• Primary production depreciating assets

    The general principles of the UCA apply to most depreciating assets used in primary production.

    However, the decline in value of the following primary production depreciating assets is worked out using special rules:

    • facilities used to conserve or convey water
    • fencing assets
    • fodder storage assets
    • horticultural plants, and
    • grapevines.

    For depreciating assets deductible under these special rules, you cannot use the general rules for working out decline in value or claim the immediate deduction for depreciating assets costing $300 or less (although some are immediately deductible regardless of cost).

    Deductions for these assets are not available to a partnership. Costs incurred by a partnership are allocated to each partner who can then claim the relevant deduction for their share of the expenditure.

    There are no specific balancing adjustment rules for these depreciating assets. However, the assets may be considered part of the land for CGT purposes.

    When the land is disposed of, any deductions you have claimed, or can claim, for the assets may reduce the cost base of the land. For more information, see Guide to capital gains tax 2016.

    Primary producers may also be able to claim deductions for capital expenditure on landcare operations, electricity connections and phone lines; see Landcare operations and Electricity connections and phone lines.

    Water facilities

    A water facility includes plant or a structural improvement that is primarily and principally for the purpose of conserving or conveying water. It also includes an alteration, addition or extension to that plant or structural improvement. Examples of water facilities are dams, tanks, 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:

    • a repair of a capital nature to plant or a structural improvement that is primarily and 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 are 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) and a fence preventing livestock entering an irrigation channel.

    Expenditure incurred on or after 1 July 2004 on a repair of a capital nature, or a change, to a depreciating asset may be eligible for the deduction for water facilities under the extended rules. This is the case even though the pre 1 July 2004 expenditure on the asset itself is not eligible for the deduction under the rules before they were extended. This is because the repair or change to the asset is not treated as part of the asset under the extended rules, and the extended rules are separately applied only to that repair or change.

    You can fully deduct capital expenditure on a water facility if you incurred the expenditure at or after 7.30pm (AEST) on 12 May 2015. You fully deduct the expenditure in the income year in which you incurred it. The total deduction cannot be more than the amount of the capital expenditure.

    If you incurred the expenditure before this time, the previous UCA rules continue to apply. These rules allow you to deduct:

    • one-third of the expenditure in the income year in which the expenditure is incurred, and
    • one-third of the expenditure in each of the following two income years.

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

    • carrying on a primary production business on land in Australia, or
    • a taxable purpose.

    The deduction for water facilities was 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 the use of 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). Your deduction is reduced if the water facility is not used wholly for a taxable purpose.

    If the expenditure incurred 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.

    No deduction is available for capital expenditure incurred on acquiring a second-hand commercial water facility unless you can show that no one else has deducted or could deduct an amount for earlier capital expenditure on the construction, manufacture or previous acquisition of the water facility.

    If you are a primary producer and a small business entity, you can choose to work out your deductions for water facilities under either the simplified depreciation rules or these UCA rules. For more information about the simplified depreciation rules, see Small business entities.

    You may need to include a recoupment of expenditure on water facilities in your assessable income. If the expenditure is deductible over more than one income year, special rules apply to determine the amount of any recoupment to be included in assessable income in the year of recoupment and in later income years. An amount received for the sale of a water facility for its market value is not regarded as an assessable recoupment.

    Fencing assets

    A fencing asset is an asset or structural improvement that is a fence, or a repair of a capital nature, or an alteration, addition or extension, to a fence. The capital expenditure you incur on the construction, manufacture, installation or acquisition of the fencing asset must have been incurred primarily and principally in a primary production business that you conduct on land in Australia. You may claim the deduction even if you are only a lessee of the land.

    The term 'fence' takes its ordinary meaning and includes an enclosure or barrier, usually of metal or wood, as around or along a field or paddock. The term 'fence' extends to parts or components of a fence including, but not limited to, posts, rails, wire, droppers, gates, fittings and anchor assemblies.

    You can fully deduct capital expenditure on a fencing asset if you incurred the expenditure at or after 7.30pm (AEST) on 12 May 2015. You fully deduct the expenditure in the income year in which you incurred it. The total deduction cannot be more than the amount of the capital expenditure.

