Edited version of private advice

Authorisation Number: 1051964791463

Date of advice: 31 March 2022

Ruling

Subject: Business/am I in business/rental properties

Question 1

Is the Partnership entitled to a deduction for depreciation under Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the costs incurred to renovate the bus?

Answer

Yes. The bus is considered to be a movable dwelling as it is not permanently affixed to the land. Therefore, the Partnership is entitled to a decline in value deduction under Division 40 of the ITAA 1997.

Question 2

Is the Partnership entitled to a capital works deduction under Division 43 of the ITAA 1997 in relation to the costs incurred to build an outdoor shelter, above ground grease trap and float pump and outdoor toilet?

Answer

No. The outdoor shelter, above ground grease trap and float pump and outdoor toilet are considered fixtures of the property. As you do not own the property and there is no lease or right granted over the land by an exempt government agency, no deduction is allowed under Division 43 of the ITAA 1997 for the costs incurred by the Partnership for these structural improvements.

This ruling applies for the following periods:

Year ended XX June 20XX

Year ended XX June 20XX

The scheme commences on:

XX July 20XX

Relevant facts and circumstances

The Partnership operates a short-term, eco-tourism rental.

The accommodation is a bus, owned by The Partnership.

The bus is not registered for road use but is able to be driven and relocated. It does connect to some permanent fixtures for utilities.

The Partnership does not own the property on which the bus is situated.

No rent or fees are paid to the legal owner of the property and there is no lease agreement in place for the use of the property.

The Partnership made specific improvements to the eco-tourism bus accommodation, including:

•                    renovations to the bus

•                    construction of an outdoor shelter

•                    installation of above ground grease trap and above ground float pump, plumbed into the existing on-site sewage system

•                    relocation and reconstruction of an existing outdoor toilet plumbed into the existing on-site sewage system

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 Section 40-25

Income Tax Assessment Act 1997 Section 40-30

Income Tax Assessment Act 1997 Section 40-665

Income Tax Assessment Act 1997 Section 42-18

Income Tax Assessment Act 1997 Division 43

Income Tax Assessment Act 1997 Section 43-10

Reasons for decision

Section 40-25 of the ITAA 1997 allows a deduction for the decline in value of a depreciating asset that is held for any time during the year. 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.

Division 43 of the ITAA 1997 provides a deduction for the structural element of a building and assets that are fixed to the property (capital works). Capital works includes buildings and structural improvements, and also extensions, alterations or improvements to buildings and structural improvements where a residential property is used for income producing purposes.

Section 43-10 of the ITAA 1997 states:

1.    You can deduct an amount for capital works for an income year.

2.    You can only deduct the amount if:

a.    the capital works have a construction expenditure area

b.    there is a pool of construction expenditure for that area, and

c.     you use your area in the income year in the way set out in Table 43-140 (current year use).

As per Note 2 to section 43-10(2) of the ITAA 1997, the definition of your area ensures that only property owners and certain lessees of capital works, and holders of quasi-ownership rights over land on which capital works are constructed, can deduct an amount under this Division.

Taxation Determination TD 97/24 considers whether an accommodation unit is an 'article' (which was included in the former definition of plant) or a fixture. It states that:

A unit is a fixture, prima facie, if it cannot be removed, or if it has been affixed with the intention that it shall remain in position permanently or for an indefinite or substantial period and it is securely fixed in such a way that it cannot be detached without substantial injury to the land or the unit itself.

The decision in Quarries Ltd v. FC of T (1961) 106 CLR 310 explains that where accommodation has been designed or constructed as a portable or movable dwelling, it is not considered a structure in the nature of buildings:

An accommodation unit is a chattel when it merely rests on land or it is affixed in such a way as to facilitate easy removal, or where the purpose and mode of affixing are for the more complete enjoyment of the unit as a chattel. An intention that a unit remain in one place for a substantial period of time does not, of itself, preclude the unit being a chattel.

The decision in Moreton Central Sugar Mill Co Ltd v. FC of T (1967) 116 CLR 151provides that a fixture cannot be considered a 'plant', where:

... It is built into the ground so as to form a static and permanent feature of the place in which a business or activity may be carried on.

Application to your circumstances

In this case, in accordance with TD 97/24, we consider the bus to be a movable dwelling as it is not permanently affixed to the land. Therefore, the Partnership is entitled to a decline in value deduction under Division 40 of the ITAA 1997.

However, the outdoor toilet, above ground grease trap and above ground float pump are considered fixtures of the property as they are attached to the existing on-site sewage system. The outdoor shelter is also considered a structure that is affixed to the land. In your circumstance, you do not own the property and there is no lease or right granted over the land by an exempt government agency. This means that you cannot satisfy the quasi-ownership provisions. Therefore, no deduction is allowed under Division 43 of the ITAA 1997 for the costs incurred by the Partnership for these structural improvements.