Capital expenditure deductible under UCA

Deductible capital expenditure

The following types of capital expenditure are deductible under UCA:

• landcare operations primary producers, other landholders and rural land irrigation water providers incur
• electricity connections or phone lines primary producers and other landholders incur
• environmental protection activities (EPA)
• exploration and prospecting, see Mining and quarrying, and minerals transport
• rehabilitation of mining and quarrying sites, see Mining and quarrying, and minerals transport
• petroleum resource rent tax, see Mining and quarrying, and minerals transport
• certain capital expenditure directly connected with a project, see Project pools
• expenditure incurred in establishing trees in a carbon sink forest
• certain business-related costs.

Generally, to work out your deductions you need to reduce the expenditure by the amount of any GST input tax credits you can claim for the expenditure. You may be able to deduct, or include in your assessable income, increasing or decreasing adjustments that relate to the expenditure. Special rules apply to input tax credits on expenditure you allocate to a project pool.

Small business entities that chose to use the simplified depreciation rules (except primary producers) may deduct capital expenditure under these UCA only if the expenditure isn't part of the cost of a depreciating asset. Primary producers that use the simplified depreciation rules can choose to deduct certain depreciating assets under UCA, see Small business entity concessions.

Landcare operations

You can claim a deduction in the year you incur capital expenditure on a landcare operation for land in Australia.

Unless you're a rural land irrigation water provider, the deduction is available to the extent you use the land for either:

• a primary production business
• in the case of rural land, carrying on a business for a taxable purpose from the use of that land, except a business of mining or quarrying.

You may claim the deduction even if you're only a lessee of the land.

A rural land irrigation water provider is an entity whose business is primarily and principally supplying water to entities for use in primary production businesses on land in Australia or businesses (except mining or quarrying businesses) using rural land in Australia. The supply of water by the use of a motor vehicle is excluded.

If you're a rural land irrigation water provider, you can claim a deduction for capital expenditure you incur on a landcare operation for either:

• land in Australia that other entities ( entities that you supply with water ) use at the time for carrying on primary production businesses
• rural land in Australia that other entities (entities that you supply with water) use at the time for carrying on businesses for a taxable purpose from the use of that land (except a business of mining or quarrying).

A rural land irrigation water provider’s deduction is reduced by a reasonable amount to reflect an entity’s use of the land for a non-taxable purpose after the water provider incurs the expenditure.

A landcare operation is one of the following:

1. erecting fences to separate different land classes in accordance with an approved land management plan
2. erecting fences primarily and principally to keep animals out of areas affected by land degradation to prevent or limit further degradation and to help reclaim the areas
3. constructing a levee or similar improvement
4. constructing drainage works (other than the draining of swamp or low-lying land) primarily and principally to control salinity or assist in drainage control
5. an operation primarily and principally for eradicating or exterminating animal pests from the land
6. an operation primarily and principally for eradicating, exterminating or destroying plant growth detrimental to the land
7. an operation primarily and principally for preventing or combating land degradation other than by erecting fences
8. an extension, alteration or addition to any of the assets described in 1, 2, 3 or 4 above or an extension of an operation described in 5, 6 or 7 above.
9. a repair of a capital nature, to an asset that is deductible under a landcare operation
10. constructing a structural improvement that is reasonably incidental to levees or drainage works deductible under a landcare operation
11. a repair of a capital nature, or an alteration, addition or extension, to a structural improvement that is reasonably incidental to levees (or similar improvements) or drainage works deductible under a landcare operation.

An example of a structural improvement that may be reasonably incidental to drainage works is a fence you construct to prevent livestock entering a drain that you construct to control salinity.

You can't claim a deduction for landcare operations if the capital expenditure is on plant unless it is on certain fences, dams or other structural improvements. You work out the decline in value of plant not deductible under the landcare provisions using the general rules for working out decline in value, see Methods of working out decline in value.

There are no specific balancing adjustment rules for a depreciating asset on which you incur capital expenditure that is deductible under the landcare provisions. That asset may, however, be considered part of the land for CGT purposes.

