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Ruling

Subject: Contributions for carrying out works and the application of Division 40 and Division 43 of the Income Tax Assessment Act 1997

Issue 1

Question 1

Is the expenditure incurred by an entity by way of contribution to another party to carry out works the cost of a depreciating asset for the purposes of section 40-175 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Does the expenditure incurred by an entity by way of contribution to another party to carry out works satisfy the definition of transport capital expenditure under Subdivision 40-I of the ITAA 1997?

Answer

Yes.

Question 3

Can the expenditure incurred by an entity by way of contribution to another party to carry out works be deducted as the cost of capital works under Division 43 of the ITAA 1997?

Answer

No.

Question 4

If contributions made to another party to carry out works are deductible under Division 43 of the ITAA 1997, are amounts reimbursed in relation to the previous contributions relevant for the purposes of Part 3-1 and Part 3-3 of the ITAA 1997?

Answer

Not necessary for the Commissioner to rule

This ruling applies for the following period

Multiple income years, including the current income year.

The scheme commenced on

On a day during the current income year

Relevant Facts

Background

An entity entered into a works agreement with another party. The entity is a member of a tax consolidated Group.

The entity has business operations, and has entered into the arrangement to allow for the transport of products.

Works Agreement

The entity entered into a works agreement, and has agreed to contribute to the cost of the works carried out by the other party (or by a contractor on the party's behalf). The works are preparatory and integral to further works that will allow the entity to transport products.

The works agreement contains details of the design, approval and construction that will occur. Under the works agreement the entity does not have any rights or title to any assets created by the works, nor any rights or title over the area on which works will occur.

The transport of the product

The entity will transport a product from its operations. Details were provided of the product, and how the product will be transported.

Relevant legislative provisions

Division 40 of the Income Tax Assessment Act 1997

Section 40-30 of the Income Tax Assessment Act 1997

Subsection 40-30(1) of the Income Tax Assessment Act 1997

Subsection 40-30(2) of the Income Tax Assessment Act 1997

Subsection 40-30(3) of the Income Tax Assessment Act 1997

Paragraph 40-30(1)(a) of the Income Tax Assessment Act 1997

Paragraph 40-30(1)(b) of the Income Tax Assessment Act 1997

Paragraph 40-30(1)(c) of the Income Tax Assessment Act 1997

Section 40-40 of the Income Tax Assessment Act 1997

Section 40-175 of the Income Tax Assessment Act 1997

Subdivision 40-I of the Income Tax Assessment Act 1997

Subsection 40-830(2) of the Income Tax Assessment Act 1997

Subsection 40-840(1) of the Income Tax Assessment Act 1997

Subsection 40-865(2) of the Income Tax Assessment Act 1997

Section 40-870 of the Income Tax Assessment Act 1997

Subsection 40-870(1) of the Income Tax Assessment Act 1997

Subsection 40-870(2) of the Income Tax Assessment Act 1997

Division 42 of the Income Tax Assessment Act 1997

Division 43 of the Income Tax Assessment Act 1997

Subsection 43-10(2) of the Income Tax Assessment Act 1997

Subsection 43-20 of the Income Tax Assessment Act 1997

Subsection 43-75(1) of the Income Tax Assessment Act 1997

Subsection 43-140 of the Income Tax Assessment Act 1997

Reasons for decision

Issue 1

Question 1

The works agreement allows for the construction on an area. This construction may create depreciating assets.

A depreciating asset is defined in subsection 40-30(1) of the ITAA 1997 as being an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used. This definition captures the meaning of plant (such as machinery) under the current Division 42 of the ITAA 1997 as well as other assets that are wasting in nature.

The three exceptions to this definition are contained in paragraphs 40-30(1)(a) to 40-30(1)(c) of the ITAA 1997; being land, trading stock and intangible assets not mentioned in subsection 40-30(2) of the ITAA 1997.

In accordance with paragraph 40-30(1)(a) of the ITAA 1997, land itself is not a depreciating asset. However, improvements to land or fixtures on land may qualify as depreciating assets. For the purposes of subsection 40-30(3) of the ITAA 1997, improvements or fixtures are treated as separate assets, not as part of the land, regardless of whether they can be removed from the land or are permanently attached.

To determine if an improvement to land is other than land in its ordinary meaning, the improvement to land must have a discrete and identifiable function separate to merely existing as the solid substance of the exposed surface of the earth.

The area where the works will be will be land, without any identifiable function separate to merely existing as the exposed surface of the earth. As such the area is excluded from being a depreciating asset under paragraph 40-30(1)(a) of the ITAA 1997.

Under the works agreement it is possible that depreciating assets will be created. For the entity to claim an amount for the decline in value of a depreciating asset, they must be the holder of the depreciating asset for the purposes of the table in section 40-40 of the ITAA. For this to occur the entity must have a quasi-ownership right or ownership right over the depreciating asset.

Under the works agreement the entity has no quasi-ownership right, or ownership rights for any of the depreciating assets that may be created as part of the Works. The entity is unable to establish that they are the holder of any depreciating asset/s. Therefore, none of the contributions paid by the entity to the party to carry out works relates to the cost of a depreciating asset for the purposes of section 40-175 of the ITAA.

Question 2

Subsection 40-830(2) of the ITAA 1997 provides that you can deduct amounts for project amounts that are allocated to a project pool.

Subsection 40-840(1) of the ITAA 1997 provides that an amount of transport capital expenditure you incur is a project amount if it does not form part of the cost of a depreciating asset you hold or held; you cannot deduct it under a provision of this Act outside this Subdivision; and it is directly connected with transport capital expenditure.

The expenditure incurred by the entity by way of contributions to the party to carry out works does not form part of the cost of a depreciating asset and is not deductible under any other provision of the Act.

You provided details of the works, It is considered that the works will be necessary for the facility. The facility is a transport facility for the purposes of subsection 40-870(1) of the ITAA 1997.

You provided details of the product, and the facilities for the transport of the product will not be excluded from being a transport facility under subsection 40-870(2) of the ITAA 1997.

As such, the facilities will be transport facilities within the meaning of section 40-870 of the ITAA 1997. As the creation of the works are necessary for the transport facilities, your contribution under the works agreement will be transport capital expenditure under subsection 40-865(2), being a contribution to someone else's capital expenditure on works necessary for a transport facility.

Your contribution will be a project amount which forms part of the project pool from which you are able to claim a deduction under subsection 40-830(2) of the ITAA 1997.

Question 3

The expenditure incurred by the entity by way of contributions to another party for works cannot be deducted as the cost of capital works under Division 43 of the ITAA 1997.

To be able to deduct an amount for capital works the entity must have a construction expenditure area for the purposes of subsection 43-10(2) of the ITAA 1997, and use the area in the income year in the way set out in table 43-140 of the ITAA 1997.

The entity one does not own, lease or have a quasi - ownership right over the construction expenditure area for the purposes of subsection 43-75(1). Therefore, the entity does not have a 'your area' for the purposes of subsection 43-10(2) of the ITAA 1997.

In addition section 43-20 of the ITAA 1997 restricts the types of works to which Division 43 will apply. It is not considered that the Area would satisfy the restrictions in section 43-20 of the ITAA 1997.

Question 4