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Edited version of private ruling
Authorisation Number: 1011748245337
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Subject: Capital Works
Issue 1
Question 1
Does the entity have an area ('Your area' as referred to in section 43-120 of the Income Tax Assessment Act 1997 (ITAA 1997)) which is part of a construction expenditure area for the purposes of section 43-120 of the ITAA 1997 and does the entity continue to hold this area after termination of an agreement and entering into a lease?
Answer:
Yes, the entity has an area ('Your area' as referred to in section 43-120 of the ITAA 1997) which is part of the entity's construction expenditure area for the purposes of section 43-120 of the ITAA 1997.
The entity will continue to have a 'your area' for the construction expenditure area that it continues to lease after the agreement terminates.
This ruling applies for the following periods
Income year ending 30 June 2011
Income year ending 30 June 2012
The scheme commenced on
1 July 2010
Relevant facts
The entity entered into an agreement that granted various rights and imposed various obligations in relation to land. The entity subsequently entered into a related construction agreement and incurred capital expenditure for various capital works projects with various completion dates. After completion of the capital works projects the entity will enter into a lease over the land and the agreement will be terminated.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 43-75
Income Tax Assessment Act 1997 Section 43-110
Income Tax Assessment Act 1997 Section 43-120
Income Tax Assessment Act 1997 Subsection 43-120(1)
Income Tax Assessment Act 1997 Subsection 43-120(2)
Reasons for decision
Issue 1
Question 1
Summary
Yes, the entity has an area ('Your area' as referred to in section 43-120 of the ITAA 1997) which is part of the entity's construction expenditure area for the purposes of section 43-120 of the ITAA 1997.
The entity will continue to have a 'your area' for the construction expenditure area that it continues to lease after the agreement is terminated.
Detailed reasoning
'Your area' as part of a construction expenditure area pursuant to the agreement
Pursuant to section 43-110 of the ITAA 1997, an entity can claim a deduction for an income year if it owns, leases or holds part of a construction expenditure area of capital works. The area an entity owns, leases or holds is the entity's 'your area'. An entity's 'your area' must be identified for each different construction expenditure area of capital works. It may comprise the whole of the construction expenditure area, or part of it.
Section 43-120 of the ITAA 1997 covers the relevant operative provisions in relation to lessees and quasi-ownership right holders. Subsection 43-120(1) provides guidelines in relation to expenditure you have incurred as lessee or quasi-ownership right holder. The subsection states that 'your area' is the part of the construction expenditure area that you lease, or hold under a quasi-ownership right over land granted by an exempt Australian government agency, and that:
a) is attributable to a pool of construction expenditure that you incurred; and
b) you have continuously leased or held since the construction was completed.
Quasi ownership right over land
In order for the entity to have a 'your area' for the purposes of subsection 43-120(1), it is required to be the lessee or hold a quasi-ownership right of a construction expenditure area per section 43-75.
Subsection 43-75(1) of the ITAA 1997 defines the construction expenditure area of capital works begun after 30 June 1997 to be 'the part of the capital works on which the construction expenditure was incurred that, at the time when it was incurred by an entity, was to be owned or leased by the entity or held by the entity under a quasi-ownership right over land granted by an exempt Australian government agency.'
A 'quasi-ownership right' is defined in subsection 995-1 of the ITAA 1997 as:
quasi-ownership right over land means:
a) a lease of the land; or
b) an easement in connection with the land; or
c) any other right, power or privilege over the land, or in connection with the land.
The agreement grants the entity various rights and imposes on the entity various obligations until the end of the agreement period in relation to the capital works.
The agreement refers to various capital works projects.
The agreement gives the entity the entitlement to access the land required to perform its obligations under the agreement and under the related construction agreement during construction of the capital works. The agreement also gives the entity the entitlement to lease the capital works upon completion of the last capital works project to allow the entity to continue to perform its obligations under the agreement.
The rights and obligations granted to the entity under the agreement in relation to the area of land on which the capital works are carried out is a quasi ownership right over the land on which the capital works will be constructed.
Therefore, the entity holds a quasi ownership right over the construction expenditure areas, being the various capital works projects, for the purposes of section 43-75 of the ITAA 1997.
Attributed to a pool of construction expenditure that has been continuously held from construction completion
'Your area' for the purposes of subsection 43-120(1) is the part of the construction expenditure area that you lease, or hold under a quasi-ownership right over land granted by an exempt Australian government agency, and that:
a) is attributable to a pool of construction expenditure that you incurred; and
b) you have continuously leased or held since the construction was completed.
The entity, as quasi ownership right holder, incurred a pool of construction expenditure in relation to each capital works project.
The entity has, as quasi ownership right holder, continuously held each of these construction expenditure areas since the completion date of each completed capital works project.
One of the capital works projects has not yet been completed. While the entity has a quasi ownership right over this capital works project, it has not continuously held this capital works project from construction completion. This capital works project does not meet the requirements to be part of the entity's 'your area' for the purposes of subsection 43-120(1) because construction of this capital works project has not been completed.
The entity has a pool of construction expenditure for the capital works projects that have been completed. The entity has continuously held these capital works projects since construction was completed.
Conclusion
The entity has a 'your area', for the purposes of section 43-120(1) of the Act, for each of the capital works projects that have been completed.
'Your area' under the lease
Identifying the corresponding area of land to the land leased under the new lease
The entity will lease the capital works projects once they enter into the new lease. The area to be leased to the entity will cover most, but not all, of the land on which the capital works projects were constructed.
After the lease is entered into, the agreement will be terminated. Terminating the agreement will end the quasi ownership right held by the entity over the construction expenditure area, being the various capital works projects.
When the entity enters into the lease and the agreement is terminated, the entity's pool of construction expenditure will reduce and the entity will have a reduced 'your area'. The entity's new 'your area' for the purposes of subsection 43-120(1) of the ITAA 1997 is the part of the construction expenditure area covered by the lease.
Attributed to a pool of construction expenditure that has been continuously held from construction completion
For the entity to continue to have a 'your area' it must have continuously leased or held the construction expenditure area since construction was completed.
The ITAA 1997 does not provide definitions for 'leased' or 'held' for the purposes of section 43-120.
The Macquarie Dictionary 2001, rev. 3rd edition, The Macquarie Library Pty Ltd, NSW defines a 'Lease' as:
an instrument conveying property to another for a definite period, or at will, usually in consideration of rent or other periodical compensation. 'Leased' is then defined as to grant the temporary possession or use of (lands, tenements, vehicles, etc.) to another, usually for compensation at a fixed rate; let; or to take or to hold by a lease.
The entity has a lease in place before the quasi-ownership right terminates. The entity will meet the requirement of continually leasing or holding the construction expenditure area for the same construction expenditure area that it continues to lease after the agreement is terminated.
The entity will have a 'your area', being part of a construction expenditure area for the purposes of section 43-120(1) after the lease is in place and the agreement is terminated.
Conclusion
After entering into the lease and terminating the agreement, the entity will have a 'your area' for the purposes of subsection 43-120(1) of the ITAA 1997, being the area covered by the lease that the entity has continually held.