• Reconciliation items

    Consider the following items below to see whether you qualify for a deduction.

    Any adjustments to your income and expense amounts are dealt with at Reconciliation adjustments.

    Deduction for environmental protection expenses

    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 a business expense for environmental protection activities?

    NO

    Go to Section 40-880 deduction.

    YES

    Read on.

    You need to know

    Show here the amount of allowable expenditure on environmental protection activities (EPA).

    You can deduct expenditure to the extent that you incur it for the sole or dominant purpose of carrying on EPA. EPA are activities undertaken to prevent, fight or remedy pollution, or to treat, clean up, remove or store waste from your earning activity. Your earning activity is one you carried on, carry on or propose to carry on for the purpose of:

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

    You may also claim a deduction for cleaning up a site on which a predecessor carried on substantially the same business activity.

    The deduction is not available for:

    • EPA bonds and security deposits
    • expenditure for acquiring land
    • expenditure for constructing or altering buildings, structures or structural improvements
    • expenditure to the extent that you can deduct an amount for it under another provision.

    Accordingly, expenditure which forms part of the cost of a depreciating asset is not deductible as expenditure on EPA if a deduction is available for the decline in value of the asset. See the Guide to depreciating assets 2005 for information on the deduction for decline in value.

    Expenditure incurred on or after 19 August 1992 on certain earthworks constructed as a result of carrying out EPA can be written off at the rate of 2.5% per annum under the provisions for capital works expenditure.

    Expenditure on an environmental assessment of a project is not deductible as expenditure on EPA. If it is capital expenditure directly connected with a project, it could be a project amount for which a deduction would be available over the project life - see Business deduction for project pool. An example would be a study to determine the quantity and type of pollutants which will be produced from a process used in a proposed business.

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

    Any recoupment of the expenditure would be assessable income.

    Completing this question

    Step 1

    Write your total primary production EPA expenses at Deduction for environmental protection expenses, Primary production column, item P8 on page 3 of your schedule. Do not show cents.

    Step 2

    Write your total non-primary production EPA expenses at Deduction for environmental protection expenses in the Non-primary production column. Do not show cents.

    Step 3

    Add up your primary production and non-primary production EPA expenses and write the amount at V.

    Section 40-880 deduction

    Can you deduct business-related costs under section 40-880?

    NO

    Go to Business deduction for project pool.

    YES

    Read on.

    You need to know

    Certain business-related costs incurred after 30 June 2001 are deductible over five income years under section 40-880 of the ITAA 1997 to the extent that the business is, was or will be carried on for a taxable purpose, such as for producing assessable income. You may be able to claim a deduction for the following types of business-related capital expenditure:

    • costs of establishing your business structure - such as the costs of incorporating a company or creating a trust or partnership through which you will carry on your business
    • costs of converting your business structure to another structure - such as the costs of transferring your business assets to another entity through which you will carry on your business
    • costs of raising equity for your business
    • costs of defending your business against a takeover
    • costs to the business of unsuccessfully attempting a takeover
    • costs of liquidating a company that carried on a business and of which you are a shareholder
    • costs to stop carrying on your business - such as the legal costs of terminating the services of employees when the business ceases.

    Note

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

    You cannot claim the deduction for capital expenditure which:

    • can be deducted under another provision
    • forms part of the cost of a depreciating asset or of land
    • relates to a lease
    • would be taken into account in working out a profit or loss
    • would be taken into account when working out the amount of a capital gain or capital loss, or
    • is specifically not deductible under the income tax laws - such as a fine.

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

    You must show any recoupment of the expenditure 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.

    Claim the amount deductible under section 40-880 here if you carried on a business as an individual at any time during the year. If you stopped carrying on business as an individual in 2003-04 and you have not fully claimed your five-year write-off under section 40-880, claim the amount deductible this year at item D15 on your tax return (supplementary section).

    Completing this question

    Step 1

    Write your deduction for primary production business-related costs at Section 40-880 deduction, Primary production column, item P8 on page 3 of your schedule. Do not show cents.

    Step 2

    Write your deduction for non-primary production business-related costs at Section 40-880 deduction in the Non-primary production column. Do not show cents.

    Step 3

    Add up your primary production and non-primary production deductions for business-related costs and write the total at A.

    Business deduction for project pool

    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:

    • 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
    • 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.

    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 2004-05 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 2004-05. Use worksheet 5 to work out your deduction.

    Worksheet 5: Project pool deduction

    Value of project pool at 30 June 2005. This is the closing pool value for the 2003-04 income year (if any) plus the sum of the project amounts you allocated to the pool in 2004-05.

    (a)

    $

     

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

    (b)

     

    years

    Divide (a) by (b)

    (c)

    $

     

    Multiply (c) by 150% - this is your 2004-05 deduction for project pool.

    (d)

    $

     

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

    If a project operated in 2004-05 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.

    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 2004-05

    This is (a) minus (d) in worksheet 5. You will need the closing pool value for 2004-05 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 2004-05

    In this case - whether or not the project had begun to operate - you can claim a deduction for the 2003-04 closing pool value (if any) plus any project amounts allocated to the pool in the 2004-05 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 question

    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 (unless you are an STS taxpayer).

    For more information, see the Capital allowances schedule instructions 2005. To find out how to get a printed copy, see More information.

    Landcare operations and business deduction for decline in value of water facility

    Did you have landcare operations and/or water conservation/conveying expenses?

    NO

    Go to Reconciliation adjustments.

    YES

    Read on.

    You need to know

    Landcare operations expenses

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

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

    • a primary production business, or
    • in the case of rural land, a business for the purpose of producing assessable income from the use of that land - except a business of mining or quarrying.

