Edited version of private advice

Authorisation Number: 1012649099094

Ruling

Subject: Capital allowances: Subdivision 40-I - project - abandonment

Question 1

Was a mining project abandoned for the purposes of subsection 40-832(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

The scheme commences on:

30 June 20XX

Relevant facts and circumstances

Company A commenced the initial phase of a multi-phase project which is directly connected to a mining operation which would continue in operation for many years.

Expenditure incurred in respect of the initial phase was allocated to a project pool.

Company A decided to terminate the project. Consequently, Company A carried out a series closeout actions including:

• terminating all the contracts in respect of the initial phase,

• selling all the assets acquired for the initial phase,

• redeploying all the employees that were specifically working on the initial phase and,

• winding up all the early planning activities in respect of later phases of the mining operation.

However, Company A has retained the right to mine for various reasons.

Company A contended that the initial phase was a project for the purposes of Subdivision 40-I of the ITAA 1997 because it was a phased development and each phase is subject to a separate internal approval.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 Subsection 40-730(7)

Income Tax Assessment Act 1997 Paragraph 40-730(7)(a)

Income Tax Assessment Act 1997 Subdivision 40-I

Income Tax Assessment Act 1997 Subsection 40-832(2)

Income Tax Assessment Act 1997 Section 40-840

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

Income Tax Assessment Act 1997 Section 40-845

Income Tax Assessment Act 1997 Section 40-860

Income Tax Assessment Act 1997 Section 40-865

Reasons for decision

All legislative references are to the ITAA 1997 unless otherwise stated.

Whether the project has been abandoned

Broadly speaking, the project pool provisions of Subdivision 40-I allow a taxpayer to pool and deduct certain capital expenditure that qualifies under section 40-840 as a project amount on the basis of the project life of the project.

However, if a project is abandoned, sold or otherwise disposed of and the taxpayer has a project pool in respect of that project to which project amounts have been allocated, subsection 40-832(2) allows a deduction for the balance of the pool's value for the year in which the abandonment, sale, or other disposal occurs.

According to the decision in Kallooar v. R [1964] 50 WWR 602, something is considered to be abandoned if it is given up completely and finally. On that basis, the temporary cessation of a project will not constitute abandonment: the cessation must be permanent. Whether a project has been abandoned is a question of fact and degree that can only be determined in light of all the relevant circumstances of each case. It is considered that a project will be abandoned if it would be objectively determined that it will not proceed having regard to all the facts and circumstances surrounding the project. The intention of the taxpayer alone would not be determinative. Factors that are outside the control of the taxpayer often provide objective evidence whether a project has been abandoned.

In respect of a mining project, whether the relevant mining right has ended generally provides the objective indicator whether the project has been abandoned.

However, in this case, the Commissioner accepts the reasons for retaining the right to mine as provided by Company A and considered that the retention did not of itself prevent a conclusion that the project has been abandoned.

After taking into account all the relevant facts and circumstances at the relevant time including the closeout actions, the Commissioner accepts that Company A has given up completely and finally (from the point of view of the objectively foreseeable future at the time of the decision to close out all relevant activities was taken) the project that was to be carried on in accordance with the particular mine plan, mine configuration and sequence.

Accordingly, the mining project including the initial and later phases of the operation has been abandoned now and for the objectively foreseeable future.

Other significant issues considered

Whether the initial phase was a project for the purposes of Subdivision 40-I

Company A indicated that expenditure has been allocated to a project pool that falls within the scope of mining capital expenditure as defined in section 40-860.

The definition of mining capital expenditure (MCE) includes amongst other things capital expenditures incurred in carrying on mining and quarrying operations. Mining and quarrying operations is, in turn, defined under subsection 40-730(7). So far as is relevant here, paragraph 40-730(7)(a) provides that mining and quarrying operations means mining operations on a mining property for extracting minerals (except petroleum) from their natural site for the purpose of producing assessable income.

Subsection 40-840(1) states that an amount of MCE is a project amount if it does not form part of the cost of a depreciating asset, is not deductible under another provision of the ITAA 1997 and it is directly connected with the carrying on of mining and quarrying operations in relation to which the expenditure was incurred.

