Edited version of private advice

Authorisation Number: 1051555125437

Date of advice: 2 August 2019

Ruling

Subject: Calculation of decline in value of primary production depreciating assets

Question 1

Is the netting structure, constructed by Company A, a fencing asset as defined by subsection 40-520(4) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Can Company A apply section 40-551 of the ITAA 1997 to work out the decline in value for the capital expenditure incurred on the construction and installation of the netting structure?

Answer

No

This ruling applies for the following periods:

Year ending 30 June WWW

Year ending 30 June XXXX

Year ending 30 June YYYY

Year ending 30 June ZZZZ

The scheme commences on:

1 July VVVV

Relevant facts and circumstances

Company A ('the Company') is an Australian proprietary company.

The Company is a primary producer operating in Australia.

The Company has been progressively installing orchard nettings across its plantings, and will continue to do so over the next X-X years as newly planted sections of orchard approach maturity.

The primary purpose of the netting is to provide the barrier to keep both ground pests and birds away, with the netting also providing some additional weather protection benefits (hail, wind). Having a proper enclosure is critical to the operation of the business in order to ensure viable production yields from these orchard blocks.

The Company's netting structure is not temporary or portable. The structure, including the mesh, remains in place all year round. It is not removed after each season, and cannot be removed without intervention from the netting construction company.

It is estimated that different elements of the structure will have different effective lives. However, the whole structure is built to last, with proper maintenance and re-tensioning done regularly by a netting contractor. The first netting was installed at the orchard years ago. All of this original netting is still in place today, and is currently being depreciated in line with its expected lifespan.

The mesh is made of HDPE (high-density polyethylene, a synthetic polymer) Monofilament, and is a durable nylon type material, strong enough to ensure that pests will not break through. A lot of traditional farm fencing is to keep ground-based pests such as rabbits and wallabies out. The Company's orchard netting does this, as well as keeping out birds which are a more destructive pest when it comes to orchard crops.

According to supplier documentation the following materials were used in construction of the netting at one of the Company's orchards in the WWWW-XXXX financial year: Wire, Cable, Prosplice, Hail links, Poles, Buried Logs, Galvanised Pins, Galvanised thimbles, Prosleeve, T Connectors, Net, Canopy, miscellaneous (pole caps, screws, nails etc.).

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 40-515

Income Tax Assessment Act 1997 Subsection 40-520(4)

Income Tax Assessment Act 1997 Section 40-551

Reasons for decision

Question 1

Is the netting structure, constructed by Company A, a fencing asset as defined by subsection 40-520(4) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

The netting structure does not satisfy the definition of a fencing asset under subsection 40-520(4) of the ITAA 1997.

Detailed reasoning

A fencing asset is defined in subsection 40-520(4) of the ITAA 1997 as:

(a)  an asset or a structural improvement that is a fence, or

(b)  a repair of a capital nature, or an alternation, addition or extension, to a fence.

The Explanatory Memorandum to the Tax Laws Amendment (Small Business Measures No 2) Bill 2015 states, at paragraph 2.40, that: 'A fencing asset is an asset or structural improvement that is a fence, or repair, or an alteration, addition or extension to a fence.' Further, at paragraph 2.41 it states: 'The term 'fence' takes its ordinary meaning and includes an enclosure or barrier, usually of metal or wood, as around or along a field, or paddock. The term 'fence' extends to parts or components of a fence including, but not limited to, posts, rails, wire, droppers, gates, fittings and anchor assemblies.'

Taxation Ruling TR 2019/5 Income tax: effective life of depreciating assets (applicable from 1 July 2019) includes lists of the Commissioner's determination of the 'effective life' of depreciating assets used to work out the asset's decline in value. The Commissioner's effective life determination is made having regard to the period the depreciating asset can be used for specified purposes, including use for a taxable purpose. Relevantly, a deduction may be available under Division 40 - Capital allowances of the ITAA 1997 for the depreciating asset's decline in value, to the extent that it is used for a taxable purpose (refer section 40-25).

Table A of TR 2019/5 lists assets that are specific to a particular industry (in categories based on ANZIC codes) or for which a particular effective life is appropriate because of the way the asset is used in that industry. In Table A, a distinction is made under the category of AGRICULTURE, FORESTRY AND FISHING between 'Fences' and 'Protective structures (including shade houses and netting constructions)', and between 'Crop protection assets: Temporary bird netting and Vine covers' under the sub-category of Fruit growing under that main category.

Note: TR 2019/5 replaces Taxation Ruling TR 2018/4 Income tax: effective life of depreciating assets (applicable from 1 July 2018), which was withdrawn from 1 July 2019. Where the Commissioner's views in that ruling still apply, they have been incorporated into TR 2019/5.

In your case, it is the Commissioner's view that the netting structure erected to protect the plantings described above falls within the category of 'Protective structures (including shade houses and netting constructions)' rather than 'Fences'.

Accordingly, it is the Commissioner's view that the netting structure does not satisfy the definition of a fencing asset under subsection 40-520(4) of the ITAA 1997.

Question 2

Can Company A apply section 40-551 of the ITAA 1997 to work out the decline in value for the capital expenditure incurred on the construction and installation of the netting structure?

Summary

Company A cannot apply section 40-551 of the ITAA 1997 to work out the decline in value for the capital expenditure incurred on the construction and installation of the netting structure.

Detailed reasoning

Under section 40-515 of the ITAA 1997 a primary producer may be able to deduct an amount equal to the decline in value for an income year of certain depreciating assets that are used in a primary production business, including a fencing asset (paragraph 40-515(1)(d)).

Section 40-551 of the ITAA 1997 is applicable to a fencing asset that an entity starts to hold, or to expenditure an entity incurs, at or after 7.30 pm (AEST) on 12 May 2015.

Section 40-551 of ITAA 1997 provides that the decline in value of a fencing asset for the year in which you incurred the expenditure is the amount of capital expenditure you incurred on the construction, manufacture, installation or acquisition of the fencing asset.

In your case, the Commissioner has determined that netting structures, such as you have, and propose to progressively continue to have, installed across your orchards are not fencing assets under subsection 40-520(4) of the ITAA 1997 (refer Question 1 above).

Therefore, you can not apply section 40-551 of the ITAA 1997 to work out the decline in value for the capital expenditure incurred on the construction and installation of the netting structure.

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