ATO Interpretative Decision

ATO ID 2009/37 (Withdrawn)

Income Tax

Capital Allowances: business related costs - limitation of deduction - forms part of the cost of land
FOI status: may be released
  • This ATO ID is withdrawn because it is superseded by Draft Taxation Ruling TR 2010/D7
    This document has changed over time. View its history.

Status of this decision: Decision Withdrawn 10 December 2010
CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Does the taxpayer's capital expenditure on landscaping the leased land on which they carry on their business form part of the cost of land for the purpose of paragraph 40-880(5)(c) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

No. The taxpayer's capital expenditure on landscaping the leased land on which they carry on their business does not form part of the cost of land for the purpose of paragraph 40-880(5)(c) of the ITAA 1997 because the taxpayer does not hold the requisite interest in the land.

Facts

The taxpayer carries on their business on land they lease from the land owner. The taxpayer does not have any right or option to purchase the land during the course of or at the end of the lease. The land is not treated as a capital gains tax (CGT) asset of the taxpayer.

The taxpayer constructed on the land that they lease a new building from which they carry on their business. The construction included landscaping works annexed to the land of the new building site. The capital expenditure incurred by the taxpayer on landscaping works includes the cost of purchasing and laying turf and mulch.

The terms of the lease provide that any work done by the taxpayer on the land that it leases remains the property of the land owner and there is no right of removal by or provision for any payment or adjustment to the taxpayer in respect of the work done by the taxpayer.

The taxpayer's capital expenditure on landscaping was incurred 'in relation to your business' for the purpose of paragraph 40-880(2)(a) of the ITAA 1997 and the taxpayer's deduction for that expenditure under section 40-880 of the ITAA 1997 is not limited under subsection 40-880(3) of the ITAA 1997.

The expenditure was incurred on or after 1 July 2005.

Reasons for Decision

Section 40-880 of the ITAA 1997 provides a deduction over five income years for certain business related capital expenditure which, generally speaking, is not recognised in some way elsewhere in the tax law. Paragraph 40-880(5)(c) of the ITAA 1997 provides that you cannot deduct anything under section 40-880 of the ITAA 1997 for an amount of capital expenditure you incur to the extent that it forms part of the cost of land; the implication being that such expenditure is provided for elsewhere in the tax law.

The expression 'forms part of the cost of land' is not defined in the legislation.

However, paragraph 2.67 of the Explanatory Memorandum to the Tax Laws Amendment (2006 Measures No. 1) Bill 2006 (the EM) states in relation to paragraph 40-880(5)(c) of the ITAA 1997 that:    


Expenditure that forms part of the cost of land, whether or not the land is held by the taxpayer, is not deductible.

Land is not a depreciating asset and therefore the meaning of 'held' in subsection 995-1(1) of the ITAA 1997 in the context of depreciating assets does not apply here. The use of the word 'held' in paragraph 2.67 of the EM provides for the various types of interest in land, in addition to legal ownership, such that whatever the taxpayer's interest in the subject land is, it must be sufficient to enable the expenditure incurred by the taxpayer to be included in the cost of that land for tax purposes; ordinarily, that would be no less than ownership.

As there is no further guidance in the EM as to the meaning of the expression 'forms part of the cost of land', consideration is required of the ordinary meaning of those words shaped by the context in which they are found.

The Australian Oxford Dictionary, 2004, Oxford University Press, Melbourne, defines the word 'land' as:

1.
the solid part of the earth's surface...
2.
a an expanse of country; ground; soil...c any part of the earth's surface and everything annexed to it, as trees, crops, buildings, etc...

The Macquarie Dictionary, 2005, 4th edn, The Macquarie Library Pty Ltd, NSW, defines the word 'land' as:

1.
the solid substance of the earth's surface...
4.
Law an area of ground together with any trees, crops or permanently attached buildings and including the air above and the soil beneath.

