Edited version of private advice

Authorisation Number: 1051538713008

Date of advice: 5 July 2019

Ruling

Subject: Deductions for the decline in value of horticultural plants

Question

Can the Company claim a deduction under paragraph 40-515(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) for an amount equal to the decline in value for an income year (as worked out under Subdivision 40-F of the ITAA 1997) of a horticultural plant based on the previous owner's expenditure for establishing the plant that has not been deducted under paragraph 40-515(1)(b) of the ITAA 1997?

Answer

Yes, provided the horticultural plant has entered its first commercial season.

This ruling applies for the following period:

XXXX

The scheme commences on:

XXXX

Relevant facts and circumstances

1.     The Company operates farms that it leases (Farms). The lessor of the Farms (Lessor) does not carry on a business of horticulture on any of the Farms.

2.     No other entity holds a lease, lesser interest or licence relating to the land on which the Farms are situated.

3.     When the Lessor purchased the Farms from their previous owner, it also acquired the horticultural plants planted on them.

4.     The Farms' previous owner supplied the Lessor with the tax depreciation schedule containing information relating to the acquisition cost, effective lives and depreciation of the horticultural plants. The Farms' previous owner had commenced claiming deductions under paragraph 40-515(1)(b) of the ITAA 1997 for the decline in value of some of the horticultural plants prior to the purchase of the Farms by the Lessor.

5.     The Company carries on a business of horticulture on the Farms for the purposes of Subdivision 40-F of the ITAA 1997.

6.     The tax depreciation schedule adopts the Commissioner's determination of the effective life of the horticultural plant.

7.     The horticultural plants are not items of trading stock for the Company.

8.     The leases under which the Farms are held by the Company permit the use of the farm by the tenant for horticulture purposes and such other agricultural and farming purposes.

Relevant legislative provisions

Income Tax Assessment Act 1997 Paragraph 40-515(1)(b)

Reasons for decision

Legislative references in these Reasons for Decision are to provisions of the ITAA 1997. A preceding asterisk (*) denotes that a term is defined in subsection 995-1(1).

Subdivision 40-F

Subdivision 40-F sets out special rules in relation to certain primary production depreciating assets, including horticultural plants.

Paragraph 40-515(1)(b) provides:

You can deduct an amount equal to the decline in value for an income year (as worked out under this Subdivision) of a *depreciating asset that is one of these:

·        a *horticultural plant;

However, under subsection 40-515(2), the deduction is only allowable if the applicable condition in subsection 40-525(2) is satisfied for the horticultural plant.

The definition of a depreciating asset is found in section 40-30. Subsection 40-30(1) broadly defines a depreciating asset as an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used, except land, trading stock and an intangible asset.

The horticultural plants, not being items of trading stock for the Company, have limited effective lives and can reasonably be expected to decline in value over the time they are used. Accordingly, they are depreciating assets within the meaning of section 40-30.

Subsection 40-520(2) defines a 'horticultural plant' as:

·        a live plant or fungus that is cultivated or propagated for any of its products or parts.

The horticultural plants are live plants cultivated by the Company for their produce and therefore fall within the definition in subsection 40-520(2).

Is the applicable ownership or use condition satisfied?

To be eligible to claim a deduction under paragraph 40-515(1)(b) for the horticultural plants, the Company must satisfy one of the following conditions in the table in subsection 40-525(2) for the plants:

Paragraph 5.17 of the Explanatory Memorandum (EM) to the New Business Tax System (Capital Allowances) Bill 2001 (NBTS CA Bill 2001) explains the purpose of the rules in subsection 40-525(2) is to:

...ensure that the taxpayer who can claim is the taxpayer with the least interest in the land who carries on a business of horticulture using the plants.

The horticultural plants were acquired by the Lessor when it purchased the Farms. The Farms' previous owner had commenced claiming deductions under paragraph 40-515(1)(b) for some of the horticultural plants prior to their acquisition.

