Edited version of private advice

Authorisation Number: 1051981684718

Date of advice: 13 May 2022

Ruling

Subject: Temporary full expensing

Question 1

Is the expenditure on the renovation to the Structure expenditure on 'plant' under section 45-40 of the Income Tax Assessment Act 1997 ('ITAA 1997') such that it is specifically excluded from deduction under Division 43?

Answer

Yes.

Question 2

Is the Partnership able to claim the business portion of the cost of the renovation to the Structure under the temporary full expensing provisions of Subdivision 40-BB of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A)?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

Relevant facts and circumstances

The Partnership operates a large-scale primary production business with an aggregated turnover in excess of $XX million (and less than $50 million).

The Lessor owns a block of land used for agricultural purposes by the Partnership. The block contains an existing Structure.

The Structure is where harvested product can be washed, sorted and packed as well as where administrative activities are carried out by staff.

The Structure is not being used for domestic or residential purposes.

Lease Agreement

The Lease between the Lessor and the Partnership (the Lessee) was signed on 1 July 20XX. The term of the lease is 5 years, with the option to be extended.

The Lease Agreement covers the whole of the land, all improvements erected on the land, the appurtenances and the Lessor's property.

The Lease Agreement contains the following information:

•         Lessee's Property means all plant and equipment, fixtures, fittings, furniture, furnishings and decorations, crops and other property in, on or fixed to the Premises that are not Lessor's Property and without derogating from the generality of the foregoing, the PVC sheeting, drip tube and all debris and used articles and supplies.

•         Lessor's Property means the Lessor's fittings, fixtures, furnishings, furniture and other property in, on or fixed to the Premises that are made available to the Lessee.

•         The Lessee cannot remove the Lessor's Property upon termination of the Lease.

•         The Lessee has the right to make changes of a structural nature to the Lessor's Property for the Lessee's own use.

In November 20XX the Partnership signed a contract with an unrelated construction company, to renovate and make improvements to the Structure.

The renovation was completed and ready for use in March 20XX. The Partnership paid for the entire cost of the contract.

No balancing adjustment event happens to the Structure in the income year ending on 30 June 20XX.

The Partnership has not made a choice under section 40-190 of the IT(TP)A in relation to the income year ending on 30 June 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997

section 40-30

section 40-40

section 40-45

section 43-10

section 43-20

section 43-70

ection 45-40

Income Tax (Transitional Provisions) Act 1997

subdivision 40-BB

section 40-150

section 40-155

section 40-160

section 40-165

section 40-175

section 40-180

section 40-185

section 40-190

section 328-181

Reasons for decision

Question 1

Summary

The associated expenditure from the renovation on the Structure will be expenditure on 'plant' under paragraph 43-70(2)(e) and therefore not a capital work to which Division 43 applies. Consequently, section 40-45 will not apply to the expenditure from the renovation

Detailed reasoning

Subsection 40-150(2) of the Income Tax (Transitional Provisions) Act 1997 ('IT(TP)A') provides that temporary full expensing (TFE) of a depreciating asset cannot apply if Division 40 does not apply to the asset because of section 40-45. Subsection 40-45(2) states that Division 40 does not apply to capital works for which you can deduct amounts under Division 43. Therefore, it is relevant to determine whether expenditure on the Structure will be deductible under Division 43 and consequently, cannot be deductible under TFE.

A deduction can be claimed for capital works under section 43-10. Section 43-20 identifies the capital works for which a deduction can be claimed under Division 43. However, expenditure from the renovation on the Structure will not be deductible under Division 43 if it is excluded from being 'construction expenditure' under paragraph 43-70(2)(e) because it is expenditure on 'plant'. Consequently, whether the Structure is 'plant' is an issue to be determined. The term 'plant' is defined in section 995-1 as having the meaning given by section 45-40, which contains an inclusive definition. That is, it extends the ordinary meaning of the word 'plant' to include the particular items listed in subsections 45-40(1) and 45-40(2).

Paragraph 45-40(1)(c) provides the following definition of 'plant':

(1)   Plant includes:

...

