Edited version of private ruling

Authorisation Number: 1011470812675

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Ruling

Subject: Eligible assets for the tax break

Question 1

Will the structural improvements, specifically electrical installations, qualify as a tangible depreciating asset for which a capital allowance deduction is available under section 40-25 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period/s:

1 July 2008 to 30 June 2009.

1 July 2009 to 30 June 2010.

The scheme commences on:

1 July 2008.

Relevant facts and circumstances

A trust conducts a primary production business.

Plans of the property and the shed have been provided.

Mains electricity comes onto the property and into the workshop where it is metered. From the workshop, electricity is supplied to the shed.

Major work was carried out after the metering point and within the shed to update the shed facilities. A lot of this work was electrical.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 40-45(2).

Income Tax Assessment Act 1997 Section 40-645

Income Tax Assessment Act 1997 Section 40-655

Income Tax Assessment Act 1997 Paragraph 43-70(2)(e).

Income Tax Assessment Act 1997 Paragraph 45-40(1)(c).

Income Tax Assessment Act 1997 Paragraph 45-40(1)(f).

Income Tax Assessment Act 1997 Section 328-110

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Small business tax break

Under the Tax Laws Amendment (Small Business and General Business Tax Break) Act 2009 a deduction is available for eligible expenditure on new investment in tangible, depreciating assets.  

Small business entities are now able to claim a 50% bonus tax deduction (the tax break) for eligible assets costing $1,000 or more that they:

- commit to investing in between 13 December 2008 and 31 December 2009, and

- start to use or have installed ready for use by 31 December 2010.

To qualify for the 50% rate you need to meet the definition of a small business entity in section 328-110 of the ITAA 1997. This generally means that the taxpayer is carrying on a business and has an annual turnover of less than $2 million.

Businesses can commit to investing in an asset by:

- entering into a contract under which they will hold the asset, or

- starting to construct the asset.

Eligible assets

The tax break is available for new tangible, depreciating assets for which a deduction is available under Subdivision 40-B of the ITAA 1997.

Subdivision 40-B of the ITAA 1997 does not apply to depreciating assets that are capital works (such as construction expenditure) for which an amount is deductible under Division 43 of the ITAA 1997, as stated in subsection 40-45(2) of the ITAA 1997.

However, paragraph 43-70(2)(e) of the ITAA 1997 specifically excludes expenditure on plant from being construction expenditure. As a result a deduction for decline in value of plant is available under Division 40 of the ITAA 1997.

Plant

Generally, to define an item as plant requires an examination of its functionality. If the function is to provide the setting or environment within which income producing activities are conducted (that is, a building) an item will generally not qualify as plant.

Section 43-10 of the ITAA 1997 provides a deduction for certain construction expenditure incurred in respect of the construction of capital works such as buildings or structural improvements, including any extensions, alterations, or improvements to buildings or structural improvements.

Subsection 43-70(1) of the ITAA 1997 defines construction expenditure as capital expenditure incurred in respect of the construction of capital works. However, paragraph 43-70(2)(e) of the ITAA 1997 specifically excludes expenditure on plant from being construction expenditure. As a result no deduction is allowed for such expenditure under Division 43 of the ITAA 1997.

Paragraph 45-40(1)(c) of the ITAA 1997 extends the meaning of plant to include structural improvements on land used for agricultural or pastoral operations, other than those used for domestic or residential purposes. However, paragraph 45-40(1)(f) of the ITAA 1997 includes as plant 'structural improvements …….. if they are provided for the accommodation of employees, tenants or sharefarmers'.

In Willeroo & Manbulloo Ltd v. FC of T (1964) 111 CLR 336; 9 AITR 424; 13 ATD 356 (Willeroo's Case) the issues of structural improvement and plant are considered. Willeroo's Case was an appeal to the High Court relating to depreciation in respect of certain structural improvements described as a road train base.

The taxpayer operated a primary production business generally described as the grazing, breeding and transporting of cattle to meat works. The taxpayer claimed plant rates of depreciation for the structural improvements that constituted the road train base.

The road train base consisted of a manager's and staff quarters, garage, workshop and store. These buildings were adjacent to holding yards and an overnight paddock in which cattle could be held to await the road trains. The Commissioner contended that the land had not been used for the purpose of pastoral pursuits.

It was found that the erection of the road train base and its application in business, equipped the station for the despatch of cattle by road train, and for the management, staffing and servicing of the road trains themselves. In judgement Kitto J stated at p.342, 'It seems to me that the whole of the station was used for the purposes of pastoral pursuits, no less after than before the erection of the road train base'.

Exclusions for electricity lines

Section 40-25 of the ITAA 1997 sets out that you can deduct an amount equal to the decline in value of a depreciating asset, which is held for any time during an income year, and used for a taxable purpose.

Section 40-50 of the ITAA 1997 excludes from Subdivision 40-B of the ITAA 1997 any decline in value deductions that can be claimed under Subdivision 40-G of the ITAA 1997.

Section 40-645 of the ITAA 1997 states that you can deduct amounts for capital expenditure that that you incur in connecting power to land or upgrading the connection. Section 40-655 of the ITAA 1997 provides the meaning of connecting power to land or upgrading the connection and metering point. In applying section 40-655 of the ITAA 1997, section 645 of the ITAA 1997 allows a deduction only for the connection of the mains electricity supply to a metering point on the land and then other expenses associated with this. There is no deduction allowed past the main metering point on the land under section 40-645 of the ITAA 1997.

Application to your circumstances

Willeroo's Case demonstrates that a farming shed can be considered a structural improvement by ordinary concepts, including any extensions, alterations, or improvements to buildings or structural improvements. In determining whether an item falls within the definition of plant under paragraph 45-40(1)(c) of the ITAA 1997, the use of the land for the purpose of agricultural or pastoral pursuits must be satisfied.

In your case, the shed that has been updated and improved is located on land used in your primary production business. This is considered to be use of the land for an agricultural or pastoral pursuit.

No deduction is allowed under section 40-645 of the ITAA 1997 as all work has been conducted after the metering point.

Therefore, the improvements to the shed fall within the definition of plant under paragraph 45-40(1)(c) of the ITAA 1997, and depreciation is deductible under Subdivision 40-B of the ITAA 1997. Accordingly, the assets are considered eligible assets for the purposes of the tax break under Division 41 of the ITAA 1997.

Note:

To claim the 50% tax break you must meet all of the eligibility criteria.

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