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Subject: Deduction for capital expenditure under section 40-880 of the ITAA 1997
Issue 1
Question 1
Is the taxpayer eligible to claim capital expenditure over five years period under section 40-880 of the Income Tax Assessment Act 1997 (ITAA 1997) for engaging X Pty Ltd to undertake project management, prepare an environmental impact statement (EIS), and engage in technical studies in relation to the construction of a Y at an existing business, that is not otherwise deductible?
Answer
Yes.
Relevant facts
The taxpayer has owned a business for a number of years.
The business has a large tract of land.
The taxpayer is exploring the feasibility of constructing a Y at the site, and has incurred costs to this end over the last several years. The evidence of this expenditure is presented with the application which contains a draft land use plan.
The development being considered is a Y which after approval will cater for various charters and tours.
Y has been designed to integrate with the existing facilities and will incorporate Y related commercial uses, amenities for Y users, and a range of tourist accommodation experiences, parking areas and parklands.
Before the development can go any further, the taxpayer needs to acquire certain approvals from relevant authorities. To this end, the taxpayer has engaged a company of consultants, called X Pty Ltd to prepare an EIS.
X Pty Ltd is an integrated professional services provider, delivering the specialist advice necessary to create or improve the physical and social infrastructure that underpins communities around the world. The contract requires X Pty Ltd to report directly to the taxpayer on a weekly basis. A project timeline of events has been submitted with the application to exhibit the progression of the project.
The contract with X Pty Ltd has already commenced and the first progress payment has been made. A tax invoice from X Pty Ltd is submitted with the application.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1
Income Tax Assessment Act 1997 paragraph 40-25(7)(a)
Income Tax Assessment Act 1997 section 40-880
Income Tax Assessment Act 1997 subsection 40-880(1)
Income Tax Assessment Act 1997 subsection 40-880(2)
Income Tax Assessment Act 1997 subsection 40-880(3)
Income Tax Assessment Act 1997 subsection 40-880(4)
Income Tax Assessment Act 1997 subsection 40-880(5)
Income Tax Assessment Act 1997 subsection 40-880(6)
Income Tax Assessment Act 1997 subsection 40-880(7)
Income Tax Assessment Act 1997 subsection 40-880(8)
Income Tax Assessment Act 1997 subsection 40-880(9)
Income Tax Assessment Act 1997 section 995-1
Reasons for decision
The legislative references are to the Income Tax Assessment Act 1997 unless otherwise specified.
Issue 1
Subsection 40-880(1) states that the object of section 40-880 is to make certain business capital expenditure deductible over 5 years if:
(a) the expenditure is not otherwise taken into account; and
(b) the deduction is not denied by some other provision; and
(c) the business is, was or is proposed to be carried on for a taxable purpose.
The term, "business" is defined in section 995-1 as including any profession, trade, employment, vocation or calling, but does not include occupation as an employee.
The taxpayer has been running the activity for a number of years on a professional basis. The activity, thus, is included in the definition of business. Since the expenditure to make future expansion of the business by integrating Y, the expenditure is not necessarily incurred in carrying on the business for the purpose of producing or gaining the assessable income. Therefore the expenditure is not taken into account under section 8-1 or in any other provision of the income tax legislation. The taxpayer has been running the business for taxable purpose within the meaning of paragraph 40-25(7)(a), namely for the purpose of producing assessable income. Since all the requirements of subsection 40-880(1) are satisfied, the taxpayer would be able to claim the expenditure over 5 year period subject to certain conditions and limitations as stated under subsections 40-880(3) to 40-880(9).
Subsection 40-880(3) limits the deduction that can be claimed to the extent the business is, was or proposed to be carried on for a taxable purpose. As discussed before, the expenditure of the taxpayer relates to business activities that are carried on for taxable purposes.
Subsection 40-880(4) relates to business expenditure that is, was or proposed to be carried on by another entity. This is not relevant to the taxpayer.
Subsection 40-880(5) states as follows:
You cannot deduct anything under this section for an amount to the extent that:
(a) it forms part of the cost of a depreciating asset that you hold, used to hold or will hold; or
(b) you can deduct an amount for it under a provision of this Act other than this section; or
(c) it forms part of the cost of the land; or
(d) it is in relation to a lease or other legal or equitable right; or
(e) it would, apart from this section, be taken into account in working out;
(i) a profit that is included in your assessable income (for example, under section 6-5 or 15-15); or
(ii) a loss that you can deduct (for example, under section 8-1 or 25-40); or
(f) it could, apart from this section, be taken into account in working out the amount of a capital gain or capital loss from a CGT event; or
(g) a provision of this Act other than this section would expressly make the expenditure non-deductible if it were not of capital nature; or
(h) a provision of this Act other than this section expressly prevents the expenditure being taken into account as described in paragraph (a) to (f) for a reason other than the expenditure being capital in nature; or
(i) it is expenditure of a private or domestic nature; or
(j) it is incurred in relation to gaining or producing exempt income or non-assessable non-exempt income.
The expenditure incurred by the taxpayer to enable X Pty Ltd to prepare an EIS and feasibility as well as project management advice does not form part of a depreciating asset. The advice is in relation to future expansion of the business which is not a depreciating asset.
The expenditure cannot be deducted under any other provision of this Act.
It does not form part of the cost of the land.
It is not in relation to a lease or other legal or equitable right.
The expenditure is not taken into account in working out the profit or loss for the taxpayer.
The amount is not taken into account in working out the capital gain or loss from a CGT event. The capital expenditure is in relation to the feasibility study and does not fall within any of the cost base element of a CGT asset.
There is no provision of this Act that would make the expenditure non-deductible if it were not of capital nature.
The expenditure is not of private or domestic nature, rather in relation to a business that the taxpayer is carrying on.
It is not incurred in gaining or producing exempt or non-assessable non-exempt income.
Therefore, none of the provisions of subsection 40-880(5) prevents the expenditure from being deductible under section 40-880.
Subsection 40-880(5) is further explanation of paragraph 40-880(5)(d) and (f) and does not apply to the taxpayer.
The project timeline of events that the taxpayer submitted as Appendix B shows that the taxpayer's proposed expansion of the business will be carried out within a reasonable time.
Subsection 40-880(8) limits deduction of an amount which because of the market value substitution rule was excluded from the cost of a depreciating asset. This does not apply to the taxpayer's situation.
Subsection 40-880(9) deals with an equity or a debt interest and not relevant to the present situation.
Considering the above, the taxpayer is eligible to claim deduction under section 40-880 for the capital expenditure incurred in paying X Pty Ltd for its services to the taxpayer in equal amount over five year period starting from the year in which it was first incurred.
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