(c) fences, dams and other structural improvements, other than those used for domestic or residential purposes, on land that is used for agricultural or pastoral operations;

In Willeroo & Manbulloo Ltd v. Federal Commissioner of Taxation (1964) 111 CLR 336; 13 ATD 356, Kitto J considered the meaning of 'plant' under section 54 of the Income Tax and Social Services Contribution Assessment Act 1936-1958 (Cth) and determined that a road train base consisting of:

• manager's quarters used to house a person who, in addition to being the manager of the road train, acted as a mechanic for the station's ordinary vehicles,
• staff quarters used for a part-time bookkeeper, a fitter, a handyman, a cook and five drivers,
• a garage used for the trains,

•         a workshop and a store used in connection with the trains,

constituted structural improvements on the land used for the purposes of pastoral pursuits. It was considered that the road train base was not separate from the grazing property and was not applied to purposes different from the overall purposes of the property. It was simply a part of the means by which the taxpayer company used the whole of the grazing property for pastoral operations.

Similarly, we consider that the Structure on the farm is a structural improvement used for agricultural pursuit that is not being used for domestic or residential purposes and therefore meets the extended definition of 'plant' in paragraph 45-40(1)(c) of the ITAA 1997.

The facts in your case can also be distinguished from Toomaroo Pty Ltd v Federal Commissioner of Taxation (1954) 10 ATD 421; (1954) 91 CLR 349. In that case, Justice Webb considered whether an office building was 'plant' within the meaning of that same provision (i.e., paragraph 54(1)(b) of Income Tax and Social Services Contribution Assessment Act 1936-1950), that is, whether it was a structural improvement on land which was used for the purpose of agricultural or pastoral pursuits. The building in that case was found not to be a structural improvement built for agricultural or pastoral operations because it was located several hundred miles away from its pastoral property.

Similarly, to fall within section 45-40(1)(c), the land on which the relevant structural improvement is built must also be used for agricultural and pastoral operations, even if the structural improvement itself was used to accommodate the administrative or other function that might be incidental to its agricultural and pastoral operations.

In your case, the Structure is located on the farmland that is used for the Partnership's agricultural operations, thus, it satisfies the meaning of 'plant' under paragraph 45-40(1)(c) of the ITAA 1997.

The associated expenditure from the renovation on the Structure will be expenditure on 'plant' under paragraph 43-70(2)(e) and therefore not a capital work to which Division 43 applies. Consequently, section 40-45 will not apply to the expenditure from the renovation.

Question 2

Temporary full expensing (TFE) means the immediate write-off of the cost of depreciating assets and relevant additional expenditure in accordance with the rules in:

• Subdivision 40-BB of theIT(TP)A, applicable to business entities generally, and
• Section 328-181 of the IT(TP)A which modifies the operation of rules in Subdivision 328-D, applicable to small business entities choosing simplified depreciation.

The Partnership is not a small business entity that has applied or can choose to apply the simplified depreciation rules in Subdivision 328-D. Relevantly, the provisions for temporary full expensing is contained in Subdivision 40-BB of the IT(TP)A.

Eligible entity

Section 40-155 of the IT(TP)A contains a definition of an eligible entity:

This section covers you for an income year if:

(a)  you are a small business entity for the income year; or

(b)  you would be a small business entity for the income year if:

(i)    each reference in Subdivision 328-C of the Income Tax Assessment Act 1997 (about what is a small business entity) to $10 million were instead a reference to $5 billion; and

(ii)   the reference in paragraph 328-110(5)(b) of that Act to a small business entity were instead a reference to an entity covered by this section.

Under section 40-155, a business qualifies for temporary full expensing if it is a small business entity for the income year with turnover under $5 billion. For the 20XX income year, you advised that the Partnership's aggregated turnover was more than $10 million and less than $50 million. Thus, it is an eligible business and section 40-155 is satisfied.

Eligible assets

Under subsection 40-150 of the IT(TP)A, a depreciating asset held by an entity is eligible for temporary full expensing if:

a)    the entity starts to hold the asset on or before 30 June 2023; and

b)    the entity starts to use the asset, or have it installed ready for use, for a taxable purpose on or before 30 June 2023.

Depreciating asset

Subsection 40-30(1) explains that a 'depreciating asset' is an asset that has a limited 'effective life' and can reasonably be expected to decline in value over the time. In Table A of Taxation Ruling TR 2021/3 Income tax: effective life of depreciating assets (applicable from 1 July 2021), the following depreciating asset is listed as having a limited effective life:

"Sheds on land that is used for agricultural or pastoral operations (including machinery sheds, workshop sheds and farm production sheds)"

It is noted that paragraph 11 of TR 2021/3 states:

"If an asset either corresponds exactly to a description in Table A for the industry in which it is used or it satisfies the general description of an asset used in the functional process of that industry, the effective life is the life specified."

It is considered that the Structure satisfies the general description of a shed on land that is used for agricultural or pastoral operations and therefore has a limited effective life. The Structure will consequently be a depreciating asset under subsection 40-30(1).

