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Edited version of your written advice
Authorisation Number: 1012994771212
Date of advice: 12 April 2016
Ruling
Subject: Primary Production Deductions - Water Facilities
Question and answer:
Are the costs incurred in developing an irrigation system deductible under subdivision 40-F of the Income Tax Assessment Act 1997 (ITAA 1997)?
Yes.
This ruling applies for the following periods:
Year ending 30 June 2016
Year ending 30 June 2017
The scheme commences on:
1 July 2015
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
You carry on business as a primary producer.
You are investing in water facilities.
The facilities will only be used in the primary production business.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 40-510
Income Tax Assessment Act 1997 section 40-515
Income Tax Assessment Act 1997 section 40-520
Income Tax Assessment Act 1997 section 40-525
Income Tax Assessment Act 1997 section 40-530
Income Tax Assessment Act 1997 section 40-540
Income Tax Assessment Act 1997 section 40-645
Income Tax Assessment Act 1997 section 40-655
Reasons for decision
Subdivision 40-F: primary production depreciating assets
Subdivision 40-F of the ITAA 1997 provides a deduction for the decline in value for an income year of a depreciating asset that is a water facility. The deduction for the water facility is worked out based on the total capital expenditure incurred and taken in a single year (section 40-540 of the ITAA 1997).
Under subsection 40-520(1) of the ITAA 1997 a water facility is defined as:
a) plant or a structural improvement, or a repair of a capital nature, or an alteration, addition or extension, to plant or a structural improvement, that is primarily and principally for the purpose of conserving or conveying water; or
b) a structural improvement, or a repair of a capital nature, or an alteration, addition or extension, to a structural improvement, that is reasonably incidental to conserving or conveying water.
Examples of a water facility include a dam, tank, tank stand, bore, well, irrigation channel, pipe, pump, water tower and windmill. Examples of things reasonably incidental to conserving or conveying water include a culvert, a fence to prevent livestock entering an irrigation channel and a bridge over an irrigation channel.
Section 40-525 of the ITAA 1997 sets out that in order to be eligible for a deduction under Subdivision 40-F of the ITAA 1997 the capital expenditure you incurred on the construction, installation or acquisition of the water facility must have been incurred:
• Primarily and principally for the purpose of conserving or conveying water for use in a primary production business that you conduct on land in Australia.
The 'primary and principal' requirement recognises that capital expenditure on irrigation and water conservation measures may be undertaken for more than one reason. Where the expenditure is incurred for dual purposes it will always be necessary to establish the primary and principal function or purpose of the result of the expenditure.
Your Situation:
You have incurred capital expenditure in establishing the irrigation system meeting the requirements of section 40-F. You are able to deduct in full the costs of the water facility.