Edited version of private advice

Authorisation Number: 1052364065638

Date of advice: 24 February 2025

Ruling

Subject: Deductions

Question 1

Will Company A qualify for a deduction under section 40-515 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of capital expenditure incurred on the proposed water storage tanks?

Answer 1

Yes

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

1.            Company A is an unlisted Australian public company.

2.            Company A carries on a business of primary production.

3.            The Company A site is located in a State of Australia.

4.            The Company A site contains:

a)            A greenhouse structure which contains an aquaculture system that is used in the primary production business comprising of:

                             i.                Tanks and water pipeline.

                            ii.                Filtration units and ultrafiltration units (filtration units).

b)            The proposed water storage tanks.

5.            The water is used for primary production.

6.            The water in the storage tanks is stored in reserve to be moved to the aquaculture system as required.

7.            The water will be pumped through a water pipe directly to the proposed storage tanks (with an estimated completion date of 31 December 20XX) on Company A's site.

8.            Company A owns the land on which the proposed water storage tanks are to be constructed.

9.            The expenses that are incurred by Company A to research, design, survey and construct the proposed water storage tanks for the purposes of primary production are amounts that Company A paid to hold these assets.

10.         This ruling relates to expenditure incurred or to be incurred in the ruling period on:

(a)          Acquisition or construction of the proposed water storage tanks;

(b)          Costs of maintaining:

a)            The proposed water storage tanks, and

b)            other depreciating assets which Company A has already acquired outside of the ruling period which meet the definition of 'water facility'.

Relevant legislative provisions

Section 25-10 of Income Tax Assessment Act 1997

Section 40-53 of Income Tax Assessment Act 1997

Section 40-180 of Income Tax Assessment Act 1997

Section 40-185 of Income Tax Assessment Act 1997

Section 40-190 of Income Tax Assessment Act 1997

Section 40-515 of Income Tax Assessment Act 1997

Subsection 40-520(1) of Income Tax Assessment Act 1997

Section 45-40 of Income Tax Assessment Act 1997

Subsection 43-20(3) of Income Tax Assessment Act 1997

Reasons for decision

Summary

Company A qualifies for a deduction under section 40-515 of the ITAA 1997 in respect of capital expenditure incurred on the proposed water storage tanks.

Detailed reasoning

Subdivision 40-F of the ITAA 1997 allows immediate deductions for capital expenditure incurred on certain depreciating assets used in primary production. One of these depreciating assets is a 'water facility' (paragraph 40-515(1)(a) of the ITAA 1997).

Under subsection 40-520(1) of the ITAA 1997 a 'water facility' is defined as:

a)            plant or a structural improvement that is primarily and principally used for the purpose of conserving or conveying water for use in a primary production business that you conducton a land in Australia, or

b)            a structural improvement, or an alteration, addition or extension that is reasonably incidental to conserving or conveying water.

The legislation provides examples of a water facility which include a dam, tank, tank stand, bore, well, irrigation, pipe, pump, water tower and windmill. Examples of things reasonably incidental to conserving or conveying water include a culvert, a fence to prevent livestock entering an irrigation channel and a bridge over an irrigation channel.

In order to claim a deduction for the decline in value of a water facility, the conditions in subsection 40-525(1) of the ITAA 1997 must be satisfied.

Paragraph 40-525(1)(a) of the ITAA 1997

The first limb of the definition in paragraph 40-520(1)(a) provides the following requirements for the depreciating assets to be considered a water facility:

•                     the assets must be 'plant or a structural improvement', and

•                     the assets must be 'primarily and principally for the purpose of conserving water or conveying water'.

'Plant or structural improvement'

The ordinary meaning of 'plant' is extended by section 45-40 of the ITAA 1997 and include 'articles, machinery, tools, rolling stock', fences, dams and structural improvements used in agricultural and pastoral operations. The ordinary meaning of the word 'plant' is considered in Taxation Ruling TR 1999/2 Income tax: deductibility of expenditure incurred on tailings dams or similar mining residue, waste storage or disposal facilities:

20. '[Plant] in its ordinary sense... includes whatever apparatus is used by a business man for carrying on his business, - not his stock-in trade which he buys or makes for sale; but all goods and chattels, fixed or moveable, live or dead, which he keeps for permanent employment in his business': Lindley LJ in Yarmouth v. France (1887) 19 QBD 647 at 658.