The term 'hold'

Section 40-40 identifies who is taken to 'hold' a depreciating asset by focusing on the nature of the ownership.

Relevantly, Item 3 of the table in section 40-40 states:

According to the definition in Division 995,"quasi-ownership right" over land means a lease of the land.

Explanatory Memorandum to the New Business Tax System (Capital Allowances) Bill 2001 (the EM) provides further explanation to Item 3 of the table in section 40-40:

1.42 Where the owner of the quasi-ownership right improves the land with a depreciating asset, or improves a depreciating asset that is itself an improvement to the land, and where that improvement is for their own use but they cannot remove that asset from the land, they are nonetheless the holder while their quasi-ownership right exists. [Schedule 1, item 1, section 40-40, item 3 in the table]

Example 1.4

Jerry is leasing land and building from Cantrell Nominees Pty Ltd, on which he carries on business. Jerry installs an in-ground watering system on the land, at his own expense and for the benefit of the business he carries on. Under the lease agreement, Jerry is not permitted to remove fixtures from the property.

Even though Cantrell Nominees has become the owner of the watering system under the law of fixtures, Jerry is recognised as a holder while the lease exists under item 3 in the table in section 40-40.

(Emphasis added)

Taxation Ruling TR 2012/7 Income tax: capital allowances: treatment of open pit mine site improvements outlines at paragraphs 8-9 the interpretation of the term "improvement to land" as follows

"8. In accordance with Division 40, a deduction may be allowed over time for the decline in value of a depreciating asset. Paragraph 40-30(1)(a) provides that land, prima facie, cannot constitute a depreciating asset. Subsection 40-30(3) operates to limit this exception by providing that an improvement to land, or a fixture on land, is to be recognised as an asset separate from the land for the purpose of applying Division 40.

9. The term improvement to land is not defined however the concept of an improvement to land has been widely considered in case law. The principles that can be extracted from the relevant cases, when considered in the context of Division 40, provide that an improvement to land is an identifiable alteration to the land that enhances the usefulness of the land to the user."

The Structure is an improvement to land as it enhances the usefulness of the land to the Partnership by providing facilities in which harvested product can be washed, sorted and packed. Administrative activities are also carried out in the Structure. The Partnership is leasing land from the Lessor. The Partnership is the Lessee. According to the terms of the Lease, the Structure is the Lessor's Property. The Lessee cannot remove the Lessor's Property upon termination of the Lease. However, the Lessee has the right to make changes of a structural nature to the Lessor's Property for the Lessee's own use.

By making improvements to the Structure the Lessee has improved a depreciating asset that is itself an improvement to the land, and that improvement was for Lessee's own use. Therefore, the point in time in which the Partnership as Lessee improved the Structure by way of undertaking the renovation will be when the Partnership started to hold the Structure under Item 3 in the table in section 40-40.

Consequently, it is considered that the asset has met the requirements of subsection 40-150(1) in that the Partnership first held and first used the improved Structure for a taxable purpose before 30 June 2023.

Exclusions

Subsection 40-150(2) of the IT(TP)A specifically excludes a number of assets from the TFE provisions:

• assets covered by section 40-45,
• assets without the relevant connection to Australia and carrying on business
• assets whose decline in value is worked out under Subdivisions 40-E or 40-F of the ITAA 1997

Section 40-45 covers the following assets to which Division 40 does not apply:

•         Subsection 40-45(1) excludes from the operation of this Division eligible work-related items for the purposes of section 58X of the Fringe Benefits Tax Assessment Act 1986 (FBTA Act 1986) where the relevant benefit provided by the employer is an expense payment benefit or a property benefit.

•         Subsection 40-45(2) of ITAA 1997 excludes capital works for which amounts can be deducted under Division 43 of ITAA 1997.

•         Subsections 40-45(3) and (4) have been repealed.

•         Subsection 40-45(5) excludes from the operation of this Division depreciating assets for which amounts are deductible either under former Division 10BA of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) (about Australian films) or former Division 10B of Part III of ITAA 1936 (about the copyright in relation to Australian films)

•         Subsection 40-45(6) stipulates that Division 40 applies to a depreciating asset that is copyright in a film where a company is entitled to a tax offset under section 376-55 in respect of the film as if the asset's cost were reduced by the amount of that offset.

•         Subsections 40-45(1), (5) and (6) are not applicable to your case.

