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Authorisation Number: 1012381749135

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Ruling

Subject: Connecting power to land

Question 1

Will you be entitled to a deduction over a number of years for the total cost of electrifying an asset under section 40-645 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Will you be entitled to a deduction over a number of years for a portion of the total cost of electrifying an asset under section 40-645 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts and circumstances

You own an asset which is located on property owned by another entity.

You were granted an occupation licence which gives you access to a portion of the property (the land) for the purpose of asset expansion investigations, testing and installation. The licence is valid for more than one year. Once all the testing or installations have been completed, you are to apply for the grant of an easement over the land.

Currently the asset has motorised components which are powered by diesel generators. Funds have been made available to electrify the assets.

The electrification of the asset will involve the following:

· the local electricity supply authority will supply a 22 kV overhead power line extension from where their power line currently ends to a substation located on the land

· the local electricity supply authority will install a master power meter at the substation

· you will install automated switching equipment at the substation

· you will install overhead power line from the substation to Location X

· additional motorised components will be added to the asset

· each of the motorised components will be fed from the overhead mains via a step down pole mounted transformer and all diesel generators will be decommissioned

· each motorised component will have its power consumption monitored via individual power meters.

The land does not have an existing electricity connection.

The overhead power line extension and master power meter at the substation will remain the property of the local electricity supply authority. You will pay for the cost of the extension and installation.

The local electricity supply authority will use the master meter at the substation to determine your electricity usage for each billing period and will invoice you on this basis.

You will own and read for maintenance and efficiency reasons the power meters associated with each individual motorised component.

At the end of the electrification process you will own an asset which contains the following components:

· power lines and associated power poles

· pole mounted transformers and power meters

· motorised components

· control systems

· telemetry for remote monitoring and control of motorised assets.

You carry on a business using the land and earning assessable income from your activities.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 40-645

Income Tax Assessment Act 1997 Section 40-655

Reasons for decision

Summary

You are entitled to a deduction for the cost of connecting power to land under section 40-645 of the ITAA 1997. Not all of the expenses incurred in work to be undertaken are included in calculating the deduction. The deduction is to be spread over a 10 year period.

Detailed reasoning

Section 40-645 of the ITAA 1997 allows you to claim a deduction for capital expenditure you incur on connecting power to land if, when you incur the expenditure,

(a) you have an interest in the land, and

(b) you or another entity intend to use some or all of the electricity to be supplied as a result of the expenditure in carrying on a business on the land for a taxable purpose at a time when you have an interest in the land.

Section 40-645 of the ITAA 1997 is a rewrite of former section 70A of the Income Tax Assessment Act 1936.

The deduction is spread over a period of 10 income years.

To determine if you will be entitled to claim a deduction for the capital expenditure incurred in connecting power to land, we will examine each component of the section 40-645 of the ITAA 1997 and its application to your situation.

Do you have an interest in the land?

You have an occupation licence which provides you with access to the land for the purpose of asset expansion investigations, testing and installations.

Whilst not a formal 'easement' the licence provides you with the right to enter and hold the land, subject to the terms and conditions specified. As the licence allows you to expand the existing asset, we consider you have rights of use over the land.

As licence provides you with rights of use over the land, you are considered to have an interest in the land for the purpose of section 40-645 of the ITAA 1997.

Are you carrying on a business on the land for a taxable purpose?

You are using the land to carry on a business and receive assessable income. It is accepted that this business is being operated for a taxable purpose.

Are you connecting power to the land?

Subsection 40-655(1) of the ITAA 1997 states that each of the following operations is considered to be connecting power to land

(a) connecting a mains electricity cable to a metering point on the land (whether or not the point from which the cable is connected is on the land)

(b) providing or installing equipment designed to measure the amount of electricity supplied through a mains electricity cable to a metering point on the land, or

(c) providing or installing equipment for use directly in connection with the supply of electricity through a mains electricity cable to a metering point on the land.

A metering point on land is defined in subsection 40-655(3) of the ITAA 1997 as a point where the consumption of electricity supplied to the land through a mains electricity cable is measured.

In your case, the local electricity supply authority will be extending an overhead high voltage power line from its current termination point to the substation. A master power meter will be installed at the substation.

It is the master power meter at the substation which is considered to be the metering point referred to in the legislation as it is from this meter that the local electricity supply authority will measure your electricity consumption and prepare their invoices based this data.

The phrase 'connecting a mains electricity cable to a metering point on the land' refers to the connection of a mains electricity cable from a point either on or outside the land to a point on the land at which the consumption of electricity supplied through the cable is to be metered

Where the consumption of electricity is metered at a point which lies outside of the land, the cost of connection of mains electricity is not an allowable deduction under section 40-645 of the ITAA 1997.

As the substation and the master power meter will be located on the land, a deduction will be allowable for the cost of connecting power to the land under section 40-645 of the ITAA 1997.

Which expenses qualify to be included in calculating your deduction?

The expenses which qualify to be included in calculating your deduction are those expenses which are directly involved in connecting the power to the land and installing the equipment designed to measure the amount of electricity supplied.

These expenses include:

(a) the payment for extension of overhead power line to the substation, and

(b) payment for the installation of a master metering point at the substation.

You will be entitled to include these expenses when calculating your deduction for the cost of connecting power to the land under section 40-645 of the ITAA 1997.

The amount you can deduct is 10% of the expenditure for the financial year in which you incur it. You may claim 10% of the expenditure incurred in each of the next nine financial years provided you have an interest in the land in the financial year in which you claim the deduction and are using the land to carry on a business for a taxable purpose in that year.