Edited version of private advice

Authorisation Number: 1051957042422

Date of advice: 2 March 2022

Ruling

Subject: Installation of shed - capital works or depreciating asset

Question 1

Is the Entity entitled to a capital works deduction under Division 43 of the Income Tax Assessment Act 1997 (ITAA 1997) for the expenses relating to the earthworks, slab and shed kit?

Answer

Yes.

Question 2

Is the Shed regarded as a depreciating asset under Division 40 of the ITAA 1997, and therefore available to be deducted under the simplified depreciation rules in Subdivision 328D of the ITAA 1997?

Answer

No.

This ruling applies for the following period

Year ended 30 June 20XX

The scheme commences on:

XX Month 20XX

Relevant facts and circumstances

The Entity is in the business of xxxx. The Entity purchased a new xxxx shed ('the Shed'). Construction of the Shed on the property owned by the Shareholder was completed X months after purchase.

The Shed's purpose is to garage the Company's vehicles and xxxx trailers used solely for the carrying on of the business.

The Shed is a standard prefabricated design, available from most commercial shed manufacturers, which is bolted and screwed together and dyna-bolted to a full concrete slab.

The Shed required a local council development application, additional earthworks to fit the new slab and has mains power connected to the Shed.

The Shed is not specifically designed to be transportable however it could be unbolted from the slab, taken apart without damage and sold or moved to another location.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 section 40-30

Income Tax Assessment Act 1997 section 40-45

Income Tax Assessment Act 1997 Division 43

Income Tax Assessment Act 1997 section 43-10

Income Tax Assessment Act 1997 section 43-15

Income Tax Assessment Act 1997 section 43-20

Income Tax Assessment Act 1997 section 43-70

Income Tax Assessment Act 1997 section 45-40

Income Tax Assessment Act 1997 Subdivision 328-D

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

A Small Business Entity ('SBE') is an entity that carries on a business and has an aggregated turnover of less than $10 million. SBEs can choose to deduct amounts for its depreciating assets under Subdivision 328-D rather than the general depreciation provisions contained in Division 40.

Division 40 of the ITAA 1997 allows a deduction for the decline in value of a depreciating asset that is held for any time during a year of income.

Section 40-30 of the ITAA 1997 specifies what assets are capable of being a depreciating asset for the purposes of Division 40. Section 40-30 of the ITAA 1997 relevantly states:

(1) A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used, except:

(a) land; or

(b) an item of trading stock; or

(c) an intangible asset, unless it is mentioned in subsection (2).

(2) ...

(3) This Division applies to an improvement to land, or a fixture on land, whether the improvement or fixture is removable or not, as if it were an asset separate from the land.

(4) Whether a particular composite item is itself a depreciating asset or whether its components are separate depreciating assets is a question of fact and degree which can only be determined in the light of all the circumstances of the particular case.

A number of assets are specifically excluded from Division 40 of the ITAA 1997 by section 40-45 of the ITAA 1997.

Is the Shed a depreciating asset pursuant to section 40-45 of the ITAA 1997?

The Shed, slab and earthworks considered together is an asset which has a limited effective life and can reasonably be expected to decline in value over the time it is used. The Shed is also subject to wear caused by the use of the asset in the conduct of the business activities and must be maintained through a regular maintenance schedule. Therefore, the Shed meets the requirements of being a depreciating asset for the purposes of subsection 40-30(1) of the ITAA 1997.

Is the Shed excluded from being a depreciating asset by section 40-45 of the ITAA 1997?

As indicated above, a number of assets are specifically excluded from being depreciating assets for the purposes of Division 40 of the ITAA 1997 by section 40-45 of the ITAA 1997. In the present context the only exclusion of relevance is subsection 40-45(2) of the ITAA 1997.

Subsection 40-45(2) relevantly states:

(2) This Division does not apply to capital works for which you can deduct amounts under Division 43, or for which you could deduct amounts under that Division:

(a) But for expenditure being incurred, or capital works being started, before a particular day; or

(b) Had you used the capital works for a purpose relevant to those capital works under section 43-140.

Determining whether the Shed falls within subsection 40-45(2) of the ITAA requires a consideration of whether it is capital works for which amounts could be deducted under Division 43 of the ITAA 1997.

