Edited version of private ruling

Authorisation Number: 1011724848501

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Ruling

Subject: Mezzanine flooring - depreciable asset or capital works

Question:

Will the structural improvements, specifically the mezzanine floor, qualify as a tangible depreciating asset for which a capital allowance deduction is available under section 40-25 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: No.

This ruling applies for the following period:

1 July 2008 to 30 June 2009.

The scheme commences on:

1 July 2008.

Relevant facts and circumstances

You installed extra floor space (mezzanine) in premises that are used exclusively for the operation of your business. The mezzanine floor is a rigid free standing steel structure fitted with handrails, stairs and safety gates. The structure is freestanding and is bolted to the floor. The structure is not bolted to any walls. The mezzanine structure is completely prefabricated and assembled on-site. It can also be dismantled on site and moved elsewhere if required.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 40-25(1)

Income Tax Assessment Act 1997 Subsection 40-30(1)

Income Tax Assessment Act 1997 Subsection 40-45(2)

Income Tax Assessment Act 1997 Section 43-10

Income Tax Assessment Act 1997 Subsection 43-20(1)

Income Tax Assessment Act 1997 Subsection 43-70(1)

Income Tax Assessment Act 1997 Paragraph 43-70(2)(e)

Income Tax Assessment Act 1997 Paragraph 45-40(1)(a)

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Division 40 of the ITAA 1997: Capital allowances and deductibility

Subsection 40-25(1) of the ITAA 1997 provides that you can deduct an amount for the decline in value for an income year of a depreciating asset that you have held during that year.

A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over time. Land, trading stock and certain intangible assets are excluded from being depreciating assets (subsection 40-30(1) of the ITAA 1997).

Subsection 40-45(2) of the ITAA 1997 prevents deductions that are available as capital works from being deductible under Division 40 of the ITAA 1997. The deductibility of expenditure incurred in relation to capital works is determined under Division 43 of the ITAA 1997.

In order to determine whether you are able to claim a deduction under Division 40 of the ITAA 1997 for the mezzanine flooring, it is necessary to determine whether it would be available to you to claim a deduction for your asset under the capital works provisions of Division 43 of the ITAA 1997.

Division 43 of the ITAA 1997: Deductions for capital works

Subsection 43-20(1) of the ITAA 1997 states that the term capital works covers three broad categories of expenditure: buildings, structural improvements and environment protection earthworks.

Section 43-10 of the ITAA 1997 provides a deduction for certain construction expenditure incurred in respect of the construction of capital works such as buildings or structural improvements, including any extensions, alterations, or improvements to buildings or structural improvements.

Subsection 43-70(1) of the ITAA 1997 defines construction expenditure as capital expenditure incurred in respect of the construction of capital works. However, paragraph 43-70(2)(e) of the ITAA 1997 specifically excludes expenditure on plant from being construction expenditure. As a result no deduction is allowed for such expenditure under Division 43 of the ITAA 1997.

Plant

There is no all inclusive definition of plant in taxation legislation. The meaning of plant is therefore given its ordinary meaning. Paragraph 45-40(1)(a) of the ITAA 1997 extends the definition of plant to include articles, machinery, tools and rolling stock.

Taxation Ruling TR 2004/16 gives the Commissioner's view as to the meaning of plant. It states that it is a question of fact and degree as to whether an item forms part of the premises or would be separate plant. The following are relevant matters to consider when determining that question:

· whether the item appears visually to retain a separate identity

· the degree of permanence with which it has been attached

· the incompleteness of the structure without it, and

· the extent to which it was intended to be permanent or whether it was likely to be replaced within a relatively short period.

TR 2004/16 discusses the situation where an item were regarded as an integral part or the 'fabric' of such a structure. So much appears from Kitto J in Imperial Chemicals Industries of Australia and New Zealand Ltd v. Federal Commissioner of Taxation (1970) 120 CLR 396; 1 ATR 450, where his Honour said in relation to false ceilings found to be part of the structure of the building:

In my opinion, while they are in position they are plainly not 'articles'.

