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Ruling

Subject: Business related expenses

Question

Is a cash contribution made to your local council towards the provision of car parking spaces adjacent to your business expenditure incurred 'in relation to your business' for the purpose of paragraph 40-880(2)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) and deductible over five years?

Answer

Yes.

This ruling applies for the following period

Year ending 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

The arrangement that is the subject of this ruling is described below. The following documents have been relied upon to reach a decision:

o your application for private ruling and

o further information received.

You are a discretionary trust. You commenced a business during the 2009-10 financial year.

You are looking to expand your business operations, however due to the lack of parking facilities currently this was not viable.

You lodged a development application for a variation of use for your business premises.

A condition of approval of the development application was that a cash contribution be provided in lieu of car parking spaces which cannot be provided on-site.

Cash-in-lieu contributions for parking are funds collected by councils to construct additional public parking in the vicinity or on adjacent council land.

These car parks could not otherwise be provided and would hamper the ability of the business to expand.

You made the payment and the council will now develop the adjacent block of council land to include additional car parking spaces.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 40-880
Reasons for decision

Section 40-880 of the ITAA 1997 is a provision of last resort which allows a deduction over five income years for certain business capital expenditure incurred after 30 June 2005 which is not otherwise taken into account or is denied a deduction by some other provision.

Subject to the limitations and exceptions contained in subsections 40-880(3) to 40-880(9) of the ITAA 1997, subsection 40-880(2) of the ITAA 1997 provides that you can deduct, in equal proportions over a period of five income years starting in the year in which you incur it, capital expenditure you incur:

(a)  in relation to your business; or

(b)  in relation to a business that used to be carried on; or

(c)  in relation to a business proposed to be carried on; or

(d)  to liquidate or deregister a company of which you were a member, to wind up a partnership of which you were a partner or to wind up a trust of which you were a beneficiary, that carried on a business.

Taxation Ruling TR 2011/6 sets out the Commissioner's views on the interpretation of the operation of section 40-880 of the ITAA 1997.

TR 2011/6 states that the use of the expression 'in relation to' in subsection 40-880(2) of the ITAA 1997 rather than 'in carrying on', which is used in section 8-1 of the ITAA 1997, indicates that Parliament intended there be greater latitude in the connection that needs to exist.

The test under the second positive limb of section 8-1 of the ITAA 1997 is therefore a more demanding test requiring a more immediate or direct link between the expenditure and the process of operating the business than a connection that qualifies the expenditure as being 'in relation to' a business.

In considering the phrase 'in relation to' contained within subsection 40-880(2) of the ITAA 1997, paragraph 2.25 of the Explanatory Memorandum to the Tax Laws Amendment (2006 Measures No. 1) Bill 2006 states:

The provision is concerned with expenditure that has the character of a business expense because it is relevantly related to the business.

The phrase 'in relation to' was considered by the High Court in PMT Partners Pty Ltd (In Liquidation) v. Australian National Parks & Wildlife Service (1995) 184 CLR 301. Brennan CJ, Gaudron and McHugh JJ observed, in considering the application of the Commercial Arbitration Act 1985 (NT), at 313:

Inevitably, the closeness of the relation required by the expression 'in or in relation to' in s 48 of the Act, indeed, in any instrument - must be ascertained by reference to the nature and purpose of the provision in question and the context in which it appears.

It is therefore necessary to consider the legislative context of subsection 40-880(2) of the ITAA 1997 in order to determine whether there is a sufficient and relevant connection between the incurrence of the expenditure and the taxpayer's business.

Whether such capital expenditure is incurred 'in relation to' the particular business will turn on the particular facts and circumstances and is a matter of impression and judgement. Determining whether the expenditure has the character of a business expense can be approached by asking what the expenditure is for, in the sense of identifying the need or object that the expenditure serves. If the facts show that the expenditure satisfies the ends of the relevant business then it will have the character of a business expense.

In your case, the additional car park facilities were necessary for the business's expanded trading operations. On these facts, there is a sufficient and relevant connection between the incurrence of the capital expenditure on the contribution to council for the provision of car parking spaces and the business you carry on.

Paragraph 40-880(5)(a) excludes expenditure from deductibility under section 40-880 if it forms part of the cost of a depreciating asset that the entity holds.

In your case, as you do not hold the asset and will never hold it, the expenditure does not form part of the cost of a depreciating asset that you hold or will hold.

Paragraph 40-880(5)(d) provides that you cannot deduct anything under section 40-880 for an amount of expenditure you incur to the extent that it is in relation to a lease or other legal or equitable right.

There is no indication from the facts provided that the payment confers on you any legal or equitable right, as it is merely a contribution to additional car parking spaces that will be
council-owned.

Accordingly, the expenditure you incurred on the contribution to council for the provision of car parking spaces is capital expenditure incurred in relation to your business for the purposes of paragraph 40-880(2)(a) of the ITAA 1997 and is deductible over a period of five years.