ATO Interpretative Decision

ATO ID 2004/15

Income Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is a taxpayer entitled to a deduction under section 40-515 of the Income Tax Assessment Act 1997 (ITAA 1997) for capital expenditure incurred on the acquisition of a second hand water facility?

Decision

No. Subsection 40-555(1) of the ITAA 1997 provides that no deduction is available for capital expenditure on the acquisition of a water facility if any person has deducted or can deduct an amount under Subdivision 40-F of the ITAA 1997 for any income year for earlier capital expenditure on the construction, manufacture or previous acquisition of that water facility.

Facts

A taxpayer has acquired second hand commercial irrigation equipment from an Australian based farming machinery dealer. The equipment is bought and sold by the dealer as a single self-contained unit.

The equipment's capacity is far in excess of domestic requirements (that is, size, water pressure, spray arc etcetera.)

The taxpayer intends to use the irrigation equipment in a primary production business undertaken in Australia.

The taxpayer does not know and can not find out who the previous owner was and if they claimed, or were entitled to claim, a deduction for the water facility under Subdivision 40-F of the ITAA 1997.

The water facility is not put to a tax preferred use so Division 250 of the ITAA 1997 does not apply to the capital expenditure.

Reasons for Decision

Paragraph 40-515(1)(a) of the ITAA 1997 provides that you can deduct an amount equal to the decline in value for an income year (as worked out under Subdivision 40-F of the ITAA 1997) of a water facility.

Subsection 40-520(1) of the ITAA 1997 defines a water facility as plant or a structural improvement, or an alteration, addition or extension to plant or a structural improvement, that is primarily and principally for the purpose of conserving or conveying water. Examples of water facilities include dams, tanks, bores, wells, irrigation channels, pipes, pumps, water towers and windmills.

Subsection 40-525(1) of the ITAA 1997 requires that the capital expenditure you incurred on the construction, manufacture, installation or acquisition of the water facility must have been incurred primarily and principally for the purpose of conserving or conveying water for use in a primary production business that you conduct on land in Australia. Primary production business is defined in subsection 995-1(1) of the ITAA 1997.

However, subsection 40-555(1) of the ITAA 1997 provides that no deduction is available for capital expenditure on the acquisition of a water facility if any person has deducted or can deduct an amount under Subdivision 40-F of the ITAA 1997 for any income year for earlier capital expenditure on the construction, manufacture or previous acquisition of that water facility. (A water facility and an alteration, addition or extension to that facility are not the same water facility for the purposes of that subsection.)

Section 40-525 of the Income Tax (Transitional Provisions) Act 1997 provides that a taxpayer is taken as having deducted or being able to deduct an amount under Subdivision 40-F of the ITAA 1997 for expenditure on a water facility if the taxpayer has deducted or could have deducted an amount for it under former Subdivision 387-B of the ITAA 1997 or section 75B of the Income Tax Assessment Act 1936.

In some instances a taxpayer who acquires a second hand water facility, particularly one not permanently affixed to land, will not know and will not be able to find out whether the previous owner claimed or was entitled to a deduction under Subdivision 40-F of the ITAA 1997. In such a case the onus of proof would be on the taxpayer to prove that a previous entitlement had not existed if they wish to claim a deduction for the decline in value of a water facility.

In certain circumstances it may not be unreasonable to conclude that an entitlement has previously existed for a water facility based on the facts and balance of probabilities.

The main factor influencing such a conclusion would be the inherently commercial nature of the item which is of the type, function and configuration ordinarily used in primary production businesses. Where the water facility provides for capacity that is in excess of that generally used for a private purpose it is not unreasonable to conclude that it was previously employed to conserve or convey water in a primary production business in Australia.

A further indicator that such an conclusion is not unreasonable is that the water facility is obtained from an Australian based farming machinery dealer who regularly acquires such equipment from local primary producers.

Based on the conclusion that a previous entitlement has existed, no deduction is allowable under Subdivision 40-F of the ITAA 1997 for capital expenditure incurred on the acquisition of second hand commercial water facilities. This conclusion will be made unless the taxpayer has proof to the contrary.

Furthermore, subsection 40-50(1) of the ITAA 1997 provides that no deduction for the decline in value of a depreciating asset is allowed under Subdivision 40-B of the ITAA 1997 where you or another taxpayer has deducted or can deduct an amount under Subdivision 40-F of the ITAA 1997.

Amendment History

Year of income:  Year ended 30 June 2003

Legislative References:
Income Tax Assessment Act 1997
   subsection 40-50(1)
   paragraph 40-515(1)(a)
   subsection 40-520(1)
   section 40-525
   subsection 40-525(1)
   section 40-540
   subsection 40-555(1)
   Subdivision 40-B
   Subdivision 40-F
   Division 250
   Subdivision 387-B
   subsection 995-1(1)

Keywords
Capital expenditure
Dam, bore & windmill construction expenses
Primary production
Primary production structural improvement expenses
Uniform capital allowances system
Water conservation & conveying expenses

Siebel/TDMS Reference Number:  3584127; 1-5F8Y602

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  16 January 2004
Date reviewed:  8 January 2018

ISSN: 1445-2782