The Structure falls within the definition of 'plant' under paragraph 45-40(1)(c) and in accordance with Willeroo & Manbulloo Ltd v. Federal Commissioner of Taxation (1964) 111 CLR 336; 13 ATD 356. Refer to the reasoning in Question One. Further, paragraph 43-70(2)(e) applies so the costs for the alterations and improvements are considered to be expenditure on plant that are not deductible under Division 43.

Accordingly, improvements made to the Structure is not specifically excluded by subsection 40-45(2).

Paragraph 42 of LCR 2021/3 provides the following explanation of 'assets without the relevant connection to Australia and carrying on a business':

An asset that might otherwise be eligible for TFE is also excluded if, at the time the entity first uses the asset, or has it installed ready for use, for a taxable purpose:

a)    it is not reasonable to conclude that the entity will use the asset principally in Australia for the principal purpose of carrying on a business, or

b)    it is reasonable to conclude that the asset will never be located in Australia.

The Structure is fixed to the land which is located in Australia and used in primary production business. Therefore, the Structure has a relevant connection to Australia.

Assets covered by Subdivision 40-E of the ITAA 1997 are:

•         low-cost (less than $1,000) assets whose decline in value is worked out through a low-value pool, and

•         in-house software on which development expenditure is incurred and allocated to a software development pool.

The Structure is not covered by Subdivision 40-E of the ITAA 1997.

Assets covered by Subdivision 40-F of the ITAA 1997 are:

•         certain primary production assets - water facilities, horticultural plants, fodder storage assets and fencing assets.

The Structure is not covered by Subdivision 40-F of the ITAA 1997.

Therefore, the improved Structure will not be excluded from being an eligible asset under subsection 40-150(2) of the IT(TP)A.

Section 40-160 deals with the full expensing of post-2020 budget assets and relevantly provides:

40-160(1)

For the purposes of Division 40 of the Income Tax Assessment Act 1997, the decline in value of a depreciating asset you hold for an income year (the current year ) is the amount worked out under subsection (3) if:

(a) you start to hold the asset at or after the 2020 budget time; and

(b) you start to use the asset, or have it installed ready for use, for a taxable purpose in the current year; and

(c) you are covered by section 40-150 for the asset; and

(d) you are covered for the current year by any of the following:

(i) section 40-155 (about businesses with turnover under $5 billion);

(ii) section 40-157 (about corporate tax entities with income under $5 billion); and

(e) no balancing adjustment event happens to the asset in the current year; and

(f) you have not made a choice under section 40-190 in relation to the current year.

...

Amount of the decline in value

40-160(3)

The decline in value for the current year is:

(a) if the asset ' s start time occurs in the current year - the asset ' s cost as at the end of the current year, disregarding any amount included in the asset ' s cost after 30 June 2023; or

(b) if the asset ' s start time occurred in an earlier year - the sum of its opening adjustable value for the current year and any amount included in the second element of its cost for the current year, disregarding any amount included in the asset ' s cost after 30 June 2023.

The Structure's start time occurred in the income year ending 30 June 20XX (that is, when the Structure had been improved by way of the renovation and the Partnership became the holder under item 3 of the table in section 40-40).

Therefore, the amount of the decline in value for the improved Structure under the TFE provisions will be the asset's cost at the end of the income year as outlined under subsection 40-160(3) of the ITTPA.

Section 40-175 states that the 'cost' of a depreciating asset you hold consists of 2 elements. Section 40-180 provides that the first element is worked out as at the time when you began to hold the depreciating asset and under paragraph 40-180(1)(b) will be the amount you are taken to have paid to hold the asset under section 40-185.

As at the time the Partnership began to hold the improved Structure the amount paid was the cost of the renovation which will therefore be the amount of the decline in value of the asset for TFE purposes.

It is noted that no balancing adjustment event happened to the Structure in the income year ending on 30 June 20XX. Therefore, paragraph 40-160(1)(e) of the IT(TP)A is satisfied.

It is also assumed that the Partnership did not make a choice under section 40-190 of the IT(TP)A in relation to the income year ending on 30 June 20XX. Therefore, paragraph 40-160(1)(f) is satisfied.

Furthermore, the Partnership is not a business with turnover of $50 million or more. Therefore, the additional exclusions contained in section 40-165 of the IT(TP)A have no application.

Conclusion

Accordingly, the requirements for temporary full expensing under Subdivision 40-BB of IT(TP)A 1997 are satisfied and the Partnership is able to claim the cost of the renovation to the Structure that it first held and first used for a taxable purpose in the 20XX income year.