Edited version of private advice

Authorisation Number: 1051922478552

Date of advice: 18 November 2021

Ruling

Subject: Project amount - Subdivision 40-I

Question1

Are the project costs incurred by Company A ('the Company') in an excavation project able to be characterised as project amounts that can be allocated to a project pool under subsection 40-830(1) of the Income Tax Assessment Act 1997 ('ITAA 1997')?

Answer

Yes.

Question2

If the answer to Question 1 is 'Yes', can the Company claim a deduction under subsection 40-830(2) for project costs in relation to the excavation project?

Answer

Yes.

Question3

If the answer to question 1 is no, will the same costs be deductable under section 40-880 of the ITAA 1997 as black hole expenditure?

Answer

N/A.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Company applied for an extraction licence with a government authority relating to a number of properties ('the Properties').

In particular, the Company provides excavation services and supplies product from the Properties for resale to their own customers ('the Project').

These properties are used by the Company as their source of the excavation materials.

As a pre-requisite to obtaining the extraction licence grant, a material change of use of the land was required.

Subsequently, the Company incurred expenses in engaging experts to prepare, lodge and manage the material change of use application along with a detailed survey on behalf of the property owners.

Further costs were also incurred in engaging an engineering firm for a public road.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 40-30(1)

Income Tax Assessment Act 1997 subsection 40-830(1)

Income Tax Assessment Act 1997 subsection 40-830(2)

Income Tax Assessment Act 1997 subsection 40-25(7)

Income Tax Assessment Act 1997 section 40-840

Income Tax Assessment Act 1997 subsection 40-840(2)

Income Tax Assessment Act 1997 paragraph 40-840(2)(d)

Income Tax Assessment Act 1997 subparagraph 40-840(2)(d)(i)

Income Tax Assessment Act 1997 subparagraph 40-840(2)(d)(v)

Income Tax Assessment Act 1997 Subdivision 40-I

Income Tax Assessment Act 1997 section 40-880

Income Tax Assessment Act 1997 subsection 40-880(1)

Reasons for decision

Summary

The Project Costs incurred by the Company can be allocated to a project pool under subsection 40-830(1) and you can therefore claim a deduction under subsection 40-830(2) in relation to the Project.

Detailed reasoning

General overview of Subdivision 40-I

Subdivision 40-I provides a tax deduction for specific items of capital expenditure directly connected with a 'project' carried on or proposed to be carried on by a taxpayer for a taxable purpose as defined in subsection 40-25(7).

Capital expenditure directly connected with a taxpayer's project, which constitutes a 'project amount', that does not form part of the cost of a depreciating asset and is not otherwise deductible, can be allocated to a taxpayer's 'project pool' and can then be deducted over the life of a project once the project starts to operate.

Taxation Ruling TR 2005/4 Income tax: capital allowances - project pools - core issues considers the operation of certain provisions in Subdivision 40-I.

Project amount and project pool

If the capital expenditure incurred is a project amount, subsection 40-830(1) allows the taxpayer to allocate the project amount to a project pool.

Under subsection 40-840(2) amounts of capital expenditure you incur is also a project amount so far as:

(a)  it does not form part of the cost of a depreciating asset you hold or held; and

(b)  you cannot deduct it under a provision of this Act outside this Subdivision; and

(c)   it is directly connected with a project you carry on or propose to carry on for a taxable purpose; and

(d)  it is one of these:

                    (i)        an amount paid to create or upgrade community infrastructure for a community associated with the project; or

                   (ii)        an amount incurred for site preparation costs for depreciating assets (except, for horticultural plants, in draining swamp or low-lying land or in clearing land); or

                  (iii)        an amount incurred for feasibility studies for the project; or

                  (iv)        an amount incurred for environmental assessments for the project; or

                   (v)        an amount incurred to obtain information associated with the project; or

                  (vi)        an amount incurred in seeking to obtain a right to intellectual property; or

                (vii)        an amount incurred for ornamental trees and shrubs.

The types of capital expenditure relevant here are to create or upgrade community infrastructure (40-840(2)(d)(i)) and expenditure relating to obtaining information for the project (40-840(2)(d)(v)).

Project Amount - Community Infrastructure

For the purposes of paragraph 40-840(2)(d)(i), to be included within the project pool, capital expenditure must be incurred to create or upgrade community infrastructure for a community associated with the project. As 'community infrastructure' is not a defined term in the ITAA 1997 and there are no extrinsic materials providing any guidance as to its meaning, reference is made to the ordinary meaning of the words.

