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Ruling

Subject: Costs associated with filling in and levelling dams and irrigation channels

Question

Are you entitled to a deduction for the cost of filling in and levelling irrigation channels and dams?

Answer

No

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts and circumstances

You carrying on a business of primary production.

You had a dam and irrigation channels on your property.

As you are now connected to a pipeline you do not need the dam or irrigation channels.

You filled in and levelled the dam and irrigation channel area.

This resulted in additional land which could be used for your primary production activities and assisted in preventing future land degradation.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 40-630

Income Tax Assessment Act 1997 Section 40-635

Reasons for decision

Summary

You are not entitled to claim a deduction for the cost of filling in and levelling a dam and irrigation channels as the expense is of a capital nature and does not meet the requirements for deductibility as a landcare operation for land.

Detailed reasoning

General deduction

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income or a provision of the taxation legislation excludes it.

The Courts have laid down guidelines for distinguishing capital and revenue expenses. In examining an expense, three elements are looked at:

· the nature of the advantage sought

· the way it is to be used or enjoyed, and

· the means adopted to get it.

Where the expense results in bringing into existence an asset or an advantage for the enduring benefit of the business, the expenditure is likely to be capital in nature. Similarly, where the expense is a single payment for the future use or enjoyment of the asset, the expenditure is likely to be capital.

You have filled in a dam and irrigation channels on your land in order to use the land for farming production.

The costs associated with this activity are considered to be capital in nature as they have resulted in an advantage for the enduring benefit of the business. The resultant advantage being additional land which can be used for farming purposes.

As the expenses are capital in nature, no deduction is allowable under section 8-1 of the ITAA 1997.

Landcare operation for land deduction

As stated above, capital losses or outgoings and losses or outgoings of a capital nature, even though they are incurred in the course of producing assessable income, are not deductible under section 8-1 of the ITAA 1997. However, certain capital costs may be deductible either outright or by way of depreciation or amortisation under specific provisions of the law.

Section 40-630 of the ITAA 1997 is a rewrite of former subsection 75D of the Income Tax Assessment Act 1936 (ITAA 1936). This section allows a deduction for capital expenditure on a landcare operation for land in Australia which you used at the time of the expenditure for carrying on a primary production business.

A landcare operation for land includes an operation primarily and principally for the purpose of preventing or fighting land degradation (except by erecting fences on the land).

Taxation Determination TD 94/9 provided the Commissioner's views of the deductibility of expenditure under former sections 75B and 75D of the ITAA 1936 where the expenditure was incurred for dual purposes, one of which was preventing and combating land degradation.

TD 94/9 stated that where the expenditure is incurred for a dual purpose, the 'primarily and principally' test does not required a consideration of the subjective or objective purpose or motives of the taxpayer in incurring the expenditure. The test requires an examination of the primary and principal function or purpose of the result produced by the expenditure.

In your case, the filling in of the dam and irrigation channels was undertaken with the purpose of providing you with additional land on which you could carry out your primary production business. Whilst the action taken would assist in preventing future land degradation this was not the primary purpose of the work done.

As such, no deduction is allowable under section 40-630 of the ITAA 1997 for the cost of filling in and levelling dams and irrigation channels on your land as the expenses were not incurred with the primary and principal purpose of preventing or fighting land degradation.

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