If a levee is constructed primarily and principally for water conservation, it would be a water facility and you can't claim a deduction under these rules. You would need to work out its decline in value under the rules for water facilities.

If you're a rural land irrigation water provider and you can deduct expenditure under both the water facilities and landcare operation rules, you can only deduct the expenditure as expenditure on a water facility.

You can't deduct an amount for landcare operations if any entity can deduct an amount for that expenditure, in any income year, under the carbon sink forest rules.

If you incur the expenditure from a non-arm’s length dealing and it exceeds the market value of what the expenditure was for, you must take the expenditure amount to be that market value instead.

A recoupment of the expenditure may be included in your assessable income.

The deduction isn't available to a partnership. Costs incurred by a partnership are allocated to each partner who can claim a deduction for their share of the relevant capital expenditure.

Capital expenditure on a landcare operation may be incurred on a depreciating asset. However, if the expenditure is deductible under these rules, you can't use the general rules for working out decline in value or claim the immediate deduction for certain depreciating assets costing $300 or less.

If you incur the capital expenditure on a depreciating asset and you're a primary producer and a small business entity, you can choose to work out your deductions for these depreciating assets using either the simplified depreciation rules or these UCA rules. For more information on the simplified depreciation rules, see Small business entity concessions.

Electricity connections and phone lines

You may be able to claim a deduction over 10 years for capital expenditure you incur on either:

• connecting mains electricity to land on which a business is carried on for a taxable purpose or upgrading an existing connection to that land
• a telephone line on, or extending to, land on which you carry on a primary production business.

If you incur expenditure from a non-arm’s length dealing that exceeds the market value of what the expenditure was for, the expenditure amount is taken to be that market value instead.

A recoupment of the expenditure may be included in your assessable income.

These deductions are not available to a partnership. Costs incurred by a partnership are allocated to each partner who can claim a deduction for their share of the relevant capital expenditure.

Such capital expenditure may be incurred on a depreciating asset. However, if the expenditure is deductible under these rules, you can't use the general rules for working out decline in value or claim the immediate deduction for depreciating assets costing $300 or less.

If you incur the capital expenditure on a depreciating asset and you're a primary producer and a small business entity, you can choose to work out your deductions for these depreciating assets using either the simplified depreciation rules or these UCA rules. For more information on the simplified depreciation rules, see Small business entity concessions.

There are no specific balancing adjustment rules for a depreciating asset on which you incur deductible capital expenditure under these rules. That asset may, however, be considered part of the land for CGT purposes.

Environmental protection activities (EPA)

You can claim an immediate deduction for expenditure you incur for the sole or dominant purpose of carrying on EPA. EPA are undertaken to prevent, fight or remedy pollution, and to treat, clean up, remove or store waste from your earning activity. These activities can also apply to a site on which another entity carried on a business that you acquire and carry on substantially without unchanging as your earning activity. Your earning activity is one you carried on, carry on or propose to carry on for one or more of these purposes:

• producing assessable income (other than a net capital gain)
• exploration or prospecting
• mining site rehabilitation.

You may also claim a deduction for expenditure on EPA relating to a site you lease or have a granted right to use the site and where another entity causes the pollution or waste.

The deduction isn't available for:

• EPA bonds and security deposits
• expenditure on acquiring land
• capital expenditure on constructing an extension, alteration or improvement to a building, structure or structural improvement
• expenditure to the extent that you can deduct an amount for it under another provision.

You can't deduct expenditure on EPA that is also for an environmental impact assessment of your project as expenditure on EPA. However, if it is capital expenditure directly connected with a project, you could deduct it as a project amount over the project life, see Project pools.

If you incur expenditure that forms part of the cost of a depreciating asset, it isn't deductible as expenditure on EPA if a deduction is available for the decline in value of the asset.

You may need to include a recoupment of the expenditure in your assessable income.

Note that expenditure you incur on or after 19 August 1992 on certain earthworks you construct as a result of carrying out EPA can be written off as a capital works expenditure at a rate of 2.5%.