According to The Butterworths Australian Legal Dictionary (1997), the word 'infrastructure' refers to 'the framework of key facilities which supports communities and their industrial and commercial activities'. More specifically, it states that 'infrastructure' 'comprises communications, transportation systems, electricity generation and distribution, water supply networks, sewerage, roads, housing, schools and universities, health services, entertainment facilities and community support services'. The Australian Oxford Dictionary (1999), Oxford University Press, Melbourne relevantly states that the word 'community' means 'all the people living in a specified locality', 'a specific locality, including its inhabitants', 'a body of people having a religion, a profession, etc., in common (Melbourne's large Greek community)', and 'a monastic, socialistic, etc. body practising common ownership'.

In Hollow & Kaye v State Planning Authority (1983) 45 LGRA 39 at 45, Wells J commented that the word 'community' has a much wider significance than the word 'locality'. Wells J also commented that whilst in its widest sense the word 'community' could embrace the entire population of a particular State, it could also apply to a much smaller population such as the people residing within a particular locality.

The phrase 'for a community associated with the project' require a broad association between the community and the project. The community may be associated with the project because the project serves that community or that community services the project.

Project Amount - Information

Regarding subparagraph 40-840(2)(d)(v), information is obtained associated with the project if it is about the substance of the project, directly connected with the project and ancillary to the income earning activities that the project proposed to carry on. The information obtained should provide benefits to the future income earning activities once the project starts to operate and should be useful in carrying on the underlying activities of the project.

Application to your circumstances

To claim a deduction under section 40-830(1) the expenditure must relate to project amount. Section 40-840(2) outlines when an amount of capital expenditure is a project amount for the purposes of 40-830(1).

The relevant elements of subsection 40-840(2) are outlined below.

Do the Costs Form Part of a Depreciating Asset Held by the Company?

The Company's expenditure was necessarily incurred for the creation of an asset, being the land that relates to the material change of use application.

The costs relating to these assets include:

• Town planning and surveyors' fees to prepare, lodge & manage the material change of use application along with a detailed survey.
• Engineering firm for road intersection design fees so that the roads at the supplier's address could be upgraded to enable the high truck use and ensure other drivers' safety at that intersection.
• Upgrade of the Intersection.

Per s 40-30(1), land cannot be a depreciation asset. Furthermore, by reference to s 40-40, the Company does not 'hold' the rights associated with the material change of use as this attaches to the land, and therefore the associated.

Can the Company Deduct the Costs under a Provision Outside of Subdivision 40I?

The Company cannot deduct the costs under section 8-1 of the ITAA 1997, as the amounts relate to an outgoing of a capital nature and are not deductible under any other provision in the ITAA 1997.

Are the Costs directly connected with a Project Carried on by the Company for a Taxable Purpose?

The Company operates excavation services and extracts quarrying materials from five properties in accordance with its extraction licence as a means of deriving assessable income.

Since the Company was unable to continue its income earning activities without incurring the expenditure in filing and submitting the material change of use application, the costs are directly connected with a project carried on for a taxable purpose pursuant to section 40-25(7) of the ITAA 1997.

Does the expenditure fall within the categories listed in s 40-880(2)(d)?

Subsection 40-840(2)(d) provides that the amounts of capital expenditure you incur is a project amount so far as they relate to:

(i) an amount paid to create or upgrade community infrastructure for a community associated with the project;

(v) an amount incurred to obtain information associated with the project

The costs involved in the construction and upgrade of the intersection were paid to upgrade community infrastructure for a community associated with their project. These costs are therefore a project amount within subparagraph 40-840(2)(d)(i).

The town planning, surveying and engineering consultancy fees incurred by the Company were directly associated with obtaining information about the design and development of the Project. These capital expenditure amounts incurred are therefore a project amount under subparagraph 40-840(2)(d)(v).

Conclusion

As you incurred this capital expenditure that constitutes a project amount within subsection 40-840(2), you can allocate the project amounts to a project pool under subsection 40-830(1).

Please see TR 2005/4 "Income tax: capital allowances - project pools - core issues" for guidance on how to deduct the capital expenditure over the life of the project.

As the costs associated with the project are able to be added to the project pool and it is deductable under s 40-830(2), due to the operation of s 40-880(1), the costs are not deducted under the blackhole expenditure provision in s 40-880.