In Eon Metals NL v. Commissioner of State Taxation (WA) 91 ATC 4841; (1991) 22 ATR 601, Ipp J at ATC 4845; ATR 606 referred to the judgement of Blackburn J in Holland v. Hodgson (1872) LR 7 CP 328 who said at 334-335:    


There is no doubt that the general maxim of the law is, that what is annexed to the land becomes part of the land.

In this case, the landscaping works done on the new building site are annexed to the land and, therefore, form part of the land which the taxpayer leases from the land owner. This is explicitly confirmed by the terms of the lease which state that the work remains the property of the land owner. It follows that the landscaping work done on the leased land is also owned by the land owner.

The term 'cost' is defined in subsection 995-1(1) of the ITAA 1997 in the context of depreciating assets and trading stock only. As the land in this case is neither, those definitions are not relevant to determining the meaning of the term. Guidance has, therefore, been sought from the ordinary meaning of the term shaped by the context in which it is found.

The Australian Oxford Dictionary, 2004, Oxford University Press, Melbourne, defines the word 'cost' as:    


1 tr. Be obtainable for (a sum of money); have as a price...
   

n. 1 what a thing costs; the price paid or to be paid.

Similarly, The Macquarie Dictionary, 2005, 4th edn, The Macquarie Library Pty Ltd, NSW, defines the word 'cost' as:    


1. the price paid to acquire, produce, accomplish, or maintain anything: the cost of a new car is very high...
   

verb (t) 5. to require the expenditure of (money, time, labour, etc) in exchange, purchase, or payment; be of the price of; be acquired in return for...

These dictionary definitions indicate that the 'cost' of a thing includes not only the price paid to acquire the thing but also expenditure incurred to improve or affix other things to it. The definitions also suggest that there needs to be an inter-relationship between the person incurring the cost and the thing being costed.

Taking into account all of these matters, it is considered that the use of the expression 'forms part of the cost of land' in paragraph 40-880(5)(c) of the ITAA 1997 requires the existence of an inter-relationship or sense of identity between the taxpayer who incurs the expenditure and the taxpayer who holds a sufficient interest in the land for their expenditure to be included in the cost of that land. In this case, the taxpayer is the lessee only of the land and, therefore, does not have the requisite interest in the leased land for their expenditure to be included in the cost of that land.

Therefore, the capital expenditure that is incurred by the taxpayer on landscaping the leased land does not form part of the cost of land for the purpose of paragraph 40-880(5)(c) of the ITAA 1997 with the result that the paragraph does not apply to limit the taxpayer's deduction otherwise available under section 40-880 of the ITAA 1997.

Date of decision:  24 April 2009

Year of income:  Year ended 30 June 2006 Year ended 30 June 2007 Year ended 30 June 2008 Year ended 30 June 2009 Year ended 30 June 2010

Legislative References:
Income Tax Assessment Act 1997
   section 40-880
   paragraph 40-880(2)(a)
   subsection 40-880(3)
   paragraph 40-880(5)(c)
   subsection 995-1(1)

Case References:
Eon Metals NL v Commissioner of State Taxation (WA)
   91 ATC 4841
   (1991) 22 ATR 601

Holland v Hodgson
   (1872) LR 7 CP 328

Related ATO Interpretative Decisions
ATO ID 2009/35
ATO ID 2009/36

Other References:
Explanatory Memorandum to the Tax Laws Amendment (2006 Measures No. 1) Bill 2006
The Australian Oxford Dictionary , 2004, Oxford University Press, Melbourne
The Macquarie Dictionary , 2005, 4th edn, The Macquarie Library Pty Ltd, NSW

Keywords
Australian Taxation Office
Blackhole expenditure
Capital Allowances CoE
Capital Works Deductions
Centres of Expertise
Deductions & expenses

Business Line:  Administration Business and Personal Taxes Centre of Expertise

Date of publication:  22 May 2009

ISSN: 1445-2782

history
  Date: Version:
  24 April 2009 Original statement
You are here 10 December 2010 Withdrawn