Edited version of your written advice

Authorisation Number: 1012704234311

Ruling

Question 1

Is a transportable home considered "plant" according to paragraph 45-40(1)(f) of the Income Tax Assessment Act 1997 (ITAA 1997)

Answer

Yes

Question 2

Can you claim a deduction for decline in value of the transportable home provided for employees engaged in your primary production business?

Answer

Yes

Question 3

Will the erection by the employer of a transportable home on the land, owned by the Director, result in the Director receiving a fringe benefit in accordance with the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986) if the transportable home is:

(a) removed during or at the end of the lease, or

(b) not removed during or at the end of the lease and the Tenant receives compensation for the value of the transportable home?

Answer

No.

Question 4

Are there Division 7A implications in relation to the arrangement?

Answer

Not applicable.

This ruling applies for the following period:

Year ended 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

The Company conducts a primary production business from property A (owned by a related entity), and property B which is owned by the shareholder/managing director (the Director).

Property B was acquired by the Director from a relative.

The transfer of property B to the Director was treated as an intergenerational transfer for the purposes of stamp duty concessions. The stamp duty legislation required the property to be transferred to a natural person for the stamp duty concession, otherwise property B would have been transferred to the Company.

Property B has been used by the Company on the basis that a rent is paid to the Director (also the previous owner prior to the transfer), and the Company pays all costs in relation to the property such as rates, insurance and repairs.

A lease agreement, between the Company (the Tenant) and the Director (the Landlord), has been completed for the use of property B by the Company for the purposes of conducting the primary production business. Further it stipulates the following:

• the Tenant may make improvements or add plant to the property, provided that consent has been given by the Landlord

• all such improvements or plant shall be paid for by the Tenant. The Tenant shall have the right to remove such improvements or plant during or at the termination of the lease. Alternatively the Tenant shall be entitled to compensation for the value of such improvements or plant at the time of termination of the lease.

The Company (employer) proposes to erect a transportable home on property B for occupation by a full time employee of the Company, to assist in the day-to-day operations of the business.

The employee will not be related to the Company or the Director.

Due to the isolated location of the property, it is necessary for the Company to provide accommodation for the employee.

All costs associated with the transportable home will be paid by the Company, and rent paid by the employee for the use of the transportable home will be payable to the Company.

The Director will receive no benefit from the transportable home being erected on the property, except that it will be erected on their land.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 Section 45-40

Income Tax Assessment Act 1997 Paragraphs 45-40(1)(a) to (f)

Income Tax Assessment Act 1997 Subsection 40-65(1)

Income Tax Assessment Act 1997 Subsection 152-35(1)

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 Section 137

Reasons for decision

Question 1

Summary

The transportable home, which will be used for residential purposes, is considered a structure which is used in connection with agricultural operations. As such it is considered plant and deductible under Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

The meaning of plant is outlined under section 45-40 of the ITAA 1997.

Plant includes:

a) articles, machinery, tools and rolling stock; and

b) animals used as beasts of burden or working beasts in a business, other than a primary production business; and

c) fences, dams and other structural improvements, other than those used for domestic or residential purposes, on land that is used for agricultural or pastoral operations; and

d) structural improvements, other than a forestry road or structural improvements used for domestic or residential purposes, on land used in a business involving:

(i) planting or tending trees in a plantation or forest that are intended to be felled; or

(ii) felling trees in a plantation or forest; or

(iii) transporting trees, or parts of trees, that you felled in a plantation or forest to the place where they are first to be milled or processed, or from which they are to be transported to the place where they are first to be milled or processed; and

e) structural improvements, other than those used for domestic or residential purposes, that are used wholly for operations (carried out in the course of a business) relating directly to:

(i) taking or culturing pearls or pearl shell; or

(ii) taking or catching trochus, bêche-de-mer or green snails;

and that are situated at or near a port or harbour from which the business is conducted; and

f) structural improvements that are excluded from paragraph (c), (d) or (e) because they are used for domestic or residential purposes if they are provided for the accommodation of employees, tenants or sharefarmers who are engaged in or in connection with the activities referred to in that paragraph.

