ATO Interpretative Decision
ATO ID 2004/410
Income Tax
Capital Works: your area - earlier lessee's expenditureFOI 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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Does entering into a sublease of a structural improvement give the taxpayer an interest in a construction expenditure area that meets the definition of 'your area' contained in subsection 43-120(2) of the Income Tax Assessment Act 1997 (ITAA 1997) where the construction expenditure on the structural improvement was incurred by the sublessor?
Decision
No. The taxpayer's interest in a construction expenditure area does not meet the definition of 'your area' in subsection 43-120(2) of the ITAA 1997 because the interest was not acquired by way of assignment of a lease.
Facts
The taxpayer entered into a sublease of the sea bed that has a floating marina berth constructed upon it. The marina berth is part of a floating marina that was constructed by the sublessor of the sublease.
The floating marina is a series of floating pontoons attached to concrete piles that are driven into the sea bed. The pontoons surround the concrete piles with heavy rubber rollers allowing the pontoons to rise and fall with the tide. The pontoons are prevented from moving horizontally by the piles. The pontoons form numerous berthing sections. Access to the berthing sections is provided by walkways.
The pontoons are capital works to which Division 43 of the ITAA 1997 applies. The expenditure incurred by the sublessor to construct the marina is construction expenditure as defined in section 43-70 of the ITAA 1997.
The capital works have a construction expenditure area and there is a pool of construction expenditure for that area as required under section 43-10 of the ITAA 1997.
The taxpayer receives rental income from letting the marina berth.
Reasons for Decision
Broadly speaking, Division 43 of the ITAA 1997 allows you to deduct an amount for construction expenditure on certain income producing capital works for an income year.
More specifically, section 43-10 of the ITAA 1997 provides that an amount may be deducted for capital works for an income year if there is a construction expenditure area, a pool of construction expenditure for that area and you use 'your area' in a required way (including to produce assessable income; section 43-140 of the ITAA 1997). The first two conditions are satisfied in this case.
'Your area' has the meaning given in sections 43-115 and 43-120 of the ITAA 1997. How 'your area' is determined under those sections depends on whether you are an owner or lessee (or holder of a quasi-ownership right) of the part of the capital work on which the construction expenditure is incurred.
For a lessee 'your area' is the part of the construction expenditure area that has been continuously leased from the time of completion by the lessee who incurred the expenditure. Subsection 43-120(2) of the ITAA 1997 provides that if an earlier lessee incurred the expenditure, 'your area' is that part of the construction expenditure area that has been continuously leased from the time of completion by that lessee or an assignee of that lessee's lease. It is only the original lessee who incurred the construction expenditure or an assignee of that lessee's lease that can have a 'your area'.
The taxpayer did not obtain their lease by way of assignment from the sublessor who incurred the expenditure. The taxpayer is a sublessee, not an assignee of the sublessor's lease. Therefore, the acquisition of a sublease does not give the taxpayer an interest in a construction expenditure area that meets the definition of 'your area' contained in subsection 43-120(2) of the ITAA 1997.
Date of decision: 26 March 2004Year of income: Year ended 30 June 2003
Legislative References:
Income Tax Assessment Act 1997
section 43-10
section 43-70
section 43-115
section 43-120
subsection 43-120(2)
section 43-140
Division 43
Keywords
Building depreciation
Buildings
Construction expenditure area
Structural improvement expenses
Date reviewed: 2 November 2017
ISSN: 1445-2782
Copyright notice
© Australian Taxation Office for the Commonwealth of Australia
You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).
