Edited version of private advice

Authorisation Number: 1051852318236

Date of advice: 18 June 2021

Subject: Capital works - qualifying expenditure

Question

Can the Project Costs incurred be allocated to a project pool under subsection 40-830(1) and can a deduction be claimed under subsection 40-832(2) in relation to the Project that was abandoned in the income year.

Answer

Yes

This ruling applies for the following period

Year ending 30 June 20xx

The scheme commences on

1 July 20xx

Relevant facts and circumstances

Background

You were planning to carry on a project (the Project) of significant size and scale. After the planning and construction was completed you intended to manage the Project for the purpose of producing assessable income for a number of years thereafter.

You incurred a number of expenses to obtain information for the Project and for your management team to consider relating to the feasibility of the Project.

Project Life

The Project was expected to operate for a defined period that considered the planning and construction and operational period of the Project.

Abandonment of the Project

Part way through the planning and design phase, it was determined that the Project was no longer commercially feasible. As a result, a decision was recorded in a director's resolution to completely abandon the Project.

The Abortive Project Costs

By the time that the Project was abandoned, significant capital costs had been incurred by you.

These costs will not add value to any future projects, they do not form part of the cost of a depreciating asset and are not otherwise deductible.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 40-830(1)

Income Tax Assessment Act 1997 section 40-832

Income Tax Assessment Act 1997 subsection 40-832(2)

Income Tax Assessment Act 1997 subsection 40-25(7)

Income Tax Assessment Act 1997 section 40-840

Income Tax Assessment Act 1997 subsection 40-840(2)

Income Tax Assessment Act 1997 paragraph 40-840(2)(a)

Income Tax Assessment Act 1997 paragraph 40-840(2)(b)

Income Tax Assessment Act 1997 paragraph 40-840(2)(c)

Income Tax Assessment Act 1997 paragraph 40-840(2)(d)

Income Tax Assessment Act 1997 subparagraph 40-840(2)(d)(iii)

Income Tax Assessment Act 1997 subparagraph 40-840(2)(d)(v)

Income Tax Assessment Act 1997 Subdivision 40-I

Reasons for decision

All legislative references are to theITAA 1997 unless otherwise indicated.

Summary

The Project Costs incurred can be allocated to a project pool under subsection 40-830(1) and a deduction can be claimed under subsection 40-832(2) in relation to the Project that was abandoned in the income year.

Detailed reasoning

General overview of Subdivision 40-I

Subdivision 40-I provides a tax deduction for specific items of capital expenditure directly connected with a 'project' carried on or proposed to be carried on by a taxpayer for a taxable purpose as defined in subsection 40-25(7).

Capital expenditure directly connected with a taxpayer's project, which constitutes a 'project amount', that does not form part of the cost of a depreciating asset and is not otherwise deductible, can be allocated to a taxpayer's 'project pool' and can then be deducted over the life of a project once the project starts to operate.

In cases where a project is abandoned, sold or otherwise disposed of during an income year, the previous year's closing pool value of the project plus any project amounts allocated to the pool during the year can be deducted outright under subsection 40-832(2) for projects initiated after 9 May 2006.

Taxation Ruling TR 2005/4 Income tax: capital allowances - project pools - core issues considers the operation of certain provisions in Subdivision 40-I.

Project

TR 2005/4 at paragraph 20 notes that the word 'project' is not defined for the purposes of Subdivision 40I, it takes its ordinary meaning shaped by the context in which it is found.

Paragraphs 45 to 49 of TR 2005/4 explains:

45. In The Australian Concise Oxford Dictionary (fourth edition, 2004), 'project' means:

• a plan; a scheme; and

• a planned undertaking.

46. In The Macquarie Dictionary (revised third edition, 2001) 'project' means:

• something that is contemplated, devised or planned; a plan; a scheme; an undertaking.

47. In general terms then, a project is a plan, scheme or undertaking.

48. Subdivision 40-I, in referring to a project, refers to both a project you carry on and a project you propose to carry on. Whether it is being carried on or is proposed to be carried on, the project must be of sufficient substance and be sufficiently identified that it can be shown that the capital expenditure said to be a project amount is directly connected with the project. These considerations require that a project for the purposes of Subdivision 40-I must be something more substantial than an idea or speculation. A project you carry on or propose to carry on would involve a plan, scheme or undertaking of some substance.

49. A project is an activity or a set of related activities. The activities undertaken and the outcome or outcomes to which they are directed assist in the identification of the project. The following are some of the things that define a project:

• A project has a start and a finish and is an entirety in itself. However, the point when a project 'starts' may be earlier than the point when the project 'starts to operate'. For example, a project undertaken in carrying on your business which is the construction and operation of a depreciating asset for use in the business has a construction phase before it begins to operate for a taxable purpose.

...

Project amount and project pool

If the capital expenditure incurred is a project amount, subsection 40-830(1) allows the taxpayer to allocate the project amount to a project pool.

Under subsection 40-840(2) amounts of capital expenditure you incur is also a project amount so far as:

(a)  it does not form part of the cost of a depreciating asset you hold or held; and

(b)  you cannot deduct it under a provision of this Act outside this Subdivision; and

(c)   it is directly connected with a project you carry on or propose to carry on for a taxable purpose; and

(d)  it is one of these:

                            (i)        an amount paid to create or upgrade community infrastructure for a community associated with the project; or

                           (ii)        an amount incurred for site preparation costs for depreciating assets (except, for horticultural plants, in draining swamp or low-lying land or in clearing land); or

                          (iii)        an amount incurred for feasibility studies for the project; or

                          (iv)        an amount incurred for environmental assessments for the project; or

                           (v)        an amount incurred to obtain information associated with the project; or

                          (vi)        an amount incurred in seeking to obtain a right to intellectual property; or

                        (vii)        an amount incurred for ornamental trees and shrubs.