21. However, if an item merely provides the setting in which income producing activities are conducted, it does not qualify as plant (J. Lyons & Co Ltd v. The Attorney-General [1944] 1 All ER 477 at 479). A permanent structure may be plant if 'it fulfils the function of plant in the trader's operations' (IRC v. Barclay Curle & Co. Ltd [1969] 1 All ER 732).

22. In Wangaratta Woollen Mills v. FC of T 69 ATC 4095; (1969) 1 ATR 329, a dye house used in a business of dyeing and spinning worsted yarn, was held to be plant because it played a part itself in the manufacturing process and was more than a convenient setting for the taxpayer's operations. The dye house was part of a complex whole in which every piece was essential for the efficient operation of the manufacturing process and was itself an item of plant for depreciation purposes.

The expression 'structural improvement' is not defined hence it is to take its meaning from the ordinary understanding of that expression. It is one of the categories covered under the broad umbrella term 'Capital works' which covers a range of structures, extensions, alterations and improvements to such structures for which deductions are available under Division 43 of ITAA 1997.

Some examples of structural improvements to which Division 43 of the ITAA 1997 applies are described in subsection 43-20(3) of the ITAA 1997 and include 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.

Company A's existing equipment are considered to be depreciating assets which fall within the meaning of the ordinary meaning of the term 'plant' because these assets are or will be used in the primary production business. The proposed water storage tanks are also considered to be depreciating assets.

While the water pipeline is also used in the primary production business, it is considered to be a depreciating asset in the nature of a structural improvement.

Company A owns the land on which the proposed water storage tanks are to be constructed, to able to claim under Division 40-F of ITAA 1997 and it is considered that Company A will hold the proposed water storage tanks under item 10 of the table in section 40-40 of the ITAA 1997.

In these circumstances, the assets the subject of this ruling are accepted to be depreciating assets which fall within the words 'plant or structural improvements' in the first limb of the definition of 'water facility' in paragraph 40-520(1)(a).

'Primarily and principally for the purpose of conserving or conveying water'

The meaning of the expression 'primarily and principally' has not been judicially considered in the context of section 40-520 of ITAA 1997, however, the meaning of the expression 'primarily and principally' has been considered by Australian courts with respect to the purpose of the object, including in similar legislative contexts.

In Parker Pen (Aust) Pty Ltd v. Export Development Grants Board (1983) FCA 77; (1983) 46 ALR 612, Lockhart J said, in considering whether advertising expenditure was incurred primarily and principally for the purpose of creating or seeking opportunities, or creating or increasing demand, for export sales by the entity incurring the expense (at ALR 619-20):

Sub-s. 4(1) uses the adverbs 'primarily' and 'principally'. It is a curious use of language. The words have different derivations and sometimes different connotations. For example, one meaning of 'primarily' is at first or originally. 'Principally' does not bear this meaning. I have looked at various dictionaries. They all define the adjectives 'primary' and 'principal' and some define the adverbs 'primarily' and 'principally'. The modern meanings given in the dictionaries to these words is much the same. For example, Collins Dictionary of the English Language, Australian edition edited by G.A. Wilkes, defines 'primarily' so far as relevant, as 'principally; chiefly; mainly'. The Macquarie Dictionary defines the adverb 'principally' as 'chiefly; mainly'. It is in this sense that the words are to be understood in sub-s.4(1). Notwithstanding the tractability of the English language I do not think that the two adverbs have separate work to perform in the sub-section.

In my view the draftsman used both words to emphasise that it is only where the Board is satisfied that expenditure has been incurred mainly or chiefly (to use neutral adverbs) for the required purpose that the expenditure answers the description of 'eligible expenditure'.

The scope of the term 'primarily and principally' was considered in St George Leagues Club v. Commissioner of Land Tax (NSW) (1983) 14 ATR 826; 83 ATC 4736 (St George), where Lee J said, in considering whether a block of land was used primarily and principally for water skiing (at ATR 833; ATC 4743-4):

The expression "primarily and principally" is not the same as "solely" and does not deny exemption in a case where there is some other user of the whole or part which, however, does not prevent a conclusion that the land is used "primarily and principally" for the purposes of the sport under consideration. This may give rise to questions of fact and degree in some cases...

These cases indicate that the question of what the taxpayer's business primarily and principally is can be determined as the chief or main, but not necessarily the sole, business of the taxpayer.

