Edited version of private ruling

Authorisation Number: 1011664724586

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Ruling

Subject: Deductibility of contribution to power upgrade

1. Are you entitled to a deduction for your contribution to the power authority to upgrade the power supply to your building?

No.

2. Does the contribution to the power authority form part of the cost base of the property under section 110-25 of the Income Tax Assessment Act 1997 (ITAA 1997) for capital gains tax (CGT) purposes?

Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You own a commercial building. As a result of increased demand for power by the tenants an upgrade to the power supply to the building was required.

You discussed the matter with the power authority and you were asked to contribute an amount to the upgrade.

All this work is done external to your property. You do not obtain any ownership of the equipment to improve the power supply.

You are not considered to be carrying on a business of letting a commercial property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Income Tax Assessment Act 1997 Section 25-10.

Income Tax Assessment Act 1997 Subsection 25-10(3).

Income Tax Assessment Act 1997 Section 40-645.

Income Tax Assessment Act 1997 Division 43.

Income Tax Assessment Act 1997 Section 43-110.

Income Tax Assessment Act 1997 Division 40.

Income Tax Assessment Act 1997 Section 40-25.

Income Tax Assessment Act 1997 Section 40-880.

Income Tax Assessment Act 1997 Section 110-25.

Income Tax Assessment Act 1997 Subsection 110-25(5).

Reasons for decision

Summary

No deduction is allowed for the contribution to the power authority for the upgrade to the power supply. It is capital expenditure and it is not incurred in carrying on a business or in relation to a business.

It is a capital expense which increases the value of your property, therefore forms part of the fourth element of the cost base of a CGT asset. The actual capital expenditure incurred by you for the power upgrade can be included in the cost base of the property.

Detailed reasoning

Section 8-1 of the ITAA 1997 (General deductions)

Section 8-1 of the ITAA 1997 allows a deduction from your assessable income of any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income or it is necessarily incurred in carrying on a business. However, you cannot deduct a loss or outgoing under this section to the extent that it is a loss or outgoing of capital or of capital nature.

It is considered that your contribution to the power authority to upgrade the power supply to your building provides an enduring benefit and is capital in nature. Therefore, it is considered that a deduction under section 8-1 of the ITAA 1997 is not allowable.

Section 25-10 of the ITAA 1997 (Repairs)

Taxation Ruling TR 97/23 sets out the types of repair expenses that are deductible and non-deductible. Repairs are defined as the remedying, or making good of defects in, or damage to, or deterioration of, property to be repaired, and contemplates the continued existence of the property.

There has been a certain level of electricity supplied to your building over a number of years and it can be assumed that this has been maintained to give a continuous supply. There has been an increase in demand from tenants and the power supply has had to be upgraded to meet this extra demand. This is considered to be an improvement rather than a repair. The action has not been to rectify a fault or wear and tear. It has been modified to allow a greater supply of electricity to the property. The improvement is seen as capital expenditure.

Subsection 25-10(3) of the ITAA 1997 specifically denies a deduction for capital expenditure. Therefore, it is considered that a deduction under section 25-10 of the ITAA 1997 is not allowable.

Section 40-645 of the ITAA 1997 (10 year write off)

For section 40-645 of the ITAA 1997 to apply you have to be considered to be carrying on a business on the land to which the power upgrade has been implemented. You are not considered to be carrying on a business at this property, it is considered to be a passive investment. Therefore, it is considered that a deduction under section 40-645 of the ITAA 1997 is not allowable.

Division 43 of the ITAA 1997 (Capital works)

Section 43-110 of the ITAA 1997 explains that a taxpayer can only get a deduction for an income year if the taxpayer owns, leases or holds part of a construction area of capital works. The area a taxpayer owns, leases or holds is called 'your area'.

The upgrade has occurred to equipment external to your property. The property is owned by the electricity provider. You do not own, lease or hold a construction expenditure area of capital works in relation to this upgrade. Therefore, it is considered that a deduction under Division 43 of the ITAA 1997 is not allowable.

Division 40 of the ITAA 1997 (Depreciation)

A deduction is available for the decline in value of a depreciating asset that is held by the taxpayer at any time during the year. With regards to the power supply upgrade you do not hold any property that could be considered a depreciating asset. Therefore, it is considered that a deduction under section 40-25 of the ITAA 1997 is not allowable.

Section 40-880 (Blackhole expenditure)

Capital expenditure that is not otherwise deductible and that relates to a business that was or is proposed to be carried on for a taxable purpose is deductible over five years provided the deduction is not denied by some other provision. You are not considered to be carrying on a business at this property, it is considered to be a passive investment. Therefore, it is considered that a deduction under section 40-880 of the ITAA 1997 is not allowable.

Capital gains cost base

As the contribution to the upgrade to the power supply is treated as a capital expense and cannot be regarded as deduction, we need to consider whether this expenditure can form part of the cost base of the property.

Under section 110-25 of the ITAA 1997, the cost base of a CGT asset consists of five elements, Section 110-25(5) states:

The fourth element is capital expenditure you incurred to increase the asset's value. However, the expenditure must be reflected in the state or nature of the asset at the time of the CGT event.

We consider the upgrade to the power supply increases the value of your property. Therefore, it is a capital expense which forms part of the fourth element of the cost base of a CGT asset. The actual capital expenditure incurred by you for the power upgrade can be included in the cost base of the property.