ATO Interpretative Decision
ATO ID 2004/254
Income Tax
Capital Allowances: project pools - project amount - feasibility studiesFOI status: may be released
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Is the capital expenditure incurred by the taxpayer an amount for feasibility studies for the project they proposed to carry on within subparagraph 40-840(2)(d)(iii) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes. The taxpayer's capital expenditure is an amount incurred for feasibility studies for the project within subparagraph 40-840(2)(d)(iii) of the ITAA 1997.
Facts
The taxpayer was unsuccessful in a tender for the development of a multimillion dollar mixed-use property. The tender was a central activity in pursuing the taxpayer's project of acquiring, developing, leasing and managing the property for a determinate project life for the purpose of producing rental and associated assessable income. On losing the tender, the taxpayer abandoned the project.
The taxpayer had incurred a significant amount of expenditure in engaging external consultants to estimate the design and construction costs of the proposed development. All information provided by the consultants was specific to the property and cannot be used for any other property development.
Reasons for Decision
Broadly, section 40-830 of the ITAA 1997 allows a deduction over the project life or on earlier project abandonment for project amounts allocated to a project pool.
To be a 'project amount' as defined in subsection 40-840(2) of the ITAA 1997, the amount must be capital expenditure which, in addition to satisfying paragraphs 40-840(2)(a) to 40-840(2)(c), is one of the amounts specified in paragraph 40-840(2)(d). For the capital expenditure to be a project amount under subparagraph 40-840(2)(d)(iii), the amount must be incurred for feasibility studies for the project.
A feasibility study is a process undertaken to gather specific information to analyse and assess technical, financial, economic, market or other viability in order to make an informed decision about the potential success of an activity or series of activities. A feasibility study has pre-determined criteria (such as level of investment, rate of return, operating costs) against which viability is assessed.
A feasibility study is 'for the project' if it is commissioned or undertaken by the taxpayer for the purpose of obtaining the required data for the specific project the taxpayer is carrying on or proposes to carry on for a taxable purpose.
The work commissioned by the taxpayer constitutes a feasibility study as that work was commissioned to obtain information on a specific aspect of the project the taxpayer proposed to carry on for a taxable purpose. The amount incurred is a 'project amount' under subparagraph 40-840(2)(d)(iii) of the ITAA 1997.
Date of decision: 9 September 2003Year of income: Year ended 30 June 2002
Legislative References:
Income Tax Assessment Act 1997
section 40-830
subsection 40-840(2)
paragraph 40-840(2)(d)
subparagraph 40-840(2)(d)(iii)
ATO ID 2003/728
Keywords
Capital Allowances CoE
Feasibility study expenses
Project amount
Project pool
Uniform capital allowance system
ISSN: 1445-2782