Under the UCA, you can allocate 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 a project pool and write it off over the project life. Each project has a separate project pool.
The project must be of sufficient substance and be sufficiently identified that it can be shown that the capital expenditure said to be a 'project amount' is directly connected with the project.
A project is carried on if it involves some form of continuing activity. The holding of a passive investment such as a rental property would not have sufficient activity to constitute the carrying on of a project.
The capital expenditure is known as a project amount and is expenditure incurred:
- to create or upgrade community infrastructure for a community associated with the project - this expenditure must be paid (not just incurred) to be a project amount
- for site preparation costs for depreciating assets (other than draining swamp or low-lying land, or clearing land for horticultural plants)
- for feasibility studies or environmental assessments for the project
- to obtain information associated with the project
- in seeking to obtain a right to intellectual property
- for ornamental trees or shrubs.
Mining capital expenditure and transport capital expenditure - see Mining and quarrying and minerals transport - can also be a project amount which you can allocate to a project pool and for which you can claim a deduction.
The expenditure must not be otherwise deductible or form part of the cost of a depreciating asset held by you.
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 project amounts allocated to a project pool commences when the project starts to operate. For projects which start on or after 10 May 2006 which only contain project amounts incurred on or after 10 May 2006 the calculation is as follows:
(Pool value × 200%) ÷ DV project pool life
For projects which start before 10 May 2006 the calculation is as follows:
(Pool value × 150%) ÷ DV project pool life
Note: Certain projects may be taken to have started to operate before 10 May 2006 - for example, when a project, on or after 10 May 2006, is abandoned and restarted just so deductions can be calculated using the post 10 May 2006 new formula.
The pool value for an income year is, broadly, the sum of the project amounts allocated to the pool up to the end of that year 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 pool value can be subject to adjustments.
If you are entitled to claim a GST input tax credit for expenditure allocated to a project pool, you reduce the pool value in the income year in which you are, or become, entitled to the credit 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 during any income year commencing after 30 June 2003 you met or otherwise ceased to have an obligation to pay foreign currency incurred as a project amount allocated to a project pool, a foreign currency gain or loss (referred to as a forex realisation gain or loss) may have arisen under the forex provisions. If the project amount was incurred after 30 June 2003 (or earlier, if you so elected) and became due for payment within 12 months after you incurred it, then the pool value for the income year you incurred the project amount is adjusted by the amount of any forex realisation gain or loss. This is known as 'the 12-month rule'. You are able to elect out of the 12-month rule in limited circumstances (for more information, see Capital assets and the 12-month rule). If you have elected out of the 12-month rule, the pool value is not adjusted; instead any forex realisation loss is generally deductible and any gain is included in assessable income.
DV project pool life. You must estimate the project life of your project each year. The project life may not change but you must turn your mind to the question each year. If your new estimate is different from the previous estimate, then the DV project pool life you use in the formula is that new estimated project life, not the project life estimated the previous year. 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. Factors that are personal only to you, such as how long you intend to carry on the project, would not of themselves be relevant when objectively estimating project life. Factors outside your control, such as something inherent in the project itself like a legislative or environmental restriction limiting the period of operation, would be relevant.
If there is no finite project life, there is no project and therefore no deduction is available under these rules.
There is no need to apportion the deduction if the project starts to operate during the income year or for project amounts incurred during the income year.
You reduce the deduction to the extent to which you operate the project for other than a taxable purpose during the income year.
If the project is abandoned, sold or otherwise disposed of in the income year, you can deduct the sum of the closing pool value of the prior income year plus any project amounts allocated to the pool during the income year, after allowing for any necessary pool value adjustments. A project is abandoned if it stops operating and will not operate again.
Your assessable income will include any amount received for the abandonment, sale or other disposal of a project.
If you recoup an amount of expenditure allocated to a project pool or if you derive a capital amount in relation to a project amount or something on which a project amount was expended, you must include the amount in assessable income.
If any 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 received is taken to be that market value.