ATO Interpretative Decision

ATO ID 2004/55 (Withdrawn)

Income Tax

• This ATO ID is withdrawn as the ATO view on this matter is now dealt with in Taxation Determination TD 2006/46.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is the capital expenditure the taxpayer incurred establishment expenditure, as defined in subsection 40-545(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. The capital expenditure the taxpayer incurred is establishment expenditure because it is an amount incurred that is attributable to the establishment of the horticultural plant.

Facts

The taxpayer proposed to carry on a business growing olive trees and bought a large block of land.

Before the olive trees were planted, the taxpayer incurred the following capital expenditure, with none of the expenditure being for clearing of the land:

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costs of conducting soil analysis tests. The tests identified the soil condition of the taxpayer's property. The report provided to the taxpayer advised the taxpayer on how to prepare the soil for olive establishment and production.

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costs of applying soil balancing nutrients

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costs of machine hire to deep rip the land

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costs of disc ploughing the land

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cost for planting site survey. The survey was required

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to ensure that the olive grove layout and subsequent irrigation design is properly undertaken and adequate water drainage is achieved

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to determine the precise number of trees that can be planted on the block

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consultancy fees for

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roughly marking out the boundaries of the areas to be planted

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assisting and supervising soil sampling, digging test holes to monitor changes in soil type

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supervising spreading of ameliorants and ripping of the block

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assisting with planting site survey and drawing up of plans for irrigation and planting

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forming up planting rows.

Reasons for Decision

Subsection 40-515 of the ITAA 1997 provides a deduction for decline in value for depreciating assets that are water facilities or horticultural plants, provided the taxpayer meets the applicable conditions in section 40-525 of the ITAA 1997.

An olive tree is 'horticultural plant' as defined in subsection 40-520(2) of the ITAA 1997.

Section 40-545 of the ITAA 1997 explains how to work out the decline in value for horticultural plants. The deduction is based on the establishment expenditure which is the amount of capital expenditure incurred that is attributable to the establishment of the horticultural plant.

Examples of what is included in establishment expenditure are given in paragraph 5.24 in the Revised Explanatory Memorandum to the New Business Tax System (Capital Allowances) Act 2001. This paragraph states that the costs of establishing horticultural plants may include the following:

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the cost of acquiring the plants or seeds

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the cost of planting the plants or seeds

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any costs incurred preparing to plant. These do not include the initial clearing of the land, but may in some cases include part of the cost of ploughing, contouring, top dressing, fertilising, stone removal, top soil enhancement and so on, that is attributable to the establishment of the plant

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the costs of pot and potting mixtures (for potted plants)

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the cost incurred in grafting trees

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the costs of replacing existing plants and trees, because of loss of fair economic return or because of declining popularity of a particular existing variety.

Based on the facts it is considered that the amount of capital expenditure that the taxpayer incurred is costs incurred for preparing to plant. Therefore, they are establishment expenditure and deductible to the taxpayer under section 40-515 of the ITAA 1997. The deduction is allowable in the income year in which the first commercial season starts (section 40-530 of the ITAA 1997) and provided that the other conditions as contained in Subdivision 40-F of the ITAA 1997 are also satisfied.

Year of income:  Year ended 30 June 2003 Year ended 30 June 2004 Year ended 30 June 2005 Year ended 30 June 2006 Year ended 30 June 2007

Legislative References:
Income Tax Assessment Act 1997
   Subdivision 40-F
   section 40-515
   subsection 40-525(2)
   section 40-530
   section 40-545

Other References:
Revised Explanatory Memorandum to the New Business Tax System (Capital Allowances) Act 2001

Keywords
Capital expenditure
Establishment expenditure for horticultural plants
Horticulture

Business Line:  Effective Life and Capital Allowances Centre of Expertise

Date of publication:  23 January 2004

ISSN: 1445-2782