You may be entitled to claim a deduction for capital expenditure incurred on a water facility if you are:
- a primary producer
- an irrigation water provider.
Under the accelerated depreciation rules, from 12 May 2015, primary producers can immediately deduct the costs of water facilities. Prior to that, they could deduct the cost of the water facilities over a period of time.
Irrigation water providers can only claim deductions for expenditure incurred on or after 1 July 2004.
You must have incurred the expenditure primarily and principally for the purpose of conserving or conveying water for use in primary production.
Your deduction must be reduced to reflect any time when the facility was not wholly used for a taxable purpose.
Irrigation water provider
An irrigation water provider primarily and principally supplies water to primary producers or to businesses using rural land (except for a mining or quarrying business). Water suppliers who use motor vehicles (for example, water tankers) are not considered irrigation water providers.
A water facility is plant or a structural improvement, or an alteration, addition or extension to plant or a structural improvement that is primarily and principally for the purpose of conserving or conveying water.
You can't claim a deduction for a swimming pool even though the water is available for emergency use, such as for fire-fighting or irrigation.
Water facilities include:
- dams, earth and underground tanks
- concrete, plastic and metal tanks and tank stands
- bores and wells
- irrigation channels and similar improvements
- pipes and pumps (including those used for fire-fighting)
- water towers and windmills
- extensions and improvements to any of these items.
On or after 1 July 2004, eligible expenditure on a water facility also includes:
- capital repairs to plant or structural improvements which are primarily for the purpose of conserving or conveying water
- a new structural improvement, or an alteration, addition, extension or capital repair to an existing structural improvement, that is reasonably incidental to conserving or conveying water. Examples include a
- fence to prevent livestock entering an irrigation channel
- bridge over an irrigation channel.
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If you incurred capital expenditure on a water facility:
- after 7.30pm AEST, 12 May 2015, deduct the whole amount in the income year in which the expenditure occurred. This is known as the accelerated depreciation for primary producers rule.
- before 7.30pm AEST, 12 May 2015, deduct one-third of the amount in the income year in which the expenditure occurred. Then deduct one-third in each of the following two years.
You must reduce your deduction if the water facility was not used only for a taxable purpose.
If the costs were incurred by a partnership, a partner can only claim the deduction for their share of the expenditure.
Any expense you recoup is included in your assessable income.
If your expense on water facilities is deducted over three income years, special rules apply. These determine the amount of recoupment to include in your assessable income in the year of recoupment and in later income years.
If the water facility is a second-hand asset, special rules apply for:
- claiming a deduction under other provisions.
You can't claim a deduction for the depreciation of a second-hand water facility, unless you can prove that no one else has or can deduct an amount for the asset's depreciation.
Claiming under other provisions
Primary producers who are considered a small business entity may choose to use the small business simplified depreciation rules to claim a deduction for a second-hand asset.
If you aren't a small business entity and believe you are eligible to claim for second-hand items, including components in otherwise new items, you should apply for a private ruling.
If you aren't eligible to claim a deduction for the second-hand asset under either the primary production or small business rules, you can't claim a deduction for the asset.
- Work out if you are a small business entity
If you sell an asset for which you can claim a deduction, and the buyer uses the asset wholly to produce assessable income, you can continue to claim the deduction. This includes any deduction you would be entitled to claim in subsequent years.
However, if the buyer does not use the asset to produce assessable income you must apportion your deduction. Examples would include where the buyer used the asset on a hobby farm or for domestic purposes or if you sell it to a dealer.
Proceeds of the sale
If you sell an asset, you can claim a deduction for under the primary production accelerated depreciation rules. The proceeds of the sale are assessable as a capital gain.
You must exclude any amount claimed as a deduction from the cost base of the asset for capital gains tax purposes.Deductions for investing in water facilities can be claimed by primary producers and irrigation water providers.