Mining and quarrying, and minerals transport

To work out your deductions for the decline in value of depreciating assets you use in mining and quarrying, and in minerals transport using the general rules, see Working out decline in value. The general rules for mining and quarrying, and minerals transport either don't apply or are modified for the depreciating assets or capital expenditure, see:

• Immediate deduction for depreciating assets used in exploration or prospecting
• Immediate deduction for expenditure not part of a depreciating asset's cost
• Farm-in farm-out arrangements
• Deduction over time for capital expenditure for projects you carry on.

Immediate deduction for depreciating assets used in exploration or prospecting

The decline in value of certain depreciating assets you first use for exploration or prospecting for minerals (including petroleum), or quarry materials, obtainable by activities carried on for the purpose of producing assessable income, can be its cost. This means you can deduct the cost of the asset in the year in which you start to use it for such activities to the extent that you use the asset for a taxable purpose.

Where the depreciating asset is a mining, quarrying or prospecting right, you first use for exploration or prospecting for minerals (including petroleum) or quarry materials, an immediate deduction is only available for the asset if you acquire it from an Australian government agency or a government entity.

Where the depreciating asset is mining, quarrying or prospecting information and you first use it for exploration or prospecting for minerals (including petroleum) or quarry materials, an immediate deduction is only available for the asset if one of the following tests are met:

• You acquire yhe mining, quarrying or prospecting right or mining, quarrying or prospecting information from an Australian Government agency or a government entity.
• You acquire the mining, quarrying or prospecting information is a geophysical or geological data package from an entity which predominantly carries on a business of providing mining, quarrying or prospecting information to other entities.
• You create the mining, quarrying or prospecting information or contribute to the cost of its creation.
• You cause the creation of the mining, quarrying or prospecting information or contribute to the cost of its creation by an entity which predominantly carries on a business of providing mining, quarrying or prospecting information to other entities.

If the mining, quarrying or prospecting right or mining, quarrying or prospecting information doesn't meet the requirements above, then there is no immediate deduction of the cost of that asset and the effective life of the asset is the shorter of either:

• the effective life in the table, if one has been determined (see Effective life of intangible depreciating assets that are mining, quarrying or prospecting rights, or mining, quarrying or prospecting information)
• 15 years.

Immediate deduction for expenditure not part of an asset's cost

An immediate deduction is available for payments of petroleum resource rent tax and for expenditure that doesn't form part of the cost of a depreciating asset and that you incur on either:

• exploration or prospecting for minerals, including petroleum, or quarry materials, obtainable by activities you carry on for the purpose of producing assessable income (see, Taxation Ruling TR 2017/1 Income tax: deductions for mining and petroleum exploration expenditure)
• rehabilitation of your mining or quarrying sites.

If the expenditure arises from a non-arm’s length dealing and is more than the market value of what the expenditure was for, the amount of the expenditure is taken to be that market value instead.

You may include a recoupment of the expenditure in assessable income.

Farm-in farm-out arrangements

A farm-in farm-out (FIFO) arrangement broadly involves an exchange of an interest in a mining, quarrying or prospecting right in return for an 'exploration benefit'. Usually an entitlement to receive exploration services or to have exploration expenditure the other party funds. The tax treatment of FIFO arrangements, prior to amendments in 2014, is outlined in:

• Miscellaneous Taxation Ruling MT 2012/1 Miscellaneous taxes: application of the income tax and GST laws to immediate transfer farm-out arrangements
• Miscellaneous Taxation Ruling MT 2012/2 Miscellaneous taxes: application of the income tax and GST laws to deferred transfer farm-out arrangements.

Further amendments in 2015 were necessary to ensure that FIFO arrangements didn't have certain tax consequences where those consequences could impede genuine exploration activity.

Deduction over time for capital expenditure for projects you carry on

Expenditure you incur after 30 June 2001 which doesn't form part of the cost of a depreciating asset and isn't otherwise deductible may be a project amount that you can allocate to a project pool for which deductions are available. To be a project amount, mining capital expenditure or transport capital expenditure must be directly connected with carrying on the mining operations or business, respectively.

