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Edited version of private advice
Authorisation Number: 1012622090220
Ruling
Subject: Income tax - deductions - primary production - land clearing
Question
Is the cost of removing trees from a recently acquired property tax deductible under section 8-1 of the Income Tax Assessment Act 1997?
Answer
No.
This ruling applies for the following periods:
Year ending 30 June 2014;
Year ending 30 June 2015.
The scheme commences on:
The scheme has commenced.
Relevant facts and circumstances
The Trust operates a primary production business.
The Trust recently acquired farmlands which contain 'worthless' certain tree plantation. This land is leased from another entity.
The Trust intends to clear the plantation to enable them to undertake a cropping program.
The Trust will incur the costs of the removal of the plantation trees.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1
Reasons for decision
Question
Is the cost of removing trees from a recently acquired property tax deductible under section 8-1 of the Income Tax Assessment Act 1997?
Summary
The benefit from the expenses associated with the removal of the trees is considered to be capital in nature as it will result in an enduring advantage, extending beyond the year in which it will be incurred. As the expense will be capital in nature, no deduction will be allowable under section 8-1 of the ITAA 1997.
Detailed reasoning
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. However, subsection 8-1(2) of the ITAA 1997 states that you cannot deduct a loss or outgoing under this section to the extent it is a loss or outgoing of capital or of a capital nature. Section 8-1 states:
8-1(1)
You can deduct from your assessable income any loss or outgoing to the extent that:
(a) it is incurred in gaining or producing your assessable income; or
(b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.
8-1(2)
However, you cannot deduct a loss or outgoing under this section to the extent that:
(a) it is a loss or outgoing of capital, or of a capital nature; or
(b) it is a loss or outgoing of a private or domestic nature; or
(c) it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income; or
(d) a provision of this Act prevents you from deducting 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.
The Trust intends to clear the tree plantation from the recently acquired land in order to utilise the land for a planned primary production program.
The benefit from the expenses associated with the removal of the trees is considered to be capital in nature as it will result in an enduring advantage, extending beyond the year in which it will be incurred. The resultant advantage will be the additional land which will become available to be used for primary production purposes.
The fact that the trees to be cleared are considered 'worthless' does not change the nature of the expense from that of capital.
As the expense will be capital in nature, no deduction will be allowable under section 8-1 of the ITAA 1997.
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