Having regard to the above provisions, it is apparent that a project does not need to be identified to assess whether an amount of MCE will be a project amount under subsection 40-840(1). However, the identification of the project is necessary for the purposes of calculating a deduction for the project amounts allocated to a project pool. This is because the method of calculation is based on the project life to which the project pool relates. Under section 40-845, the project life of a project refers to the time that elapses between when the project starts to operate until it stops operating. Therefore, the identification of the particular project is required.

The word 'project' is not defined for the purposes of Subdivision 40-I. It is therefore appropriate that the term takes its ordinary meaning shaped by the context in which it is found. In The Macquarie Dictionary (revised third edition, 2001) 'project' means something that is contemplated, devised or planned; a plan; a scheme; an undertaking.

Although Taxation Ruling TR 2005/4 - Income tax: capital allowances - project pools - core issues is not concerned with project amounts that are MCE or transport capital expenditure (TCE), the principles set out in the ruling are considered instructive in identifying a project such as the mining project in question for which MCE or TCE can be allocated to a project pool in respect of that project and in determining its project life.

TR 2005/4 provides the Commissioner's view at paragraph 36 that the determination of project life is a matter for objective determination. Factors that are personal only to the taxpayer, such as how long the taxpayer intends to carry on the project, would not of themselves be relevant. Factors outside the control of the taxpayer would be relevant.

It is considered that the principles equally apply to a mining project and the project life of a mining project is a matter for objective determination. It logically follows that the identification of the relevant mining project is also a matter for objective determination. Thus, factors that are subjective or personal only to a taxpayer such as an internal approval process would not of themselves be relevant in identifying the mining project and determining its project life. Equally, the decision to phase a development would not of itself be relevant in identifying such a project and its project life.

In this case, it is evident from Company A's internal documents that the initial phase on its own was not viable unless it was to be followed by later phases of development. The importance of ensuring the later phases were to be carried out is also evident in these documents where they stated that Company A planned to integrate the initial phase with the next phase to ensure that there was a clear and endorsed path for the next expansion beyond the initial phase. Further, it is a requirement for any project for the purposes of Subdivision 40-I that it encompass not only initial stages where the apparatus of the project are assembled but also their operation for the entirety of the finite time the project will operate to satisfy the income producing and taxable purposes requirements in subsection 40-730(7) and section 40-865 respectively. In Company A's case it is obvious that operating the project for this time and for these purposes necessarily includes the later so-called phases of the mining operations.

Therefore, viewed objectively, Company A would not have and could not have proceeded the initial phase alone without further phases to follow. The initial phase and the later phases were integral to each other and the phased operation would not make business and commercial sense without one another. Evidently, Company A considered it was not worthwhile to continue the initial phase as it was net present value negative without further investment and decided to terminate the initial phase. The fact that Company A had a discrete internal approval process for each of the phases and each phase may have well defined objectives and activities for the purposes of the approval does not change this.

Accordingly, Company A's decision points for the commitment of further expenditure to the project, are not seen to delineate the commencement of another discrete project for which a separate project pool can be established and a separate project life can be determined.

Taxation Ruling TR 2012/7- capital allowances: treatment of open pit mine site improvements provides the Commissioner's view on what is also relevant in identifying the project. TR 2012/7 states that an open pit mine site improvement is a single depreciating asset. Each pushback enhances an existing depreciating asset rather than creating a new asset or destroying an existing one.

Therefore, it is considered that an open pit mining project will be directly connected with and will encompass, at least, those mining operations that bring into existence and operate over its effective life the open pit depreciating asset. This will then allow the objective determination of the project life of such a project. That is the project life will be the life of the mine in the case of a single pit mine and any rehabilitation works which itself is objectively determined by the period of time the deposit remains commercially viable to extract or is depleted.

That is, an open pit mine has objectively, a finite income producing life for the purposes of calculating decline in value deductions and, consistently, the calculation for deductions in respect of the pool balance of project amounts allocated to the project pool associated with that depreciating asset that largely represents the manifestation of the extractive operations of the mine itself are calculated with reference to the same period of time. The Commissioner acknowledges that these outcomes appear undesirable in respect of mines having unusually long lives but that outcome is consistent with the policy intentions of Division 40 over the former law.

It follows that the Commissioner does not accept that the initial phase was a project in its own right for which MCE or TCE could be allocated to a project pool.