Edited version of private ruling

Authorisation Number: 1011798888233

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Ruling

Subject: Deduction - installation of water tanks

Question

Is the cost of installing a series of water tanks at a place of business that is specifically required by council in order to use the property for the desired purpose (and earn assessable income) fully deductible under section 8-1 of the Income tax Assessment Act 1997 (ITAA)?

Answer: No

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

18 February 2010

Relevant facts and circumstances

The Council instructed you that the property you owned and used solely for business purposes required a series of water tanks. In order for you to continue to use the property for the business purpose for which you used it, you complied.

At the premises there were:

· No existing barrels were replaced.

· No pipes were replaced.

· Concrete slabs were poured to support new tanks.

· No water tank existed prior to the council requirement to install one.

· Original DA plans were submitted to council and approved; these plans contained a stormwater retention element however no water tanks were in the initial DA approved plans.

· The development went ahead and was completed.

· Upon inspection of the completed development the council noted that the original DA plans had not been adhered to by the builder and the stormwater retention element of the plans was not included, unbeknown to you.

· The council then issued letters stating the original specifications in the DA had not been complied with and requested this be rectified. This would mean tearing down the work completed and starting again at the cost of hundreds of thousands of dollars due to the builder's error.

· After verbal consultation the council instructed that a series of water tanks would be a sufficient solution to fix the problem and you arranged for amended plans to be submitted which were subsequently approved.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1,

Income Tax Assessment Act 1997 section 8-1(2)(a),

Income Tax Assessment Act 1997 section 40-30(3),

Income Tax Assessment Act 1997 section 40-30(1)(a),

Income Tax Assessment Act 1997 section 45-40 and

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

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

Installation of the water tanks were a modification to the premises as there were no water tanks previously on the property. Hence it is considered an improvement to the property and not a replacement of existing water tanks. Therefore the cost of installing the water tanks is capital expenditure and not deductible under section 8-1 of the ITAA 1997.

Detailed reasoning

Subsection 8-1(2) ITAA 1997 provides that you cannot deduct a loss or outgoing under section 8-1 of the ITAA 1997 to the extent that is a loss or outgoing of capital, or of a capital nature.

The judgment of Dixon J in Sun Newspapers Ltd v. FC of T (1938) 61 CLR 337 (the Sun Newspapers Case ) is a leading exposition of the matters that must be examined in order to differentiate whether an amount is capital or revenue in nature.

Accordingly the following indicators, consistent with the matters raised by Dixon J, in the Sun Newspapers Case point towards an expense being capital in nature:

The expenditure is related to the business structure itself. This includes the establishment, replacement or enlargement of the profit yielding structure of business rather than the money earning process.

The nature of the asset has lasting and enduring benefit to the business.

The payment is made 'once and for all' being a single final provision for the future use or enjoyment of the asset or advantage rather than on a regular basis, such as weekly, monthly or yearly or for a specific period.

It must be borne in mind that the statements made by Dixon J are not exhaustive or ultimately definitive of the relevant matters to be considered in each case.

The courts have held, in the absence of special circumstances, the expenditure is capital in nature where it is made with the view to bring into existence an asset or an advantage whether tangible or intangible for enduring benefit of the business: British Insulated & Helsby Cables v. Atherton (1926) AC 205.

The test laid down in the Sun Newspaper Case involved three elements, although none is in itself decisive:

1. The nature of the advantage sought.

2. The way it is to be used or enjoyed; and

3. The means adopted to get it.

Applying the above indicators, the following factors indicate that the expenditure by you in installing the Water tanks is capital in nature.

The expenditure incurred in respect of the water tanks is made with a view to acquiring an asset that has an enduring benefit for the business (i.e. an improvement to your facilities to the extent that you can store water in the water tanks as per council requirements.

The benefits flowing from the water tanks, is of a lasting and recurrent nature.

The expenditure incurred on the installation of the water tanks and the laying down of the concrete slab was a significant amount paid once off with the intention of creating an enduring benefit.

Accordingly, the cost of installing new water tanks is a capital cost and not deductible under section 8-1 of the ITAA 1997. Furthermore, there is no other section of the ITAA 1936 or ITAA 1997 that would give a full deduction for the cost of the water tanks in the year the cost was incurred.

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