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Ruling

Subject: depreciation, active asset concession, and remote area housing

Issue 1

Question 1

Is the house considered "plant" according to paragraph 45-40(1)(f) of the Income Tax Assessment Act 1997 (ITAA 1997)

Advice/Answers

Yes

Question 2

Can the notional cost of the house and machinery be determined by apportioning the market value at purchase in the same ratio as their replacement values?

Advice/Answers

Yes

Question 3

Can a capital allowance under Division 40 of the ITAA 1997 be claimed using the notional cost of the house with an effective life of 40 years with either the prime cost or diminishing value methods?

Advice/Answers

Yes

Question 4

Does there have to be an apportionment for private use and business use for the house?

Advice/Answers

No

Question 5

If the director remains an employee and the company maintains primary production at all times during ownership of the farm, is the house considered an active asset for the purposes of CGT concessions?

Advice/Answers

We decline to rule on this issue

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

The company purchased a farming business in 20XX.

A house is located on the farm.

Inside the house there is a control room which is used to monitor the activities of the business. The control unit is housed in the control room. The control unit can communicate with the computers in the business.

Due to the importance of the activities in the control room, it is not used for private purposes.

The director of the company is employed by the company to run the farm. The director owns all the shares in the company and lives in the house with family members free of charge.

Assumptions

It is assumed that there were no expenses which were considered second element of the cost.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 40-175

Income Tax Assessment Act 1997 subsection 40-180(2)

Income Tax Assessment Act 1997 section 40-185

Income Tax Assessment Act 1997 section 40-190

Income Tax Assessment Act 1997 section 45-40

Income Tax Assessment Act 1997 subsection 40-65(1)

Income Tax Assessment Act 1997 subsection 40-25(1)

Income Tax Assessment Act 1997 subsection 40-25(2)

Income Tax Assessment Act 1997 subsection 40-25(7)

Income Tax Assessment Act 1997 subsection 152-35(1)

Income Tax Assessment Act 1997 subsection 152-40(3A)

Taxation Administration Act 1953 paragraph 357-110(1) of Schedule 1

Section 25 of the Fringe Benefits Tax Assessment Act 1986

Subsection 58ZC(1) of the Fringe Benefits Tax Assessment Act 1986

Subsection 58ZC(2) of the Fringe Benefits Tax Assessment Act 1986

Subsection 140(1) of the Fringe Benefits Tax Assessment Act 1986

Subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986

Reasons for decision

Issue 1

Question 1

Summary

The house, which is used for domestic or residential purposes, is considered a structure which is used in connection with agricultural purposes therefore it is considered plant and deductible under Division 40 of the ITAA 1997.

Detailed reasoning

The meaning of plant is outlined under section 45-40 of the ITAA 1997.

Plant includes:

(a) articles, machinery, tools and rolling stock; and

(b) animals used as beasts of burden or working beasts in a business, other than a primary production business; and

(c) fences, dams and other structural improvements, other than those used for domestic or residential purposes, on land that is used for agricultural or pastoral operations; and

(d) structural improvements, other than a forestry road or structural improvements used for domestic or residential purposes, on land used in a business involving:

(i) planting or tending trees in a plantation or forest that are intended to be felled; or

(ii) felling trees in a plantation or forest; or

(iii) transporting trees, or parts of trees, that you felled in a plantation or forest to the place where they are first to be milled or processed, or from which they are to be transported to the place where they are first to be milled or processed; and

(e) structural improvements, other than those used for domestic or residential purposes, that are used wholly for operations (carried out in the course of a business) relating directly to:

(i) taking or culturing pearls or pearl shell; or

(ii) taking or catching trochus, bêche-de-mer or green snails;

and that are situated at or near a port or harbour from which the business is conducted; and

(f) structural improvements that are excluded from paragraph (c), (d) or (e) because they are used for domestic or residential purposes if they are provided for the accommodation of employees, tenants or sharefarmers who are engaged in or in connection with the activities referred to in that paragraph.

The Macquarie Dictionary defines agriculture as the cultivation of land, including crop-raising, forestry, stock-raising, etc; farming.

In this case the house is considered a structural improvement which is excluded from paragraphs 45-40(1)(c),(d)&(e) as it is used for domestic or residential purposes. The house is however, used in connection with agricultural operations and is provided for as accommodation for an employee who is engaged in agriculture, therefore paragraph 45-40(1)(f) applies to include the house as plant.

Question 2

Summary

The calculations you have submitted in relation to working out the market value for the dwelling are acceptable to the Commissioner however, the amount is considered to be the notional market value of the dwelling and it must be adjusted to reflect the actual amount paid (the cost) and not the market value.

