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Edited version of private ruling
Authorisation Number: 1011491573791
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Ruling
Subject: Depreciation of dam improvement where land leased to third party
Question
Are you entitled to a deduction for the decline in value of a dam improvement on land you leased the property to a third party?
Answer
Yes.
This ruling applies for the following period:
1 July 2008 to 30 June 2009
The scheme commences on:
1 July 2008
Relevant facts and circumstances
You are the owner of a grazing property.
You lease the property to a third party.
The dam on the property had dried up so you took the opportunity to make improvements to the dam by cleaning out and extending the dam.
You state that you should be able to claim depreciation as you cannot lease the grazing property without water.
You are not carrying on a business of primary production and you are not an irrigation water provider.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 40-1
Income Tax Assessment Act 1997 subsection 40-30(1)
Reasons for decision
Summary
We have determined in your circumstances that you are entitled to a deduction for the decline in value of the dam improvements.
This is because you are the holder of a depreciating asset fixed to the land, the lessee has no right to remove it and you use it for the purpose of producing assessable income.
Detailed explanation
Expenditure incurred on a repair of a capital nature, or a change, to a depreciating asset may be eligible for the deduction for water facilities over three years, provided the expenditure is incurred principally for conserving or conveying water for use in a primary production business that you conduct on land in Australia.
As you do not conduct a primary production business on the land, you are not eligible for the 3-year write-off for water facilities.
You may, however, be eligible to claim a deduction for the decline in value of the improvement to the dam, based on the dam's effective life.
As the dam is an improvement to land, has a discrete and identifiable function, has a limited effective life and can reasonably by expected to decline in value over the time it is used, the dam is a depreciating asset for the purposes of subsection 40-30(1) of the Income Tax Assessment Act 1997.
Only the holder of a depreciating asset can claim a deduction for its decline in value.
In most cases, the legal owner of a depreciating asset will be its holder.
Under property law the dam is treated as part of the land and you are the holder of the land which you received as a beneficiary of a deceased estate.
If a depreciating asset is fixed to leased land and the lessee has a right to remove it, the lessee is the holder for the time that the right to remove the asset exists.
In your case, the lessee has no right to remove the dam so the lessee is not the holder of the dam.
Therefore, you are the holder of the asset and you can claim a deduction for the decline in value of the improvements to the dam as you use it to produce assessable income.
The Commissioner's determination of the effective life of a dam is 40 years.
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