A deduction can be claimed for capital works under Division 43 of the ITAA 1997. Section 43-10 of the ITAA 1997 states:

(1) You can deduct an amount for capital works for an income year.

(2) You can only deduct the amount if:

(a) the capital works have a construction expenditure area; and

(b) there is a pool of construction expenditure for that area; and

(c) you use your area in the income year in the way set out in Table 43-140 (Current year use).

Section 43-20 of the ITAA 1997 identifies the capital works for which a deduction can be claimed under Division 43 of the ITAA 1997:

Buildings

(1) This Division applies to capital works being a building, or an extension, alteration or improvement to a building

(a) begun in Australia after 21 August 1979; or

(b) begun outside Australia after 21 August 1990.

Structural improvements

(2) This Division also applies to capital works (other than capital works referred to in subsection (1)) begun after 26 February 1992 that are structural improvements, or extensions, alterations or improvements to structural improvements, whether they are in or outside Australia.

(3) Some examples of structural improvements are:

(a) sealed roads, sealed driveways, sealed car parks, sealed airport runways, bridges, pipelines, lined road tunnels, retaining walls, fences, concrete or rock dams and artificial sports fields; and

(b) earthworks that are integral to the construction of a structural improvement (other than a structural improvement described in subsection (4)), for example, embankments, culverts and tunnels associated with a runway, road or railway.

In the circumstances provided, we do not consider the Shed to be a structural improvement for the purposes of subsection 43-20(2) of the ITAA 1997. It does not have a character which is identical to or similar to any of the examples given in subsection 43-20(3) of the ITAA 1997. It is therefore necessary to consider whether it is a building for the purposes of subsection 43-20(1) of the ITAA 1997.

Is the Shed a building for the purposes of subsection 43-20(1) of the ITAA 1997?

The term "building" is not defined in the ITAA 1997 for the purposes of subsection 43-20(2) of the ITAA 1997. The word 'building' therefore takes its ordinary meaning appropriate to the context in which the term is used.

The Macquarie Dictionary defines a building as: '...a substantial structure with a roof and walls, as a shed, house, department store, etc'.

The term 'building' has been considered in a number of authorities, including Stevens v Gourley (1859) 7 CBNS 99, Moir v Williams [1892] 1 QB 264; Hilderbrandt v Stephen [1964] NSWR 740; Australian Building Construction Employees' & Builders Labourers' Federation v Dillingham Australia Ltd (1982) 58 FLR 170. These authorities anticipate that a building is a substantial or permanent structure which has a roof and walls which form an enclosure.

Several authorities have also considered that it is appropriate to have regard to what an ordinary person would consider to be a building, including: Harris v. De Pinna (1886) LR 33 Ch D 238 (Harris); Re St Peter the Great, Chichester [1961] 1 WLR 907 (Re St Peter); Metals & Alloys Co v. Ontario Regional Assessment Commissioner (1985) 36 RPR 163 (Metals & Alloys).

In Morrison v Commrs of Inland Revenue [1915] 1 KB 716 Rowlatt J set out some principles for this purpose, which suggests that the fact that a structure has been built does not, in itself, make that structure a building. Rather, it is the nature of the structure itself and also its function which determine whether or not it is a "building" in ordinary parlance. In considering the nature of the structure, the permanence of the structure itself should be considered, for example the nature of the workmanship and materials evident in the structure, and the extent to which the structure is permanently attached to the land.

Given the authorities above it is appropriate when looking at whether something is a building to consider, in addition to whether it has walls and a roof, whether a reasonable person would consider that it was a building and the level of permanence that the structure is intended to have.

The Shed is built, it is a substantial structure, capable of providing shelter and a reasonable person observing the structure would likely describe it as a building within the ordinary meaning of the word 'building'. Although the Shed is capable of being unbolted and transferred, for the foreseeable future it will remain at the current site, with power connected, and therefore satisfies the permanence requirement.

Could amounts be claimed for the Shed under Division 43 of the ITAA 1997?

The amount that can be deducted for capital works under section 43-10 of the ITAA 1997 is determined by section 43-15 of the ITAA 1997. Section 43-15 of the ITAA 1997 states:

(1) The amount you can deduct is a portion of your construction expenditure. However, it cannot exceed the amount of undeducted construction expenditure for your area.

(2) Your deduction is calculated under section 43-210 or 43- 215.