This is not to say, however, that an item simply attached to a building will not qualify as 'articles': the carpet held to be an 'article' in FCT v. Faichney (1972) 129 CLR 38; 3 ATR 435 was more than likely in some way attached, though it was clearly not an integral part of the home there under consideration.

Thus, as a finding that an item is part of the 'fabric' of a structure (where the structure is itself the 'setting' of the taxpayer's operations), will result in it being held to not be 'plant'; such a finding will also preclude any characterisation of the item as 'articles'.

Taxation Determination TD 97/24 states that an item of property that is a fixture will not meet the definition of plant where it merely provides the general setting in which income producing activities are conducted. Additionally, a fixture is not plant where it is built into the ground so as to form a permanent feature of the place where a business may be carried on and where it had no other function than to provide a convenient stand for the performing of work of the business. Those comments reflect the judgment in the first Australian court decision of note on the matter, Moreton Central Sugar Mill Co Ltd v. FC of T (1967) 14 ATD 468; (1967) 116 CLR 151.

Paragraph 11 of Taxation Ruling TR 1999/2 sets boundaries as to the nature of plant for 'structures':

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).

An item which forms an integral part or a part of the setting is excluded from the ordinary meaning of plant where it does nothing more than excludes the elements. In Wangaratta Woollen Mills Ltd v. Federal Commissioner of Taxation (1969) 119 CLR 1; 69 ATC 4095; 1 ATR 329 (Wangaratta case), McTiernan J at 4101 said:

I think therefore that the dyehouse should be regarded as a single unit of plant and not a collection of bricks mortar, paint, timber etc. each of which is to be separately examined. It is not merely a special factory; it is a complex whole in which every piece is essential for the efficient operation of the whole, I would however except from the description of paint what might be referred to as the external cladding of the dyehouse, that is the external walls including the single walls at the east and west ends and the roof as distinct from the ceiling, but not the controlled louvres or the cowlings in the roof. The cladding really does nothing more than exclude the elements and whilst I am not convinced of the validity of this distinction nevertheless it is clearly supported by prior decisions on this sort of question.

Being specially customised or designed to be integrated into a taxpayer's activities does not necessarily imply that a structure is plant. In Case D42 72 ATC 239, eight buildings had been specially designed for the reception and storage of mineral sands pending shipment were no more than the general setting in which income producing activities were carried on.

An item may have elements of both plant and setting. This does not mean that the setting or part of the setting is plant because it performs some 'function' in the relevant operations of the taxpayer. Macquarie Worsteds Pty Ltd v. FC of T 74 ATC 4121 applied the function test to consider that a false ceiling was not plant. Mahoney J said (at 4125):

To be plant, a thing of the kind here in question must be more than mere setting for the taxpayer's operations; but if it is, the question still remains whether its relationship to the operations is such that it should be held to be within the meaning of the term.

...

Where the question has been whether buildings, structures or the like, or parts of them, constitute plant, the process of decision appears generally to have been, not of deriving the decision merely by deduction from a verbal formula or test, but of deciding whether the function performed by the thing is so related to the taxpayer's operations or special that it warrants it being held to be plant.

In Dixon (Inspector of Taxes) v. Fitch's Garage Ltd [1975] 3 All ER 455, a canopy erected over a petrol station was held not to be plant. The canopy was merely part of the setting. The petrol pumps would deliver petrol to vehicles whether or not there was a canopy overhead. The canopy merely made the business of supplying petrol more comfortable for motorists and staff.

Application to you

You erected a mezzanine level to provide you with extra floor space. The mezzanine level provides you with additional floor space to conduct your activity. The mezzanine flooring is not a tool or apparatus used in your business but merely a setting for you to conduct your business.

We have concluded that the mezzanine floor space is part of the premises on the following basis:

· the mezzanine floor was built within the premises and is made of steel and has stairs, handrails and gates

· it has a significant degree of permanence as it is bolted to the floor

· it provides additional floor space which is a setting for the business

· even though it can be dismantled, it has been in place for a couple of years giving it some degree of permanency.

As such, the mezzanine flooring will not qualify as a depreciating asset and no deduction is available under section 40-25 of the ITAA 1997.