The Macquarie Dictionary defines agriculture as the cultivation of land, including crop-raising, forestry, stock-raising, etc; farming.

In this case, the accommodation is considered a structural improvement which is excluded from paragraphs 45-40(1)(c),(d) and (e) of the ITAA 1997 as it will be used for domestic or residential purposes. However the accommodation will be used in connection with agricultural operations, namely the grazing of livestock, and will be provided for as accommodation for an employee who is engaged in agriculture. As such, paragraph 45-40(1)(f) of the ITAA 1997 applies to include the accommodation as plant.

Question 2

Summary

As the house is considered plant the Company can deduct the decline in value using either the prime cost or diminishing value methods.

Detailed reasoning

Subsection 40-65(1) of the ITAA 1997 states you have a choice of two methods to work out the decline in value of a depreciating asset. You must choose to use either the diminishing value method or the prime cost method, however there are some exceptions to your choice of method.

In this case the Company intends to purchase accommodation which is considered a depreciating asset under Division 40 of the ITAA 1997. None of the exceptions apply therefore either of the two methods can be used.

Question 3

Summary

The erection of the transportable home will not result in the Director receiving a fringe benefit, as the Director in this situation:

(a) will not receive a benefit, and

(b) the benefit will not be in respect of employment.

Detailed reasoning

Subsection 136(1) of the FBTAA 1986 defines a benefit to include any right (including a right in relation to, and an interest in, real property or personal property), privilege or facility which includes a right, privilege, service or facility that is, or is to be provided under an arrangement in relation to:

(i) the performance of work, whether with or without the provision of property

(ii) the provision of, or the use of facilities for, entertainment, recreation or instruction, or

(iii) the conferring of rights, benefits or privileges for which remuneration is payable in the form of royalty, tribute or similar exaction.

It has been stated in the ruling application that the Director will receive no benefit from the transportable home being erected, other than it will be erected on their land.

If the transportable home is not removed during or at the end of the lease agreement, the Director will receive a benefit being an interest in the transportable home, which will be erected and paid for by the Company (employer).

However, this will not be the case if the transportable home is removed.

For there to be a fringe benefit, there first needs to be a benefit, as per the definition of benefit in subsection 136(1) of the FBTAA 1986. Therefore, if there is no benefit there can be no fringe benefit. As stated earlier if the transportable home is removed, during or at the end of the lease agreement, there will be no benefit, and consequently no fringe benefit received by the Director.

If the transportable home is not removed, again a stated earlier there is a benefit. Hence there may be a fringe benefit.

Subsection 136(1) of the FBTAA 1986 defines a fringe benefit:

'...being a benefit provided to the employee or an associate of the employee by:

(a) the employer

(b) …

(c) …

in respect of the employment of the employee…'

The Director is either a current employee directly under the definition in subsection 136(1) of the FBTAA 1986, or as a result of the extended definition of salary and wages under section 137 of the FBTAA 1986.

Therefore, it needs to be determined if the potential benefit will be provided in respect of employment.

The term 'in respect of employment' was discussed in J & G Knowles & Associates Pty Ltd v. Federal Commissioner of Taxation (2000) 96 FCR 402, 2000 ATC 4151, (2000) 44 ATR. In this case the full High Court in examining its meaning in relation to fringe benefits tax noted:

'…..what must be established is whether there is a sufficient or material, rather than a causal connection or relationship between the benefit and employment…….'

In this case the Director has three relationships with the Company:

(i) employer - employee

(ii) company - shareholder

(iii) lessee - landlord

With regards to the erection of the transportable home, it is considered that it is the lessee - landlord relationship that gave rise to the benefit. Hence, it is considered that there is not a sufficient or material connection or relationship between the benefit and the employment. As a consequence the Director and will not receive any fringe benefit as a result of the erection of the transportable home.

Note: as previously advised, the employee who will live in the home will receive a fringe benefit. The taxable value of the fringe benefit will be reduced by the amount of rent paid by the employee.

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