Edited version of private ruling

Authorisation Number: 1011748506419

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Depreciating Assets - Cost Base

Question 1

Does the taxpayer's capital expenditure to protect ownership of a depreciating asset form part of the second element of the assets' cost base under section 40-190 of the Income Tax Assessment Act 1997 ('ITAA 1997')?

Answer

No, as the water dam is not a depreciating asset for which you can claim a deduction under Division 40 of the ITAA 1997, it is not necessary to consider if the capital expenditure forms part of the second element of cost under section 40-190 of the ITAA 1997.

Facts

The taxpayer leases land to a related party which is a primary producer.

In the 20XX financial year the taxpayer built a water dam at the property. The dam was built to irrigate and fertigate fruit trees.

In July 20YY the taxpayer incurred legal expenditures regarding a dispute (solicitor's fees, barrister's fees, court costs, etc).

The legal dispute was settled in the recent year in favour of the taxpayer.

This ruling applies for the following period<s>:

1 July 2009 to 30 June 2010

Relevant legislative provisions

Income Tax Assessment Act 1997

Subdivision 40-C

Section 40-180

Section 40-185

Section 40-190

Subdivision 40-F

Section 40-515

Section 40-520

Section 40-525

Reasons for decision

Subdivision 40-F of the ITAA 1997 allows a deduction for the decline in value of primary production depreciating assets. Section 40-515 of the ITAA 1997 specifically allows a deduction for a water facility or horticultural plant.

"Water facility" is defined in subsection 40-520(1) of the ITAA 1997. Examples of a water facility include a dam, tank, tank stand, bore, well, irrigation channel etc. The water dam constructed by the company meets the definition of water facility.

Subsection 40-525(1) of the ITAA 1997 sets out the conditions to be met if a taxpayer seeks to claim a deduction for the decline in value of the asset:

"The capital expenditure that you incurred on the construction, manufacture, installation or acquisition of the water facility must have been incurred:

(a) primarily and principally for the purpose of conserving or conveying water for use in a primary production business that you conduct on land in Australia."

The subsection makes it clear that the entity incurring the expenditure on the depreciating asset must be conducting a business of primary production to be eligible for a deduction under subdivision 40-F of the ITAA 1997. In this instance the company leases the land to a related entity which carries on a primary production business (fruit growing).

Taxation Determination TD 95/62 makes the following points about situations where land owned by one entity is leased to another for the purpose of carrying on a primary production business:

"4. Many arrangements do not amount to the carrying on of a business in partnership. In such cases, the fact that the land is used for cultivation in a business of primary production does not necessarily mean that the owner of the land is also carrying on that business.

5. To be carrying on a business, the taxpayer must be involved in the activities that make up that business. This would be evidenced by an element of control over, and/or an ongoing participation in, the business. The involvement should be direct or immediate, rather than passive. The payment of expenses relating to the ownership of the land, would not, without more, be sufficient.

6. In the absence of such an involvement, the landowner would not be regarded as being engaged in the business of primary production.

The receipt by the landowner of a payment from the farmer for the use of the land would be in the nature of income from property rather than from the carrying on of a business of primary production."

As the taxpayer is not conducting a business of primary production on the land it does not meet the condition in paragraph 40-525(1)(a) of the ITAA 1997. Accordingly, it is ineligible to claim a deduction for the decline in value of the asset.

Therefore it is unnecessary to decide if the legal expenses form part of the second element of cost of the asset.