Project Amount - Feasibility Studies

The term 'feasibility studies' is not defined for the purposes of the project pooling provisions of Subdivision 40-I and is not otherwise defined in the income tax law. The Macquarie Dictionary (Revised Third Edition, 2001) defines feasibility study as a survey or analysis of the need, value and practicability of a proposed enterprise. The Oxford Dictionary of Business (Third Edition, 2002) defines feasibility study as an investigation to determine which of a range of decisions is likely to give a satisfactory return in a financial appraisal or economic appraisal of the alternatives.

Regarding subparagraph 40-840(2)(d)(iii), broadly speaking a feasibility study may be described as a process to gather and analyse sufficient information to adequately consider technical, financial, economic or market viability factors in order to make an informed decision about the potential success of a proposed activity. A feasibility study may also have pre-determined criteria (such as level of investment, rate of return and operating costs) against which the viability of the activity is assessed.

Project Amount - Information

Regarding subparagraph 40-840(2)(d)(v), information is obtained associated with the project if it is about the substance of the project, directly connected with the project and ancillary to the income earning activities that the project proposed to carry on. The information obtained should provide benefits to the future income earning activities once the project starts to operate and should be useful in carrying on the underlying activities of the project.

Project Life

A point in paragraph 49 of TR 2005/4 states that:

A project has a start date and a finish and is an entirely in itself. However, the point when a project 'starts' may be earlier than the point when the project 'starts to operate'. For example, a project undertaken in carrying on your business which is the construction and operation of a depreciating asset for use in the business has a construction phase before it begins to operate for a taxable purpose.

It is the Commissioner's view that a project must have a finite "project life" to constitute a project for Subdivision 40-I purposes. This is explained in paragraphs 64 and 65 of TR 2005/4:

64. A further essential element of a project for the purposes of Subdivision 40-I is a finite project life which can be objectively and reasonably determined

65. There is no explicit statement in the legislation or in the extrinsic material that accompanied it to the effect that, for an activity or activities to be a project, they must be carried on over a finite period: that is, they must have a finite project life. However, it is the Commissioner's view that this requirement is implied in the legislation.

Abandoned

According to the decision in Kallooar v. R [1964] 50 WWR 602 (Kallooar), something is considered to be abandoned if it is given up completely and finally. On that basis, the temporary cessation of a project will not constitute abandonment: the cessation must be permanent. A project will be abandoned if it is objectively determined that it will no longer proceed. A project can be abandoned before it starts to operate.

If a project is abandoned, sold or otherwise disposed of and the taxpayer has a project pool in respect of the project to which project amounts have been allocated, subsection 40-832(2) allows a deduction for the balance of the pool's value for the year in which the abandonment, sale or other disposal occurs.

Application to your circumstances

Based on the information provided it is accepted that there was a project for which project amounts can be allocated to a project pool.

The Project in this case encompassed the planning and construction and the management of it.

Although the Project was abandoned, a finite project life is an element of a Subdivision 40-I.

The Project had a finite life that can be objectively and reasonably determined.

During the course of the Project, you incurred Project Costs.

These Project Costs constitute a project amount under subsection 40-840(2) as:

• They were costs incurred to determine the feasibility of the Project or to obtain information associated with the Project and they do not form part of the cost of a depreciating asset held by you, satisfying paragraph 40-840(2)(a).
• They were not deductible to you under a provision outside Subdivision 40-I, therefore paragraph 40-840(2)(b) is satisfied.
• They were directly connected with the Project you were carrying, on or proposed to carry on, for a taxable purpose, satisfying paragraph 40-840(2)(c).
• They fall under one of the categories in subparagraph 40-840(2)(d).

Of the amounts specified in paragraph 40-840(2)(d) the relevant categories in this case are:

(iii) an amount incurred for feasibility studies of the project, or

(v) an amount incurred to obtain information associated with the project

Various costs were incurred for feasibility studies. They provided direct information for your board on the viability of the Project. The amounts incurred are a project amount under subparagraph 40-840(2)(d)(iii).

Other cost you incurred were directly associated with obtaining information about the Project, these capital expenditure amounts incurred are a project amount under subparagraph 40-840(2)(d)(v).

As you incurred capital expenditure that constitutes a project amount within subsection 40-840(2), you can allocate the Project amounts to a project pool under subsection 40-830(1).

Due to a number of factors you determined that the Project was no longer commercially or financially viable. You decided to abandon the Project in the current income year.

You have no plans to resume the Project and the Project Costs incurred are not expected to add value to any future projects.

As the Project has permanently ceased, you have abandoned the Project which is consistent with the decision in Kallooar.

The Project did not start to produce assessable income. However, your Project started when you first started gathering information to determine the feasibility of the Project and committed to it. For the purposes of subsection 40-832(2), a project can be abandoned any time after it starts, even before it starts to operate for a taxable purpose.

As the Project has been abandoned, you can claim a deduction under subsection 40-832(2) for post-9 May 20xx projects in relation to the sum of the closing pool value for the previous income year and any Project amounts allocated to the pool for the current income year.

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