• Business deduction for project pool

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    Did you have capital expenditure directly connected with a business project?

    No, Go to Landcare operations and business deduction for decline in value of water facility.

    Yes, Read on.

    You need to know

    Certain capital expenditure you incurred after 30 June 2001 which is directly connected with a project you carry on or propose to carry on for a taxable purpose can be allocated to a project pool and written off over the life of the project.

    A project is carried on if it involves a continuity of activity and active participation. Merely holding a passive investment such as a rental property would not be regarded as carrying on a project.

    Such capital expenditure, known as a project amount, is expenditure incurred on:

    • 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 also include mining capital expenditure and expenditure on certain facilities used to transport minerals or quarry materials. For more information on these project amounts, see the Guide to depreciating assets 2005-06 (NAT 1996-6.2006).

    The expenditure must not be otherwise deductible or form part of the cost of a depreciating asset.

    Project amounts are allocated to a 'project pool'. Your deduction for project amounts allocated to a project pool is spread over the 'project life'. The project life is the period from when the project starts to operate until when it stops operating. The period must be limited by something inherent in the project. A deduction for project amounts would be available over that limited project life (or an earlier abandonment, sale or other disposal). If there is no limited project life, no deduction is available under these rules.

    A deduction is available for the 2005-06 income year if you started to operate a project in that year to gain or produce assessable income. The deduction is worked out on the value of the project pool at the end of 2005-06. Use worksheet 5 to work out your deduction.

    Worksheet 5: Project pool deduction

    Value of project pool at 30 June 2006. This is the closing pool value for the 2004-05 income year (if any) plus the sum of the project amounts you allocated to the pool in 2005-06. (a)

    $

    Your estimate of the life of the project (in years) (b)

                             years

    Divide (a) by (b)

    $

    Multiply (c) by 150% - this is your 2005-06 deduction for project pool (d)

    $

    Note: Your deduction at (d) must not be more than the amount at (a).

    If a project operated in 2005-06 for purposes other than earning assessable business income, you must reduce your deduction at (d) by a reasonable amount for the extent to which the project operated for such purposes.

    At the time of printing Business and professional items 2005-06, there was legislation before Parliament which will provide that when your project pool contains only project amounts incurred on or after 10 May 2006 and the project started to operate on or after that date, your deduction at (d) is calculated by multiplying (c) by 200% instead of 150%. However, the new legislation does not allow you to use the higher rate if you abandon, sell or otherwise dispose of an existing project and then restart it on or after 10 May 2006 just so deductions can be calculated using the higher rate.

    If you want to know whether the law has come into effect, phone the Business Infoline on 13 28 66.

    The pool value can be subject to adjustments. An adjustment could happen under specific rules that apply to transactions conducted in foreign currency (the foreign exchange, or forex, rules). If during the income year you met an obligation to pay foreign currency incurred as a project amount which you allocated to a project pool, you might have derived a gain or incurred a loss under these rules. For more information about the forex rules, visit our website.

    Closing pool value for 2005-06

    This is (a) minus (d) in worksheet 5. You will need the closing pool value for 2005-06 to work out your deduction for the project pool next year.

    Any recoupment of the expenditure must be shown as assessable income either at Other business income or as part of your Income reconciliation adjustments in the Reconciliation items section of item P8 on your schedule.

    Where a project was abandoned, sold or otherwise disposed of in 2005-06

    In this case - whether or not the project had begun to operate - you can claim a deduction for the 2004-05 closing pool value (if any) plus any project amounts allocated to the pool in the 2005-06 year. You must show any proceeds from the abandonment, sale or disposal of the project as assessable income either at Other business income or as part of your Income reconciliation adjustments in the Reconciliation items section of your schedule.

    Completing this item

    Step 1, Write your total primary production project pool business deduction at Business deduction for project pool in the Primary production column, item P8 on page 3 of your schedule. Do not show cents.

    Step 2, Write your total non-primary production project pool business deduction at Business deduction for project pool in the Non-primary production column. Do not show cents.

    Step 3, Add up your primary production and non-primary production project pool business deductions and write the total at L.

    Is the amount at L greater than $1,000?

    No, Go to Landcare operations and business deduction for decline in value of water facility.

    Yes, You will need to complete and attach a Capital allowances schedule 2005-06 (unless you are an STS taxpayer).

    For more information, see the Capital allowances schedule instructions 2005-06 (NAT 4089-6.2006). This publication is available on our website or to find out how to get a printed copy, see More information.

    Last modified: 01 Sep 2006QC 18499