Edited version of your written advice

Authorisation Number: 1012691667155

Ruling

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

Question 1

Was a mining project abandoned in the income year ended 30 June 2013 for the purposes of subsection 40-832(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Relevant facts and circumstances

Company A initiated a mining project for the purpose of increasing production capacity.

Expenditure incurred in respect of this project was allocated to a project pool.

Company A decided to no longer proceed with the project. Consequently, Company A carried out a series of closeout actions including:

• termination of existing contracts in respect of the project,

• further packages of work not awarded, and

• redeployment of employees that were working on the project.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 40-I

Income Tax Assessment Act 1997 Section 40-832

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 Subsection 40-840(2)

Reasons for decision

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

Subsection 40-832(2) - abandonment

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.

A project can be abandoned before it starts to operate.

The term 'project' is not defined in the ITAA 1997; however, Taxation Ruling TR 2005/4 Income Tax: capital allowances - project pool - core issues (TR 2005/4) sets out the Commissioner's view in respect of what will constitute a project for the purposes of Subdivision 40-I for project amounts under subsection 40-840(2). It is considered that the principles in TR 2005/4 equally apply in identifying a project for which project amounts under subsection 40-840(1) can be allocated to a project pool in respect of the project which may be the case for the amounts incurred in this case.

In summary, the Commissioner's view is that a project:

• is a set of related activities,

• must be more substantial than an idea or speculation,

• would involve a plan, scheme or undertaking of some substance,

• has a start and finish and

• is an entirety in itself.

Further, the Commissioner considers that a finite project life is an element of a Subdivision 40-I project and the project life of the project is a matter for objective determination.

Based on the information provided by Company A, it is accepted that there is a project for which project amounts can be allocated.

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 this case, there was a major capital review in responding to a subdued commodity prices. As part of the review, it was determined that certain capital intensive expenditure projects including the mining project would cease. Following this decision, the focus was turned to achieving additional production capacity through expansion of production at existing mines. Thus, the mining project has been obviated for the foreseeable future.

A series of closeout actions were undertaken including:

• termination of existing contracts,

• further packages of work not awarded, and

• redeployment of employees that were working on the mining project.

After taking into account the relevant circumstances of this case, 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.

Accordingly, the mining project was abandoned in the income year ended 30 June 20XX for the purposes of subsection 40-832(2).