Edited version of private advice

Authorisation Number: 1051625646010

Date of advice: 10 January 2020

Ruling

Subject: Property deduction

Question 1

Is entity A entitled to a capital works deduction for its colourbond shed?

Answer

Yes.

Question 2

Is the shed regarded as a depreciating asset under Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

>Year ending 30 June 2020

The scheme commenced on

1 July 2019

Relevant facts

Entity A is purchasing a very large colourbond shed that will be used for its non-primary production business.

The shed will sit over a concrete floor which will have most of the plumbing and electrical services plus drainage system embedded in it.

The estimated cost, installed, of the shed is approximately $xxx,xxx.

Inside the shed will be the equipment used in the business.

Because of the nature of the business activities, it is highly unlikely that the shed could ever be recovered to use at another location which effectively removes any resale value for it.

The shed is not attached to other buildings.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 Division 43

Reasons for decision

Section 40-25 of the ITAA 1997 allows a deduction for the decline in value (depreciation) of a depreciating asset you hold, to the extent the asset is used for a taxable purpose.

A depreciating asset is an asset that has a limited effective life and can be expected to decline in value over the time it is used (subsection 40-30(1) of the ITAA 1997).

However, a deduction for a depreciating asset is not allowed under Division 40 of the ITAA 1997 if a capital works deduction is allowed under Division 43 of the ITAA 1997.

Division 43 of the ITAA 1997 provides a deduction for capital works. Capital works includes buildings, or an extension, alteration or improvement to a building as well as structural improvements.

Construction expenditure for capital works purposes excludes, among other things, expenditure on plant (paragraph 43-70(2)(e) of the ITAA 1997).

The primary factor in determining whether an item qualifies as plant is its function. If the function is to provide the setting or environment within which income-producing activities are conducted, an item does not qualify as plant or a depreciating asset.

Where the function of the structural improvement is no more than to provide a location on which income producing activities can be carried on, then this will be another form of setting which indicates that the item is not plant.

The Commissioner has taken the view that multi-storeyed demountable car parks are not plant for depreciation purposes, on the basis that they are more in the nature of buildings which provide a setting or environment in which the income producing activity is conducted. Although your shed is not a car park, the principles in Taxation Ruling IT 2130 Income tax: depreciation: investment allowance - demountable car parks: whether plant are relevant. In contrast, if the function is essentially the permanent means or apparatus used to produce income such as machines or manufacturing equipment, the item qualifies as plant.

Floors, walls and ceilings that perform normal functions rather than a special function for the taxpayer's business will not qualify as depreciating assets, even if they have sound-absorbing or humidity resistant qualities or provide other incidental efficiencies (Macquarie Worsteds Pty Ltd v. FCT (1974) 4 ATR 334).

In this case, the main function of the shed is to provide a setting in which the business is carried on. That is, the shed is the premises in which the income producing activity is carried on as distinct from the apparatus or equipment by which it is carried on. Some of the apparatus and equipment used for the business is attached or connected to the shed but it is still considered that the shed itself provides the setting or environment in which the business is carried on.

The fact that the shed is not made of brick is not a determining factor. Furthermore, even if the shed may not be used for 40 years, this does not mean that it is a depreciating asset.

It is acknowledged that a fodder storage asset such as a grain storage shed may be a depreciating asset for primary producers under subdivision 40-F of the ITAA 1997. However such exceptions do not apply to a shed used by non- primary production businesses.

As the shed will be the premises in which the income-producing activity will be carried on, it is regarded as capital works and not a depreciating asset. Therefore entity A is entitled to a deduction of 2.5% of the construction expenditure after the completion of the capital works.

If in the future, entity A demolishes the shed before all the construction expenditure has been claimed as capital works deductions (for example, because the shed has deteriorated to such an extent that entity A decides it should no longer be used), entity A will be entitled to deduct an amount for the undeducted construction expenditure under sections 43-40 and 43-250 of the ITAA 1997.