Edited version of your written advice

Authorisation Number: 1051226500088

Date of advice: 19 May 2017

Ruling

Subject: Accelerated depreciation of fencing assets

Question 1

Can X immediately deduct an amount attributed to the fencing assets acquired as part of a property purchase under Subdivision 40-F of the Income Tax Assessment Act 1997 (ITAA1997)?

Answer

No

This ruling applies for the following period:

Year ended 30 June 201X

The scheme commences on

April 201X

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.

X is the head company of an income tax consolidated group (the Group). The Group is in the business of primary production, which mainly involves specific wool type production, and the maintaining of agriculture for the purpose of selling them or their bodily produce, including natural increase.

Y was established in 201X and is a subsidiary member of the Group for income tax purposes. Y acquired a sheep station in April 201X from an unrelated party. X intends to operate the property as a primary production business.

The purchase price paid for the sheep station included property, livestock and plant; with each component individually itemised on the settlement statement. The plant portion of the purchase price did not cover fencing assets. The property acquisition portion included the fences and the subsequent capital repairs, alterations, additions or extensions to the fences (hereafter collectively referred to as the fencing assets).

The taxpayer engaged experts to prepare a capital allowance and tax depreciation report for the property to dissect the property purchase value. A value attributable to the fencing assets from the purchase price of the property was determined.

The taxpayer contends that an immediate deduction is available for the amount attributed to the fencing assets under Subdivision 40-F of the ITAA 1997 in the 201X income year.

Relevant legislative provisions

Income Tax Assessment Act 1936

Former section 75B

Income Tax Assessment Act 1997

Division 40

Subdivision 40-F

Subsection 40-30(1)

Subsection 40-30(3)

Section 40-50

Section 40-53

Subsection 40-515(1)

Paragraph 40-515(1)(d)

Subsection 40-520(4)ubsection 40-525(4)

Section 40-530

Section 40-551

Subsection 40-555(5)

Former Subdivision 387-B

Division 700

Section 701-1

Subsection 995-1(1)

Reasons for decision

Summary

As the amount attributed is not 'expenditure incurred on the … acquisition of the fencing assets' and is not incurred 'primarily and principally for the use in a primary production business that you conduct' X cannot deduct the decline in value of the fencing assets under Subdivision 40-F of the ITAA 1997.

Detailed reasoning

Consolidated groups - single entity rule

Under the group consolidation regime in Division 700 of the ITAA 1997, a wholly-owned group of companies may choose to consolidate for income tax purposes. The subsidiary members of a consolidated group are treated as parts of the head company for income tax purposes (section 701-1 of the ITAA 1997).

Taxation Ruling TR 2004/11 Income tax: consolidation: the meaning and application of the single entity rule in Part 3-90 of the Income Tax Assessment Act 1997 at paragraph 8 explains that this single entity rule has the effect that:

(a) the actions and transactions of a subsidiary member are treated as having been undertaken by the head company;

(b) the assets a subsidiary member of the group owns are taken to be owned by the head company (with the exception of intra-group assets) while the subsidiary remains a member of the consolidated group.

In April 201X, Y acquired a sheep station from an unrelated third party. Y is a subsidiary member of a consolidated group, and X is the head company of that consolidated group. As such, under the single entity rule, X is treated as having acquired the sheep station for taxation purposes.

The accelerated depreciation rules

Subdivision 40-F of the ITAA 1997 sets out the current accelerated depreciation rules for primary producers.

Accelerated depreciation for primary producers, in relation to expenditure on plant or a structural installation for conserving or conveying water, has been available for many years (see former section 75B of the Income Tax Assessment Act 1936 (ITAA 1936), former Subdivision 387-B of the ITAA 1997, and Subdivision 40-F of the ITAA 1997).

From DD MM YY, Subdivision 40-F of the ITAA 1997 was amended to allow primary producers accelerated depreciation for capital expenditure on fodder storage assets and fencing assets, in addition to the existing water facilities and horticultural plant (2015 amendment).

As explained in the Explanatory Memorandum to the Tax Laws Amendment (Small Business Measures No. 2) Bill 2015 (the EM) at 2.8, the new provisions were intended to encourage primary producers to invest in fodder storage, water facilities and fencing assets, as an important part of mitigating and managing the risks of drought.