The term 'construction expenditure' as used in section 43-15 of the ITAA 1997 is defined in section 995-1 of the ITAA 1997 as having the meaning given by section 43-70 of the ITAA 1997. Section 43-70 of the ITAA 1997 states:

(1) Construction expenditure is capital expenditure incurred in respect of the construction of capital works.

Paragraphs 43-70(2)(a) - (i) of the ITAA 1997 list a number of items which are not included in the meaning of 'construction expenditure' under subsection 43-70(1) of the ITAA 1997. Paragraphs 43-70(2)(a) - (i) of the ITAA 1997 are alternatives, in the event that any one paragraph is satisfied it will not be necessary to consider the remaining paragraphs and the expenditure will not be 'construction expenditure' for the purposes of subsection 43-70(1) of the ITAA 1997.

Relevantly, paragraph 43-70(2)(e) of the ITAA 1997 states that expenditure on 'plant' does not fall within the meaning of the term 'construction expenditure' under subsection 43-70(1) of the ITAA 1997. In the event that the Shed is considered to be 'plant' then expenditure incurred on it will be excluded from the meaning of 'construction expenditure' by paragraph 43-70(2)(e) and a deduction could not be claimed for the amounts under section 43-15 of the ITAA 1997.

The term 'plant' is defined in section 995-1 of the ITAA 1997 as having the meaning given by section 45-40 of the ITAA 1997. Section 45-40 of the ITAA 1997 contains a definition of the word 'plant' which is inclusive, that is, it extends the ordinary meaning of the word 'plant' to include the particular items listed in subsections 45-40(1) and 45-40(2) of the ITAA 1997. None of the items listed in either subsection 45-40(1) or subsection 45-40(2) of the ITAA 1997 are relevant in terms of the Shed. As such, it is necessary to consider the ordinary meaning of the word 'plant' for the purposes of paragraph 43-70(2)(e) of the ITAA 1997.

Ordinary meaning of plant

In Wangaratta Woollen Mills Limited v The Commissioner of Taxation of the Commonwealth of Australia (1969) 119 CLR 1 (Wangaratta Woollen Mills) the High Court of Australia considered whether a dyehouse was 'plant or articles' for the purposes of former subsection 54(1) of the Income Tax Assessment Act 1936. McTiernan J on page 9 considered earlier authorities and identified that 'plant' is generally considered to be something more than the mere setting in which a business is conducted, that is plant is essentially a part of the business or a tool which plays a part in the business activities. McTiernan J concluded in Wangaratta Woollen Mills at page 10:

I am of the opinion that the appellant's dyehouse is "in the nature of a tool" in the trade and does "play a part" itself in the manufacturing process. It is much more than a convenient setting for the appellant's operations. It is an essential part in the efficient and economic operation of the appellant's business... Its structure is an active tool in preventing spoiling of material, and in enabling the operatives to carry out their tasks.

The basis of the conclusion reached by McTiernan J in Wangaratta Woollen Mills is consistent with the reasoning in Taxation Ruling TR 2007/9: Income tax: circumstances when an item used to create a particular atmosphere or ambience for premises used in a cafe, restaurant, licensed club, hotel, motel or retail shopping business constitutes an item of plant. TR 2007/9 considered the decision of the Supreme Court of New South Wales in Macquarie Worsteds Pty Ltd v The Commissioner of Taxation of the Commonwealth of Australia (1974) 23 FLR 69 and stated at paragraph 38:

Whether 'buildings, structures or the like, or parts of them' that are 'more than mere setting' come within the ordinary meaning of plant depends upon 'whether the function performed by the thing [the building, structure, or part of it] is so related to the taxpayer's operations or special that it warrants it being held to be plant.

The Shed is not considered as 'plant' as it does not "play a part" in the weed spraying services. Instead, it provides 'a mere setting' for the Company's operations, by providing shelter to the vehicles and equipment used in the weed spraying services.

In the circumstances the earthworks, slab and the installation of the Shed is capital works for which an amount could be claimed under Division 43 of the ITAA 1997. As such, the Shed is excluded from being a depreciating asset under subsection 40-30(1) of the ITAA 1997 by the operation of subsection 40-45(2) of the ITAA 1997, and therefore is unable to be deducted under the small busines concessions in subdivision 328-D of the ITAA 1997.

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