    If you incurred the expenditure before this time, the previous UCA rules that allow you to deduct the capital expenditure on a fencing asset over the effective life of the asset continue to apply.

    In addition, you cannot deduct an amount for any income year for capital expenditure on a fencing asset if the fencing asset is (or is a repair, alteration, addition or extension to) a stockyard, pen or a portable fence.

    Your deduction is reduced in any income year where the fencing asset is not:

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

    This prevents primary producers from deducting expenditure on a fencing asset to the extent that the asset is used other than in carrying on their primary production business or for a taxable purpose.

    If the expenditure incurred 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.

    If you are a primary producer and a small business entity, you can choose to work out your deductions for fencing assets under either the simplified depreciation rules or these UCA rules. For more information about the simplified depreciation rules, see Small business entities.

    You may need to include a recoupment of expenditure on fencing assets in your assessable income. If the expenditure is deductible over more than one income year, special rules apply to determine the amount of any recoupment to be included in assessable income in the year of recoupment and in later income years. An amount received for the sale of a fencing asset for its market value is not regarded as an assessable recoupment.

    Fodder storage assets

    A fodder storage asset is an asset that is primarily and principally for the purpose of storing fodder. It is also a structural improvement, or a repair of a capital nature, or an alteration, addition or extension, to an asset or a structural improvement, that is primarily and principally for the purpose of storing fodder.

    The capital expenditure you incur on the construction, manufacture, installation or acquisition of the fodder storage asset must have been incurred primarily and principally for use in a primary production business that you conduct on land in Australia. You may claim the deduction even if you are only a lessee of the land.

    For a fodder storage asset to satisfy the 'primarily and principally' test, its main purpose (other than some incidental or other minor purpose, but not necessarily the sole purpose) must be to store fodder. For example, if a shed was built for the purpose of storing hay but is occasionally used to store a neighbour's tractor when borrowed twice a year, the shed will be an asset that is primarily and principally for the purpose of storing fodder.

    The term 'fodder' takes its ordinary meaning and refers to food for livestock. It is usually dried like grain, hay or silage but can include liquid feed supplements. Examples of typical fodder storage assets include:

    • silos
    • liquid feed supplement storage tanks
    • bins for storing dried grain
    • hay sheds
    • grain storage sheds, and
    • above-ground bunkers for silage.

    If you incurred the capital expenditure at or after 7.30pm (AEST) on 12 May 2015, you deduct one-third of the expenditure in the income year in which the expenditure is incurred, and the same amount in each of the following two income years. The total deduction over the three income years cannot be more than the amount of the capital expenditure. If you incurred the expenditure before this time, the previous UCA rules that allow you to deduct the capital expenditure on a fodder storage asset over the effective life of the asset continue to apply.

    Your deduction is reduced in any income year where the fodder storage asset is not:

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

    This prevents primary producers from deducting expenditure on a fodder storage asset to the extent that the asset is used other than in carrying on their primary production business or for a taxable purpose.

    No deduction is available for capital expenditure incurred to acquire a second-hand fodder storage asset unless you can show that no one else has deducted or could deduct an amount for earlier capital expenditure on the construction, manufacture or previous acquisition of the fodder storage asset.

    If the expenditure incurred 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.

    If you are a primary producer and a small business entity, you can choose to work out your deductions for fodder storage assets under either the simplified depreciation rules or these UCA rules. For more information about the simplified depreciation rules, see Small business entities.

    You may need to include a recoupment of expenditure on fodder storage assets in your assessable income. If the expenditure is deductible over more than one income year, special rules apply to determine the amount of any recoupment to be included in assessable income in the year of recoupment and in later income years. An amount received for the sale of a fodder storage asset for its market value is not regarded as an assessable recoupment.

    Horticultural plants

    A horticultural plant is a live plant or fungus that is cultivated or propagated for any of its products or parts.

    You can claim a deduction for the decline in value of horticultural plants, provided:

    • you owned the plants (lessees and licensees of land are treated as if they own the horticultural plants on that land)
    • you used them in a business of horticulture to produce assessable income, and
    • the expense was incurred after 9 May 1995.

