payment.
If you received any eligible payments and incurred matched expenditure before the law was changed, you can make a retrospective choice. This means if you have already lodged your income tax return for previous years and applied ordinary income provisions, you can choose to apply the NANE income provisions. If you anticipated the law change and applied the NANE income provisions to prior years, you must make sure you have anticipated the law correctly.
To make a retrospective choice, you must request an amendment to prior-year income tax returns. You must lodge any amendment requests before 31 March 2015.
Your choice will apply to all eligible payments you receive. You need to consider the impact on all the income tax returns you have lodged since you were able to make the choice.
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