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

    The deduction for landcare operations has been extended to rural land irrigation water providers for certain expenditure they incur after 1 July 2004. 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 using a motor vehicle is excluded.

    If you are a rural land irrigation water provider, you can claim a deduction for capital expenditure you incurred supplying water to a landcare operation on:

    • land in Australia being used for primary production businesses, or
    • rural land in Australia being used for a taxable purpose (except a business of mining or quarrying).

    Your deduction is reduced by a reasonable amount to reflect an entity's use of the land for other than a taxable purpose after you incurred the expenditure.

    A landcare operation is one of the following:

    • erecting fences to separate different land classes in accordance with an approved land management plan
    • erecting fences primarily and principally to keep animals out of areas affected by land degradation in order to prevent or limit further damage and assist in reclaiming the areas
    • constructing a levee or similar improvements
    • constructing drainage works - other than the draining of swamps or low-lying land - primarily and principally to control salinity or assist in drainage control
    • an operation primarily and principally for eradicating or exterminating animal pests from the land
    • an operation primarily and principally for eradicating, exterminating or destroying plant growth detrimental to the land
    • an operation primarily and principally for preventing or combating land degradation other than by the use of fences, or
    • an extension, alteration or addition to any of the assets described in the first four dot points or an extension of an operation described in the fifth to seventh dot points.

    The meaning of landcare operation has been extended to apply to expenditure incurred on or after 1 July 2004 on:

    • a repair of a capital nature to an asset which is deductible under a landcare operation
    • constructing a structural improvement that is reasonably incidental to levees or drainage works deductible under a landcare operation
    • 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 constructed to prevent livestock entering a drain that was constructed to control salinity.

    No deduction is available if the capital expenditure is on plant unless it is on certain fences, dams or other structural improvements. Where a levee is constructed primarily and principally for water conservation, it would be a water facility and no deduction would be allowable under these rules. Its decline in value would need to be worked out under the rules for water facilities. See Water conservation and conveyance facilities.

    You may need to show any recoupment of the expenditure 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. Phone the Business Infoline (see More information).

    These deductions are not available to a partnership. Expenses for landcare operations incurred by a partnership are allocated to each partner who can then claim the relevant deduction in respect of their share of the expenditure.

    Water conservation and conveyance facilities

    You can claim a deduction for the decline in value of a water facility. A water facility includes plant or a structural improvement, or an alteration, addition or extension to plant or a structural improvement, that is primarily or principally for the purpose of conserving or conveying water. The expenditure must be incurred primarily and principally for conserving or conveying water for use in a primary production business on land in Australia.

    'Water facility' includes dams, tank stands, bores, wells, irrigation channels pipes, pumps, water towers and windmills. The meaning of water facility has been extended to include certain other expenditure incurred on or after 1 July 2004 as follows:

    • a repair of a capital nature to plant or a structural improvement that is primarily or principally for the purpose of conserving or conveying water - for example, if you purchase a pump that needs substantial work done to it before it can be used in your business, the cost of repairing the pump may be treated as a water facility
    • a structural improvement, or an alteration, addition or extension to a structural improvement, that is reasonably incidental to conserving or conveying water
    • a repair of a capital nature to a structural improvement that is reasonably incidental to conserving or conveying water.

    Examples of structural improvements that are reasonably incidental to conserving or conveying water include a bridge over an irrigation channel, a culvert (a length of pipe or multiple pipes that are laid under a road to allow the flow of water in a channel to pass under the road), or a fence preventing livestock entering an irrigation channel.

    A deduction for the decline in value of a water facility can be claimed in equal instalments over three years.

    Unless you are an irrigation water provider, the expenditure must be incurred primarily and principally for conserving or conveying water for use in a primary production business you conduct on land in Australia. You may claim the deduction even when you do not own the land. Therefore, if you are a lessee carrying on a business of primary production on the land, you can still claim the deduction. Your deduction is reduced where the facility is not wholly used for either:

    • carrying on a primary production business on land in Australia, or
    • a taxable purpose - for example, producing assessable income.

    The deduction for water facilities has been extended to irrigation water providers for expenditure incurred on or after 1 July 2004. An irrigation water provider is an entity whose business is primarily and principally the supply of water to entities for use in primary production businesses on land in Australia. The supply of water by using a motor vehicle is excluded.

    If you are an irrigation water provider, you must incur the expenditure primarily and principally for the purpose of conserving or conveying water for use in primary production businesses conducted by other entities on land in Australia - being entities supplied with water by you. The deduction is reduced if the facility is not used wholly for a taxable purpose. Any recoupment of the expenditure may be assessable income. Phone the Business Infoline (see More information).

    These deductions are not available to a partnership. Costs incurred by a partnership for facilities to conserve or convey water are allocated to each partner who can then claim the relevant deduction in respect of their share of the expenditure.

    STS taxpayers

    The amount you show at W must not include any amount relating to a depreciating asset used in your primary production business if you have chosen to claim a deduction for it under the STS depreciation rules.

    Completing this question

    Step 1

    Write your total deductions for primary production landcare operations expenses and for water facilities at Landcare operations and business deduction for decline in value of water facility in the Primary production column, item P8 on page 3 of your schedule. Do not show cents.

    Step 2

    Write your total deduction for non-primary production landcare operations expenses at Landcare operations and business deduction for decline in value of water facility in the Non-primary production column. Do not show cents.

    Step 3

    Add up your primary production and non-primary production deductions for landcare operations and water facilities and write the total at W.

    Last modified: 15 Mar 2007QC 27592