Edited version of private ruling

Authorisation Number: 1011825035284

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Ruling

Subject: Tax break: livestock sheds

Question 1

Are you entitled to claim a deduction under section 40-25 of the Income Tax Assessment Act 1997 (ITAA 1997) for the decline in value of environmentally controlled livestock sheds?

Advice/Answers

Yes.

Question 2

Will the environmentally controlled livestock sheds qualify for the small business tax break under Division 41 of the ITAA 1997?

Advice/Answers

Yes.

This ruling applies for the following periods:

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commences on:

1 July 2008

Relevant facts and circumstances

You carry on business as a primary producer.

You are constructing environmentally controlled livestock sheds, at a total cost of over $1,000. The land and the sheds will be used solely for the purposes of the business.

Ownership of the land, the sheds and all other property, plant and equipment used in the business vests in you.

You committed to investing in the sheds between 13 December 2008 and 31 December 2009.

You have an annual (and aggregate) turnover of less than $2 million.

The price of each shed taken separately fully installed is in excess of $1,000.

The livestock will be installed and ready for use by 31 December 2010.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 40-25

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

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

Income Tax Assessment Act 1997 Subsection 45-40(1)

Income Tax Assessment Act 1997 Section 328-110

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 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 of the ITAA 1936 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 of the ITAA 1936 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 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.

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 accommodation of employees, tenants or sharefarmers'.

In Willeroo & Manbullco Ltd v. Federal Commissioner of Taxation (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'.

Business of primary production

Taxation Ruling IT 233 advises the Tax Offices position regarding whether or not particular primary producers should be treated as carrying on a business of primary production. The ruling, in part states that:

…X growers should now be accepted as carrying on a business of primary production.

Application to your circumstances

Willeroo's Case demonstrates that a farming shed can be considered a structural improvement by ordinary concepts. In determining whether an item falls within the definition of plant under paragraph 45-10(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 buildings for raising livestock are to be erected on land used in your primary production business. This is considered to be use of the land for an agricultural or pastoral pursuit.

Therefore the buildings fall within the definition of plant under paragraph 45-40(1)(c) of the ITAA 1997, and depreciation is deductible under section 40-25 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.

You carry on a business and meet the definition of a small business entity as you have an annual and aggregate turnover of less than $2 million. You committed to investing in the sheds, which cost $1,000 or more, between 13 December 2008 and 31 December 2009, and the sheds will be installed and ready for use by 31 December 2010.

The other relevant requirements under Division 41 of the ITAA 1997 are therefore satisfied, and the environmentally controlled sheds will qualify for the small business tax break at the 50% rate.

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