    Your deduction for the decline in value of horticultural plants is based on the capital expenditure incurred in establishing the plants. This does not include the cost of purchasing or leasing land, or expenditure in draining swamp or low-lying land or on clearing land. It would include, for example:

    • the costs of acquiring and planting seeds, and
    • part of the cost of ploughing, contouring, fertilising, stone removal and topsoil enhancement relating to the planting.

    You cannot claim this deduction for forestry plants.

    If the expenditure incurred 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.

    The period over which you can deduct the expenditure depends on the effective life of the horticultural plant. You can choose to work out the effective life yourself or you can use the effective life determined by the Commissioner which is listed in Taxation Ruling TR 2015/2.

    If the effective life of the plant is less than three years, you can claim the establishment expenditure in full generally in the year in which the first commercial season starts.

    If the effective life of the plant is three or more years, you can write off the establishment expenditure over the maximum write-off period, which generally begins at the start of what is expected to be the plant’s first commercial season. If the plant is destroyed before the end of its effective life, you are allowed a deduction in that year for the remaining unclaimed establishment costs less any proceeds, for example, insurance.

    Table: Plants with an effective life of three or more years

    Effective life

    Annual write-off rate

    Maximum write-off period

    3 to less than 5 years

    40%

    2 years 183 days

    5 to less than 6 2/3 years

    27%

    3 years 257 days

    6 2/3 to less than 10 years

    20%

    5 years

    10 to less than 13 years

    17%

    5 years 323 days

    13 to less than 30 years

    13%

    7 years 253 days

    30 years or more

    7%

    14 years 105 days

    Where ownership of the horticultural plants changes, the new owner is entitled to continue claiming the balance of capital expenditure they incurred in establishing the plants on the same basis.

    If you are a primary producer and a small business entity, you must use the UCA rules to work out your deductions for horticultural plants. For more information about the simplified depreciation rules, see Small business entities.

    You may need to include a recoupment of expenditure on horticultural plants in your assessable income. As the expenditure may be deductible over more than one income year, special rules apply to determine the amount of any recoupment to be included in assessable income in the year of recoupment and in later income years. An amount received for the sale of a horticultural plant for its market value is not regarded as an assessable recoupment.

    Grapevines

    The specific rules for working out the decline in value of grapevines only apply to grapevines that are planted and first used by you in a primary production business before 1 October 2004. If a grapevine is planted and first used by you in a primary production business on or after 1 October 2004, the decline in value of the grapevine is worked out under the provisions relating to horticultural plants; see Horticultural plants.

    The decline in value of a grapevine is worked out at a rate of 25%, provided:

    • you own the grapevine, or
    • the grapevine is established on Crown land that you hold under a quasi-ownership right (such as a lease) and that is used in a primary production business.

    If you are not entitled to work out your deduction for decline in value under the provisions relating to grapevines because these conditions are not met, a deduction may be available for decline in value under the provisions relating to horticultural plants; see Horticultural plants.

    Your deduction for the decline in value of grapevines is based on the capital expenditure incurred in establishing the grapevines. Capital expenditure incurred in establishing grapevines does not include the cost of:

    • purchasing or leasing land
    • expenditure on draining swamps or low-lying land
    • expenditure on clearing land,
    • but it does include, for example, the cost of:
    • preparing the land (ploughing and topsoil enhancement)
    • planting the vines
    • the vines.

    If the expenditure incurred 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 start to deduct the decline in value of grapevines from the time you first use the grapevines in a primary production business to produce assessable income. If ownership of the grapevines changes, the remaining deduction is available to the new owner while they use the grapevines in a primary production business.

    If a grapevine is destroyed before the end of the write-off period, you are allowed a deduction in the year of destruction for the remaining unclaimed establishment expenditure less any proceeds, for example, insurance.

    If you are a primary producer and small business entity, you must use the UCA to work out your deductions for grapevines. For more information about the simplified depreciation rules, see Small business entities.

    A recoupment of expenditure on grapevines may be assessable income. As the expenditure is deductible over more than one income year, special rules apply to determine the amount of any recoupment to be included in assessable income in the year of recoupment and in later income years. An amount received for the sale of a grapevine for its market value is not regarded as an assessable recoupment.

      Last modified: 26 May 2016QC 48118