Mining capital expenditure is capital expenditure you incur on:

• carrying out eligible mining or quarrying operations
• site preparation for those operations
• necessary buildings and improvements for those operations
• providing or contributing to the cost of providing water, light, power, access or communications to the site of those operations
• buildings you use directly for operating or maintaining plant for treating minerals, or quarry materials, that you obtain from those operations
• buildings and improvements for storing minerals or quarry materials or to facilitate minerals treatment
• certain housing and welfare (except for quarrying operations).

Transport capital expenditure includes capital expenditure on:

• a railway, road, pipeline, port or other facility used principally for transporting minerals, quarry materials or processed minerals (other than wholly within the site of mining operations) or the transport of petroleum in certain circumstances
• obtaining a right to construct or install such a facility
• compensation for damage or loss caused by constructing or installing such a facility
• earthworks, bridges, tunnels or cuttings necessary for such a facility
• as part of carrying on your business, contributions you make to someone else’s expenditure on the above items.

For information on how to work out deductions, see using a project pool.

Project pools

Under UCA, you can allocate to a project pool certain capital expenditure that is directly connected with a project you carry on (or propose to carry on) for a taxable purpose 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.

You're carrying on a project if it involves some form of continuing activity. The holding of a passive investment such as a rental property would not represent sufficient continuing activity to constitute the carrying on of a project.

The capital expenditure is known as a ‘project amount’ and is expenditure you incur:

• to create or upgrade community infrastructure for a community associated with the project, you must pay for this expenditure (not just incur it) 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 that 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 you hold.

If the expenditure you incur arises from a non-arm’s length dealing and is more than or less than the market value of what the expenditure was for, the amount of the expenditure is that market value instead.

The deduction for project amounts allocated to a project pool begins when the project starts to operate. For projects that start on or after 10 May 2006 and that only contain project amounts you incur on or after 10 May 2006 the calculation is:

(Pool value multiplied by× 200%) divided by DV project pool life

The ‘DV project pool life’ is the project life of a project or the most recent recalculation of the project life of a project.

You calculate the pool value for an income year by adding the project amounts you allocate to the pool up to the end of that year less the sum of the deductions claims for the pool in previous years (or could claim had you operated the project wholly for a taxable purpose).

The pool value can be subject to adjustments.

If you can claim a GST input tax credit for expenditure you allocate to a project pool, you reduce the pool value in the income year in which you can or become, entitled to the credit by the amount of the credit. Certain increasing or decreasing adjustments for expenditure you allocate to a project pool may also affect the pool value.

If during the 2024–25 income year, you met or otherwise cease to have an obligation to pay foreign currency you incur as a project amount and allocate 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 you incur the project amount in the 2024–25 income year and became due for payment within 12 months after, then adjust the pool value for the income year you incur the project amount by the amount of any forex realisation gain or loss. This is known as ‘the 12-month rule’. You're able to elect out of the 12-month rule in limited circumstances, , see Election out of the 12 month rule.

If you elect out of the 12-month rule, don’t adjust the pool value , instead, any forex realisation loss is generally deductible, and you include any gain 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 reconsider the question each year. If your new estimate is different from the previous estimate, the DV project pool life you use in the formula is the new estimate project life, not the project life you estimate the previous year.

You calculate the project life 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, aren't relevant when objectively estimating project life. Factors outside your control, such as something inherent in the project itself, for example, 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 you incur during the income year.

You reduce the deduction to the extent to which you operate the project for a non-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 you allocate to the pool during the income year, after allowing for any necessary pool value adjustments. A project is abandoned if it stops operating and won't operate again.

Your assessable income will include any amount you receive for the abandonment, sale or other disposal of a project.

If you recoup an amount of expenditure you allocate to a project pool or if you derive a capital amount for a project amount or something on which you expend a project amount, you must include the amount in assessable income.

If any receipt arises from a non-arm’s length dealing and the amount is more than or less than the market value of what the receipt was for, you're taken to receive that market value instead.

Business related costs – section 40-880 deductions

UCA allows a 5-year write-off for certain business-related capital expenditure, if no other provision either takes the expenditure into account or denies a deduction (known as blackhole expenditure).