Detailed reasoning

Section 40-175 of the ITAA 1997 states the cost of a depreciating asset you hold consists of 2 elements. The first element is covered under section 40-180. If the item appears under the table contained under 40-180(2) of the ITAA 1997, the cost is that amount otherwise it is the amount you are taken to have paid to hold the asset under section 40-185. The second element which is outlined under section 40-190 is worked out after you start to hold the depreciating asset. The second element is:

· the amount you are taken to have paid under section 40-185 for each economic benefit that has contributed to bringing the asset to its present condition and location from time to time since you started to hold the asset; and

· expenditure you incur that is reasonably attributable to a balancing adjustment event occurring for the asset.

In this case the house is considered plant, which is a depreciating asset. The first element of cost is the amount you are taken to have paid to hold the asset.

The actual amount paid for the dwelling alone where the employee lives, is not known for the purposes of working out the cost of the house for Division 40 purposes.

You have asked whether the market value of the house and the shed can be determined by apportioning the market value of the dwelling and the in the same ratio as their replacement values. This calculation gives a notional market value of the dwelling, however this is not what was actually paid (cost). The total market value for the farm was different from the total amount paid for the farm.

The nominal market value of the house is adjusted to take into account how much was actually paid. This calculation more accurately reflects the actual cost of the dwelling at the time of purchase. The Commissioner is satisfied that the calculations reflect the amount the company is taken to have paid to hold the asset (dwelling).

For your information, a balancing adjustment event occurs when the house is sold.

Question 3

Summary

As the house is considered plant, the company can deduct the decline in value using either the prime cost or diminishing value methods.

Detailed reasoning

Subsection 40-65(1) of the ITAA 1997 states you have a choice of 2 methods to work out the decline in value of a depreciating asset. You must choose to use either the diminishing value method or the prime cost method, however there are some exceptions to your choice of method.

In this case the company purchased a house which is considered a depreciating asset under Division 40 of the ITAA 1997. None of the exceptions apply therefore either of the two methods can be used.

Question 4

Summary

The company is entitled to a business deduction for the decline in value. As there is no private element to the business deduction, the full amount allowable under Division 40 can be claimed by the company.

Detailed reasoning

Subsection 40-25(1) of the ITAA 1997 states you can deduct an amount equal to the decline in value for an income year of a depreciating asset that you held for any time during the year.

Subsection 40-25(2) of the ITAA 1997 states you must reduce your deduction by the part of the asset's decline in value that is attributable to your use of the asset, or having it installed ready for use, for a purpose other than a taxable purpose.

Subsection 40-25(7) of the ITAA 1997 states subject to subsection (8), a taxable purpose is:

· the purpose of producing assessable income; or

· the purpose of exploration or prospecting; or

· the purpose of mining site rehabilitation; or

· environmental protection activities.

In this case the company provides an exempt housing benefit which replaces part of the employee's remuneration (salary and wages - cash) with a non-cash exempt housing benefit and therefore it is considered a business expense. As there is no private element to the business deduction, the full amount allowable under Division 40 can be claimed by the company.

Question 5

Summary

The Commissioner is declining to rule on the issue of CGT active asset concessions due to having to make a number of assumptions in order to provide a private ruling on the issue.

Detailed Reasoning

Under certain circumstances the Commissioner may decline to make a private ruling. We are declining to give you a private ruling on this issue for the following reason.

Paragraph 357-110(1)(a) of Schedule 1 to the Taxation Administration Act 1953 [TAA 1953] states the Commissioner may decline to make a ruling if he considers that the correctness of a private ruling would depend on assumptions which were made about a future event or other matter.

The Commissioner must consider the correctness of the issue within your private ruling on whether the house would be considered an active asset for CGT concession purposes. The answer to this question depends on a number of assumptions about future events.

We are not prepared to make a ruling on the basis of these assumptions.

The Commissioner has considered the facts regarding the arrangement as submitted by you in your application for private ruling. Without making a number of assumptions the Commissioner cannot determine whether the house will be considered an active asset for CGT concession purposes.

In order to rule that the house would be considered an active asset in your arrangement, the Commissioner must be satisfied that all conditions under Division 152 of the ITAA 1997 will be met. It is not possible to know with any certainty whether those conditions will be met without making a number of assumptions.

The Commissioner considers the correctness of providing you with a private ruling on this issue would depend on assumptions about future events or some other matters. Pursuant to paragraph 357-110(1)(a) of Schedule 1 of the TAA 1953, the Commissioner will decline to rule.

Issue 2

Remote area housing

Question

Is the provision of accommodation provided by the employer to the director an exempt housing benefit in accordance with section 58ZC of the Fringe Benefits Tax Assessment act 1986?

Answer

Yes.

This part of the ruling applies for the following periods:

FBT year ended 31 March 2011

FBT year ended 31 March 2012

FBT year ended 31 March 2013

Reasons for decision

Summary

A housing benefit arises and it is a remote area housing benefit which is exempt from fringe benefits tax.

Detailed reasoning

The company owns the farm property which has a house on it. The company allows the working director to reside in the house without charge.

