The UCA allows certain capital expenditure incurred after 30 June 2001 which is directly connected with a project you carry on, or propose to carry on, for a taxable purpose to be written off over the life of the project using a pool.
Such capital expenditure, known as a project amount, must be incurred on:
- creating or upgrading community infrastructure for a community associated with the project-this expenditure must be paid (not just incurred) to be a project amount
- site preparation for depreciating assets (other than to drain swamp or low-lying land or to clear land for horticultural plants and grapevines)
- feasibility studies for the project
- environmental assessments for the project
- obtaining information associated with the project
- seeking to obtain a right to intellectual property or
- ornamental trees or shrubs.
Project amounts may also include mining capital expenditure and transport capital expenditure see Mining and quarrying and minerals transport.
The expenditure must not be otherwise deductible or form part of the cost of a depreciating asset.
If the expenditure incurred arises from a non-arm's length dealing and is more than the market value of what it was for, the amount of the expenditure is taken to be that market value.
The deduction for a project pool commences when the project begins to operate and is calculated as follows:
(Pool value × 150%) ÷ DV project pool life
The pool value at a particular time is, broadly, the sum of the project amounts allocated to the pool up to that time less the sum of the deductions you have claimed for the pool in previous years or could have claimed had the project operated wholly for a taxable purpose.
The DV project pool life is the project life or, if that life has been recalculated, the most recently recalculated project life. The project life is worked out by estimating how long (in years and fractions of years) it will be from when the project starts to operate until it stops operating.
There is no need to prorate the deductions where the project starts or permanently stops operating during a year or for project amounts incurred during a year.
However, the deduction is reduced to the extent to which the project does not operate for a taxable purpose.
Example: Working out deductions for a project pool (ignoring any GST impact)
Before constructing an office block, a building company undertook an environmental assessment at a cost of $30,000. The construction of the building was completed on 17 August 2002 and the company started leasing floor space from that date. The company expects that the building will produce rental income for the next 35 years so this is the 'project life'. The company can start deducting the amount incurred on the environmental assessment for the income year the project started operating. This would be the 2002–03 income year, the year the company started leasing floor space. The company works out its deductions for the 2002–03 and 2003–04 income years as follows:
($30,000 × 150%) ÷ 5
($28,714 × 150%) ÷ 35
End of example
If you are entitled to claim a GST input tax credit for expenditure allocated to a project pool, the pool value in the income year in which you are, or become, entitled to the credit is reduced by the amount of the credit. Certain increasing or decreasing adjustments in relation to expenditure allocated to a project pool may also affect the pool value.
If the project is abandoned, sold or otherwise disposed of in an income year, the project's pool value at the time is an allowable deduction.
A recoupment of the expenditure may be included in your assessable income for the year in which you receive it.
Your assessable income will also include amounts received for the abandonment, sale or other disposal of the project and any other capital amounts you receive in relation to an amount allocated to a project pool or in relation to something on which a project amount is expended.
If the receipt arises from a non-arm's length dealing and the amount is less than the market value of what it was for, the amount of the receipt is taken to be that market value.