The new 'fodder storage asset' and 'fencing asset' provisions mirror the existing 'water facility' provisions in Subdivision 40-F of the ITAA 1997, and have been designed to operate in a similar manner. As such, cases and taxation rulings in relation to the provisions that existed prior to the 2015 amendment equally apply to the new provisions where relevant.

Deductions for fencing assets

Paragraph 40-515(1)(d) of the ITAA 1997 allows a deduction equal to the decline in value for an income year (as worked out under Subdivision 40-F) of a depreciating asset that is a fencing asset.

A 'depreciating asset' is an asset that has a limited effective life and that can reasonably be expected to decline in value over the time it is used, excluding land, trading stock and certain intangible assets (subsection 40-30(1) of the ITAA 1997). Division 40 applies to an improvement to land, or a fixture on land (whether the improvement or fixture is removable or not) as if it were an asset separate from the land (subsection 40-30(3)).

A fencing asset is defined in subsection 40-520(4) of the ITAA 1997 to be:

Amount attributed to the fencing asset acquired as part of the purchase of the property

A deduction is only available under subsection 40-515(1) of the ITAA 1997 if the applicable condition in section 40-525 is satisfied for the depreciating asset (subsection 40-515(2)). The applicable condition for a fencing asset is provided in subsection 40-525(4):

'The capital expenditure you incurred on the construction, manufacture, installation or acquisition of the fencing asset must have been incurred primarily and principally for use in a primary production business that you conduct on land in Australia.'

Similarly, section 40-551 of the ITAA 1997 provides the decline in value of a fencing asset for the income year in which you incurred the expenditure is:

'… the amount of capital expenditure you incurred on the … acquisition of the fencing asset.'

The significance of the words: expenditure incurred on the construction,… acquisition of … and the purposes for which the expenditure was incurred was considered under former section 75B of the ITAA 1936 in AAT Case W9 89 ATC 178, AAT Case 4852 (1988) 20 ATR 3191:

When sec. 75B(2) speaks of expenditure incurred, on the construction, acquisition or installation of plant, or a structural improvement for the purpose of conserving or conveying water, for use in carrying on that business on that land it means expenditure by the taxpayer who carries on the business of primary production, and it means that he has to spend the money himself or have it spent to improve the property (ATC 181)

… sec. 75B requires purposive element and expenditure by the taxpayer himself on improving the land in the relevant statutory respects, and not just the acquisition of land from somebody else who has already spent that money… (ATC 182)

The view expressed by the Tribunal was reflected in Taxation Determination TD 96/40 Income tax: can a deduction be claimed under section 75B of the Income Tax Assessment Act 1936 for part of the purchase prices of a property if the contact allocates the price to relevant existing structural improvements? (TD 96/40). Paragraph 3 of TD 96/40 states:

'The Commissioner does not consider that expenditure has been incurred on the construction, acquisition or installation of relevant plant or structural improvements if a taxpayer does no more than purchase a property under a contract that allocates part of the consideration towards existing structural improvements.'

In short, the principles that emerged from AAT Case W9 and TD 96/40 are that:

1. The taxpayer must spend the money himself on the improvement; and

2. The money must be spent for the required purpose. That is, in this case, it must have been spent primarily and principally for use in a primary production business that you conduct. It is not enough that you spend money on purchasing a property which is then used for carrying on a primary production business.

We consider that these principles equally apply to a fencing asset for the purposes of determining the deductibility of an amount under Subdivision 40-F of the ITAA 1997.

For taxation purposes, X (as head company of the consolidated group) incurred expenditure on a single transaction to purchase a sheep station. The fencing assets were inevitably acquired as part of the acquisition of the sheep station.

Following the purchase, X engaged experts to prepare a capital allowance and tax depreciation report for the property which dissected the property purchase value, and attributed a value to the fencing assets.

Applying the principles stated above, the Commissioner does not consider that the amount attributed is 'expenditure incurred on the acquisition of the fencing assets'. Further, the expenditure was not incurred primarily and principally for use in a primary production business you conduct. Rather, the expenditure was incurred to purchase the sheep station and the fencing assets simply formed part of the property you purchased. This is the case whether or not the contract specifically allocates a value to the fencing assets.

It follows that X cannot deduct the decline in value of the fencing assets under Subdivision 40-F of the ITAA 1997.