The term 'housing benefit' is defined in subsection 136(1) of the FBTAA to mean a benefit referred in section 25 of the FBTAA.

A housing benefit arises where a housing right, granted by the company to its director, subsists during the all or part of the year. The benefit is taken to be provided by the provider (company) to the recipient (sole director).

The term, 'housing right' is defined in subsection 136(1) of the FBTAA to mean a lease or licence granted to someone to occupy or use of accommodation at a time when the unit of accommodation (the house) is the person's usual place of residence.

Therefore a housing benefit arises in accordance with section 25 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA). The employer is providing a housing benefit to the director.

Whether this benefit is taxable or free from fringe benefits tax (FBT) will depend on the benefit being exempt under subsection 58ZC(1) of the FBTAA. Under subsection 58ZC(1) of the FBTAA, a housing benefit is a 'remote area housing benefit' is an exempt benefit.

However, all the conditions have to be satisfied in subsection 58ZC(2) of the FBTAA.

Subsection 58ZC(2) of the FBTAA provides the conditions for remote area housing benefit:

i. for the whole of the tenancy period the unit of accommodation was not at a location in, or adjacent to, an eligible urban area;

ii. for the whole of the tenancy period the accommodation was occupied by a person who was a current employee of the employer and the usual place of employment of the employee was in the remote area;

iii. it is necessary for the employer to provide or arrange free or subsidised accommodation because, amongst other criteria, the nature of the employer's business is such that employees are liable to move frequently from one residential location to another, or there is no suitable accommodation for employees close to place of employment or, it is customary for employers in that industry to provide free or subsidised accommodation for employees; and

iv. the recipients overall housing right was not granted under a non-arm's length arrangement, nor was granted for a purpose that included the purpose of enabling the employer to obtain the benefit of the application of section 58ZC of the FBTAA (that is, the housing right was granted under bona fide circumstances).

From the facts of this case, conditions (ii) and (iv) above are satisfied.

For condition (iii) above, the tax office accepts that it is customary for farmers in this industry to provide an employee with accommodation on the farm, in order to control and monitor the living conditions of the animals during the day and night.

However, condition (i) needs to be addressed, for the exemption from fringe benefits tax to apply as all the conditions have to be satisfied.

The question is whether the accommodation on the farm is not located in, or adjacent to, an 'eligible urban area'.

Section 140 of the FBTAA addresses what is an 'eligible urban area'.

Paragraph 140(1)(a) of the FBTAA provides that an 'eligible urban area' is a reference to an area that is an urban centre with a 1981 census population of not less than 14,000 (or 28,000 for an urban centre located in Zone A or B for Income Tax purposes).

Paragraph 140(1)(b) defines a location that is adjacent to an eligible urban area to be either:

· situated less than 40 kilometres, by the shortest practicable surface route, from the centre point of an eligible urban area with a census population of less than 130,000; or

· situated less than 100 kilometres, by the shortest practicable surface route, from the centre point of an eligible urban area with a census population of at least 130,000.

The surface route means a route other than an air route.

Subsection 140(3) of the FBTAA defines 'census population' in relation to an urban centre to mean the census count on an actual location basis of the population of that urban centre specified in the results of the Census of Population and Housing taken by the Australian Statistician on 30 June 1981.

The Tax Office guidance in applying these provisions is set out in Law Administration Practice Statement PSLA 2000/6, Fringe Benefits Tax: What is considered to be remote for the purposes of the remote area housing benefit.

The attachments to PSLA 2000/6 are available on the tax office website www.ato.gov.au.

A location will be in a remote area (and not adjacent to an eligible urban area) where it is:

40 kilometres or more from a town or city with a census population of 14,000 or more, if that town is not in Zone A or B for Income Tax purposes, and

40 kilometres or more from a town or city with a census population of 28,000 or more, if that town is in Zone A or B for Income Tax purposes, and

100 kilometres or more from a town or city with a census population of 130,000 or more.

The attachments are a non-exhaustive list of areas within Australia, on a state by state basis, that are either remote or not remote.

The location in question cannot be located in or adjacent to an eligible urban area. If it is, then it is not a remote area.

Attachment 1 applies to paragraph 140(1)(b) of the FBTAA, which refers to locations adjacent to eligible urban areas for ease of reference.

The attached list, states that the town is in a remote area and is not adjacent or close to an eligible urban area.

The closest town and the farm are not located in, or adjacent to an eligible urban area as provided in paragraph 140(1)(b)(ii) of the FBTAA and therefore a remote area, hence condition (i) is satisfied.

Conclusion

Therefore, in accordance with section 25 of the FBTAA, the employer has provided the director with a housing benefit.

The employer meets all the conditions set out in subsection 58ZC(2) of the FBTAA.

Therefore, as subsection 58ZC(2) of the FBTAA requirements are met, and the housing benefit provided by the employer to the employee on the farm, will be a remote area housing benefit that is an exempt benefit under subsection 58ZC(1) of the FBTAA.