Edited version of private ruling

Authorisation Number: 1011746274241

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Ruling

Subject: Investment Allowance

Question

Are the facilities which you established considered to be depreciating assets and therefore eligible for the Tax Break in Division 41 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No. However, some of the assets would qualify as plant for the purposes of Division 41of the ITAA 1997.

This ruling applies for the following period:

Year ending 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

The taxpayer constructed a facility. The nature of the facility is such that significant components of the construction are necessary and integral to the day to day operations. Such components include walls, rooms and pits.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 40-30

Income Tax Assessment Act 1997 Section 40-45

Income Tax Assessment Act 1997 Section 41-1

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 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 of the ITAA 1936 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

Unless otherwise stated, all legislative references in the following Reasons For Decision relate to the Income Tax Assessment Act 1997 (ITAA 1997).

Summary

Some of the items are depreciating assets for the purposes of the Tax Break. Others are not.

Detailed reasoning

The Small Business and General Business Tax Break is available for new, tangible, depreciating assets, as well as for new investment in existing eligible assets. Section 41-1 provides that the allowance is limited to those assets for which a deduction is available under Subdivision 40-B.

Section 40-30 provides the definition of a depreciating asset. For the purposes of this ruling, an asset will qualify if it is held to form part of the plant of the facility.

There is no all inclusive definition of plant in taxation legislation. The meaning of plant is therefore given its ordinary meaning. In paragraph 45-40(1)(a) the legislation 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.

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 Moreton Central Sugar Mill Co Ltd v. FC of T (1967) 14 ATD 468; (1967) 116 CLR 151.

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

In identifying what constitutes plant or a depreciating asset, the courts have adopted a functionality test which seeks to identify the function which a property performs. The courts have drawn a distinction between items that fulfil an integral function in the taxpayer's business operations and those which merely provide a 'convenient setting' for the taxpayer's business operations: the former constitute plant, the latter do not.

A structure may qualify as a depreciating asset if it does more than provide a convenient setting for business operations. Buildings form integral parts of plant when, and to the extent that, the structures are absolutely essential to the support of the working plant.

In some cases, only a part of a building or structure will qualify as plant. For that reason, it is necessary to evaluate each of the items in its own right.

Walls

In the general run of cases, walls are considered part of the structural setting within which income-earning activities are performed and therefore not plant. In order for the walls to fall within the definition of plant it would be necessary for them to have features which make them intrinsic to the process not merely the place where it occurs. In Wangaratta Woollen Mills Ltd v FC of T, for example, it was significant that the side walls did not support the roof which added weight to the argument that their function was not purely structural.

The function performed by the front wall is for all relevant purposes indistinguishable from that performed by such a wall in any typical building. It performs no function associated with the process. Consequently, it would not be considered to be plant.

In Wangaratta Woollen Mills Ltd v FC of T, the tiles were acid-proof and lain with a slope to a drain. The tiles and the wall were erected to perform a particular function unique to the production process involved. That can be distinguished from the walls in the present case. Tiling in the interests of cleanliness would not alter the function of the walls.

The function of providing divisions is difficult to differentiate from the function performed by walls in any workplace. Where walls may not be load-bearing or otherwise perform a structural function but exist merely to divide a work area into separate sections to allow the performance of multiple activities in distinct areas they are nevertheless still considered structural in nature not plant.

Plant room

The plant room is described as 'paramount for protecting and storing all equipment'. That would suggest that a large part of its function is to provide plant with protection from the elements.

The plant room is described as having all relevant plumbing and electrical work built into the floor in specific locations for equipment to be connected to. On that basis, it is difficult to differentiate between it and any normal building equipped for use of plumbing and electricity. The set-up would not seem to extend beyond the normal degree of integration of plant and building which occurs in respect of most income-earning premises.

Islands

The islands exist to hold items which are utilised in the productive process. Consequently, they are best described as providing the setting in which the productive process is performed or, at best, facilitating the income-producing activity. Mahoney J in Macquarie Worsteds Pty Ltd v FC of T pointed out that it is not enough simply to find that the property performs some function in enabling the taxpayer's operations to be carried on.

The question is whether the function performed by the property is so related, or has such a special relationship, to the taxpayer's operations that it warrants being held to be plant. As a result, the islands will not fall within the definition of depreciating asset for the purposes of Division 41.

Steel gantry system

The nature of the construction of the gantry system and the function which it performs within the process indicates that it is in the nature of plant. However, it should be noted that Taxation Ruling IT 31 Investment Allowance - Structural Improvements - Plant Structures states in paragraph 16 that "the cost of additional height of walls or roof to house a gantry should not be treated as depreciable cost of building integral with the gantry."

Pits

Generally speaking, an item will not be plant if it is built on or into the land. Apart from any other considerations, the degree of permanence associated with the construction would count against a concrete pit being able to fall within the definition of plant.

However, in the present case the pits are specially adapted to the needs of the operation and are constructed to perform an essential function in the process. Consequently, they can be considered to be in the nature of plant.

Summary

We recognise that the premises are purpose built and may not be able to be used for any other purpose. That does not itself qualify the structures as items of plant. It makes the structures particularly well suited to the operation in question but does not mean the structure is an active tool in the process. As Fox LJ said in Wimpy International Ltd v Warland:

"The fact that the building in which a business is carried on is, by its construction particularly well-suited to the business, or indeed was specially built for that business, does not make it plant. Its suitability is simply the reason why the business is carried on there. But it remains the place in which the business is carried on and is not something with which the business is carried on."

Similarly, in Carr v Sayer 65 TC 15 where it was held that quarantine kennels were not items of plant, Nicholls J said:

"… buildings, which I have already noted would not normally be regarded as plant, do not cease to be buildings and become plant simply because they are purpose-built for a particular trading activity. Such a distinction would make no sense. Thus the stables of a racehorse trainer are properly to be regarded as buildings and not plant. A hotel building remains a building even when constructed to a luxury specification. I say nothing about particular fixtures within the building. Similarly with a hospital for infectious diseases. This might require special lay-out and other features, but this does not convert the buildings into plant. A purpose-built building, as much as one which is not purpose-built, prima facie is no more than the premises on which the business is conducted."

In Attwood v Anduff Car Wash Ltd [1977] STC 1167 (Attwood case) the structures housing a commercial car wash were held not to be items of plant. Gibson LJ said at 1177:

Like the building in the Attwood case, the facilities in the present case essentially function only as premises-to house the machinery used and so on. Adopting the ratio in the Attwood case, these are the ordinary functions of a building and not sufficient to transform those structures to an item in the nature of plant with the exception of those items specified above.