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Ruling

Subject: Application of Division 40

Question

Does Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to allow a claim for depreciation/capital allowance on certain building structures?

Advice/Answers

No.

This ruling applies for the following periods:

Year ended 30 June 2010.

The scheme commences on:

1 July 2009.

Relevant facts and circumstances

The trust conducts business on land owned by an individual. Additional buildings were constructed.

The buildings are permanent structures and not designed to be movable.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 40-25
Income Tax Assessment Act 1997 Subsection 40-30(1)
Income Tax Assessment Act 1997 Subsection 40-45(2)
Income Tax Assessment Act 1997 Paragraph 40-70(2)(e)
Income Tax Assessment Act 1997 Section 43-10

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

Reasons for decision

Subsection 40-25(1) of the Income Tax Assessment Act 1997 (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) ITAA 1997).  

The deduction must be reduced to take into account any decline in value that is attributable to use, or availability for use, other than for a taxable purpose (subsection 40-25(2) ITAA 1997).  

Taxable purpose has the meaning given by subsection 40-25(7) ITAA 1997, which includes the purpose of producing assessable income.  

Subsection 40-45(2) prevents deductions that are available as capital works from being deductible under Division 40.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 for your demountable buildings it is, therefore, necessary to determine whether it would be available to you to claim a deduction for your assets under the capital works provisions of Division 43.

Subsection 43-10(1) allows you to deduct capital expenditure incurred in constructing capital works, including buildings and structural improvements.  

Capital works is term of wide definition. Subsection 43-20(1) states that it covers three broad categories of expenditure: buildings, structural improvements and environment protection earthworks.  

In order to establish whether your situation is subject to the provisions of Division 43 it must be determined whether the demountables that you intend to purchase will fall into the definitions of buildings or structural improvements.

Whether an accommodation unit is a chattel or a fixture depends on the circumstances of each case.

Taxation Ruling TR 2004/16 states that it is a question of fact and degree as to whether an item forms part of the premises or would be a separate article of 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 accommodation unit is a chattel when it merely rests on land or it is affixed in such a way as to facilitate easy removal, or where the purpose and mode of affixing are for the more complete enjoyment of the unit as a chattel. An intention that a unit remain in one place for a substantial period of time does not, of itself, preclude the unit being a chattel. Units that are designed or constructed as portable or movable are not structures in the nature of buildings (Quarries Ltd v. Federal Commissioner of Taxation (1961) 106 CLR 310 at 316; (1961) 8 AITR 383 at 386).

However, an accommodation unit fixed to the ground may lose its identity as a chattel and become part of that land, that is, a fixture. A unit is a fixture, prima facie, if it cannot be removed, or if it has been affixed with the intention that it shall remain in position permanently or for an indefinite or substantial period and it is securely fixed in such a way that it cannot be detached without substantial injury to the land or the unit itself.

Therefore, a feature of a building is that its construction results in it being built into the ground so as to form a static and permanent feature of the place in which a business is carried on. Generally, a building is considered as fixed to the ground as it cannot be detached from the ground without substantial injury to either the building or the ground and the intention is that it remains there permanently, becoming a structural improvement to the land upon which it is affixed.

In Dixon v Fitch's Garage Ltd (1976) 1 WLR 215, setting and function were distinguished in relation to plant. In that case the garage proprietor built a canopy over petrol pumps to provide adequate lighting and protection from the weather for the pumps and customers. Brightman J held that the canopy could not be considered as plant as it was not performing the function of supply of the petrol, it was merely providing the setting.

In Carr v Sayer (UK) 65 TC 15;(1992) STC 396, the General Commissioners held that the movable kennels were plant, however, the High Court decided in the same case that permanent kennels are neither plant nor industrial buildings. It was held that quarantine kennels were not items of plant, Nicholls J said at 23:

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.

Application of the law to the circumstances

Additional buildings were constructed. The buildings are permanent and not designed to be movable.

The buildings are considered to be a fixture on the land. They are purpose built permanent buildings. They do not meet the definition of 'plant' as they provide the general setting at which business is conducted.

Expenditure incurred in relation to the construction of additional buildings is not deductible under Division 40 of the ITAA 1997.