The St George case indicates that land may have a primary and principal use notwithstanding that it is used for more than one purpose. This principle can equally be applied to determining what the primary and principal purpose of the expenditure incurred by a taxpayer is.

The phrase 'primarily and principally' has also been used in sales tax and depreciation contexts. Its interpretation appears to be fairly uniform. Courts read it to have a meaning which is synonymous with words like chiefly, mainly and predominantly (see Parker Pen (Australia) Pty Ltd v Export Developments Grant Board (1983) 67 FLR 234, 240 - 241). In the legislative context of Subdivision 40-F, there is nothing to indicate this meaning is inappropriate.

In respect of the purpose which must be primary and principal, cases indicate that the purpose is not the purpose of any particular person but it is instead the characteristic purpose which such an item would be dedicated to (see Kearney v Federal Commissioner of Taxation (1984) 15 ATR 564; Federal Commissioner of Taxation v Kearney (1985) 16 ATR 351; National Mutual Life Association of Australasia Ltd v Federal Commissioner of Taxation (1970) 122 CLR 13; Smith v Federal Commissioner of Taxation (1982) 13 ATR 115, 118; Sunchen Pty Ltd v Federal Commissioner of Taxation (2010) 190 FCR 38, 45 - 46 [38] - [41] (Edmonds and Gilmour JJ)).

It is accepted that the water pipeline and the existing and proposed water storage tanks constitute a system for the conserving and conveying of water to where it will be used by Company A in their primary production business. As such it is considered that these assets are used by Company A primarily and principally for the purpose of conserving or conveying water.

Likewise, it is also accepted that the conditions in subsection 40-525(1) of the ITAA 1997 are satisfied. That is, the capital expenditure incurred on the construction, installation or acquisition of the water facilities (being the proposed water storage tanks) were incurred primarily and principally for the purpose of conserving or conveying water for use in a primary production business that Company A conducts on land in Australia.

Costs associated with the water facilities

Cost of research, design, survey and construction of the water storage tanks

The cost of a depreciating asset consists of two elements (section 40-175 of the ITAA 1997).

The first element of cost is worked out as at the time an entity begins to hold the asset. Generally, the first element of cost is the amount paid, or taken to have been paid, to hold the asset (sections 40-180 and 40-185 of the ITAA 1997).

The second element of cost is worked out after the entity has begun to hold the asset and includes the amount that is taken to have paid for economic benefits that have contributed to bringing the asset to its present condition and location (section 40-190 of the ITAA 1997).

The means by which a taxpayer may hold a depreciating asset may vary. In this case, Company A holds the proposed water storage tanks through having constructed it.

The expenses that are incurred by Company A to research, design, survey and construct the proposed water storage tanks are first elements of cost because they are amounts that Company A paid to hold these assets.

Maintenance and repair costs

Where the expenditure incurred in the repair of any of the depreciating assets that are the subject of this ruling and the expenditure is not capital in nature, the expenditure is deductible under section 25-10 of ITAA 1997.

Whether a particular expense qualifies as a repair is considered by Taxation Ruling TR 97/23 Income tax: deductions for repairs, which states at paragraph 15:

Repair for the most part is occasional and partial. It involves restoration of the efficiency of function of the property being repaired without changing its character and may include restoration to its former appearance, form, state or condition.

In the High Court decision of W Thomas & Co Pty Ltd v. FC of T (1965) 115 CLR 58 Windeyer J commented at 72 that:

Repair involves a restoration of a thing to a condition it formerly had without changing its character.

Where there is a repair of a capital nature, or an alteration, addition or extension, to one of the assets the subject of this ruling, the repair, alternation, addition or extension will be treated as a depreciating asset, separate to the depreciating asset being repaired or altered (section 40-53 of ITAA 1997).

In these circumstances, the repair of a capital nature, or an alteration, addition or extension is immediately deductible in the year it is incurred under section 40-515 of ITAA 1997 provided it meets the definition of 'water facility'.

Limitation

Second hand water facilities are not generally deductible under Division 40-F of ITAA 1997.

As mentioned above, repairs of a capital nature are a separate depreciating asset, so if Company A incurred expenditure on repairs of a capital nature to one of its second hand water facilities, that expenditure would be deductible in the year the expenditure is incurred. Otherwise repairs not of a capital nature would be deductible under section 25-10 of ITAA 1997.

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