Subdivision 40-F contemplates the transfer of deductions for a horticultural plant from one taxpayer to another in certain circumstances. Paragraphs 5.32 and 5.33 of the EM to the NBTS CA Bill 2001 relevantly state:

5.32 The deduction for a horticultural plant...can be transferred from one taxpayer to another. When a taxpayer acquires a horticultural plant...from another entity in circumstances that makes the taxpayer eligible to claim the deduction, section 40-575 assists with the implementation of these rules by ensuring sufficient information is given to a taxpayer who acquired a horticultural plant...from the last entity in the chain who satisfied a condition in subsection 40-525(2) in relation to that horticultural plant...

5.33 The inclusion of amounts of establishment expenditure used by the entity in calculating the asset's decline in value, as well as the period of effective life used in the calculations for horticultural plants, must continue to be applied by the taxpayer who acquired the horticultural plant...

Paragraph 40-515(3)(b) limits the total deductions under paragraph 40-515(1)(b) to the amount of capital expenditure incurred on the horticultural plant.

Section 40-575 sets out a procedure by which a taxpayer may obtain information from the previous holder of the horticultural plant for working out the deductions still available. Subsection 40-575(1) provides that a taxpayer that begins to satisfy a condition in section 40-525 for a horticultural plant may give the last entity that satisfied such a condition for the plant a written notice requiring the entity to give the taxpayer the following information:

(a)   the amount of establishment expenditure for the plant;

(b)   if the entity used the plant's *effective life to work out the decline in value of the plant - its effective life and the day on which it could first be used for *commercial horticulture.

The Company may be eligible to claim a deduction under paragraph 40-515(1)(b) for the decline in value of the horticultural plants based on the Farms' previous owner's expenditure for establishing the plants that has not been deducted under the provision, provided the Company satisfies one of the conditions in the table in subsection 40-525(2).

In this case, as the horticultural plants are attached to land which the Company holds under leases, the relevant condition to consider is at item 2 of the table in subsection 40-525(2).

The lease or quasi-ownership right enables you to carry on a *business of *horticulture on the land; and

For the requirement in paragraph (a) of the condition at item 2 of the table in subsection 40-525(2) to be satisfied, the Company's activities on the Farms must constitute the carrying on of a business of horticulture.

The term 'horticulture' is defined in subsection 40-535(1) to include:

(a) propagation and cultivation of a * horticultural plant in any environment (whether natural or artificial); and

(b) propagation and cultivation of seeds, bulbs, spores and similar things; and

(c) propagation and cultivation of fungi.

Subsection 995-1(1) defines 'business' to include 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'.

The Company carries on a business of horticulture on the Farms within the meaning of subsection 40-525(2).

It is considered the leases under which the Farms are held enable the Company to carry on a business of horticulture on the Farms.

Consequently, it is considered that the Company meets the requirement in paragraph (a) of the condition at item 2 of the table in subsection 40-525(2).

Any holder of a lesser interest or licence relating to the land does not carry on a *business of *horticulture on the land

As there is no other entity holding a lease, lesser interest or licence relating to the land on which the Farms are situated, the Company meets the requirement in paragraph (b) of the condition at item 2 of the table in subsection 40-525(2).

In view of the above, the Company satisfies the condition at item 2 of the table in subsection 40-525(2).

When the decline in value starts

Subsection 40-530(2) states that a horticultural plant starts to decline in value in:

(a) if you are the first entity to satisfy a condition in subsection 40-525(2) for the plant - the income year in which the first commercial season starts; or

(b) if not - the later of the income year in which you first satisfied that condition and the income year in which the first commercial season starts.

The Company is not the first entity to satisfy a condition in subsection 40-525(2) for the horticultural plants. As such, the deduction under paragraph 40-515(1)(b) for a horticultural plant is allowable from the later of the income year in which the Company first satisfied the condition at item 2 of the table in subsection 40-525(2) for the plant and the income year in which the plant enters its first commercial season.

Conclusion

For the reasons given above, the Company can claim a deduction under paragraph 40-515(1)(b) for an amount equal to the decline in value for an income year (as worked out under Subdivision 40-F) of a horticultural plant based on the previous owner's expenditure for establishing the plant that has not been deducted under paragraph 40-515(1)(b), provided the plant has entered its first commercial season.