Capital expenditure is deductible if you incur it:

• for your business
• for a business that you use to carry on, such as capital expenses you incur in order to cease the business
• for a business you propose to carry on, such as the costs of feasibility studies, market research or setting up the business entity
• as a shareholder, beneficiary or partner to liquidate or deregister a company or to wind up a trust or partnership (and the company, trust or partnership has carried on a business).

If you incur capital expenditure for your existing business, a business that you used to carry on or a business that you propose to carry on, the capital expenditure is deductible to the extent the business is, was or is proposed to be carried on for a taxable purpose.

You can't deduct capital expenditure for an existing business that is carried on by another entity. However, you can deduct capital expenditure you incur for a business that used to be, or is proposed to be, carried on by another entity. The capital expenditure is only deductible to the extent that both:

• the business was, or is proposed to be, carried on for a taxable purpose
• the capital expenditure is in connection with your deriving assessable income from the business and the business that was carried on or is proposed to be carried on.

A 5-year straight-line write-off is allowed for certain capital expenditure incurred to terminate a lease or licence if the expenditure is incurred in the course of carrying on a business, or in connection with ceasing to carry on a business. See Claiming a tax deduction for depreciating assets and other capital expenses.

If you're an individual operating either alone or in partnership, this deduction may be affected by the non-commercial loss rules, see Non-commercial losses.

The extent to which a business is, was or is proposed to be carried on for a taxable purpose you work out at the time you incur the expenditure. For an existing business or a business proposed to be carried on, you need to take into account all known and predictable facts in all years.

For a business to be ‘proposed to be’ carried on, you need to be able to sufficiently identify the business and there needs to be a commitment of some substance to commence the business. Examples of such a commitment are establishing business premises, investment in capital assets and development of a business plan. The commitment must be evident at the time the expenditure is incurred. It must also be reasonable to conclude that the business is proposed to be carried on within a reasonable time. This time may vary according to the industry or the nature of the business.

You can't claim a deduction for capital expenditure to the extent to which it:

• can be a deduction under another provision
• forms part of the cost of a depreciating asset you hold, used to hold or will hold
• forms part of the cost of land
• relates to a lease or other legal or equitable right
• would be taken into account in working out an assessable profit or deductible loss
• could be taken into account in working out a capital gain or a capital loss
• would specifically be not deductible under the income tax laws if the expenditure was not capital expenditure
• is specifically not deductible under the income tax laws for a reason other than the expenditure is capital expenditure
• is of a private or domestic nature
• is an amount you incur for gaining or producing exempt income or non-assessable non-exempt income
• is an amount to exclude from the cost or cost base of an asset because, under special rules in UCA or the CGT regimes respectively, the cost or cost base of the asset is to be the market value
• is a return of, or on, capital (for example, dividends paid by companies or distributions by trustees) or a return of a non-assessable amount (for example, repayments of loan principal).

The amount of the expenditure is taken to be market value if the expenditure both:

• arises from a non-arm’s length dealing
• is more than the market value of what the expenditure was for.

You deduct 20% of the expenditure in the year you incur it and in each of the following 4 years.

Certain start-up expenditure is fully deductible in the income year you incur it if either:

• you're a small business entity, or would be if the aggregated turnover threshold was less than $50 million
• you're not in business in the income year and aren't connected with, or an affiliate of, an entity that carries on a business that isn't a small business entity or has an aggregated turnover of more than $50 million.

See, Certain start-up expenses immediately deductible.

Even if the business ceases or the proposed business doesn't commence (for example, if there is an unforeseen change in circumstances), you may claim the deduction over the 5 years. You can claim deductions for expenditure for a proposed business before you carry on the business. However, if you're an individual taxpayer, the non-commercial loss rules may defer your deductions for pre- and post-business expenditure, see Non-commercial losses.

You may include a recoupment of the expenditure in your assessable income.

Carbon sink forests

You can claim a deduction, subject to certain conditions, for the expenditure you incur in establishing trees in a carbon sink forest.

You can claim a maximum capital write-off rate of 7% of the expenditure incurred in establishing the trees (conditions apply).

You'll find the rules in Subdivision 40-J of the ITAA 1997 and in Claiming a deduction for carbon sink forest.

Continue to: Small business entity concessions

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