Edited version of private advice

Authorisation Number: 1051982491131

Date of advice: 18 May 2022

Ruling

Subject: Instant asset write-off

Question

Is the bridge a 'structural improvement' under section 45-40 of the Income Tax Assessment Act 1997 (ITAA 19997)?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The partnership conducts a primary production business adjacent to a river.

The turnover of the business in financial year 20XX was less than $X million.

The partnership has built a bridge over an anabranch of the river to be able to safely access and graze livestock on land otherwise cut off from the main farm.

The bridge building works were completed after 7.30 pm AEDT on X October 20XX.

There is no domestic or residential use. The bridge is only used in carrying-on the farming business.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 328-180

Income Tax Assessment Act 1997 Subsection 328-175(2)

Income Tax Assessment Act 1997 Section 40-45

Income Tax Assessment Act 1997 Subsection 40-45(2)

Income Tax Assessment Act 1997 Section 43-10

Income Tax Assessment Act 1997 Subsection 43-20(3) of the ITAA 1997

Income Tax Assessment Act 1997 Paragraph 43-20(3)(a) of the ITAA 1997

Income Tax Assessment Act 1997 Section 43-70

Income Tax Assessment Act 1997 Subsection 43-70(1)

Income Tax Assessment Act 1997 Paragraph 43-70(2)(e)

Income Tax Assessment Act 1997 Paragraph 45-40(1)(c)

Income Tax Assessment Act 1936 Section 82AE

Income Tax (Transitional Provisions) Act 1997) Section 328-181

Reasons for decision

All the legislative references that follow are to the Income Tax Assessment Act 1997 unless otherwise noted.

Is the bridge a deprecating asset?

Subsection 328-175(2) states that Subdivision 328-D will not apply where section 40-45 operates to make a capital work deductible under Division 43 rather than under Division 40.

Subsection 40-45(2) ensures that depreciating assets that are capital works are not deductible under both Division 40 and 43. It does this by excluding from Division 40 those capital works for which an amount can or could be deducted under Division 43.

Section 43-10 provides a deduction for certain 'construction expenditure' incurred in respect of the construction of capital works such as buildings or structural improvements, including any extensions, alterations, or improvements to buildings or structural improvements.

Subsection 43-70(1) defines 'construction expenditure' as capital expenditure incurred in respect of the construction of capital works. However, paragraph 43-70(2)(e) specifically excludes expenditure on 'plant' from being construction expenditure. As a result, no deduction is allowed for such expenditure under Division 43.

Paragraph 45-40(1)(c) extends the meaning of 'plant' to include structural improvements on land used for agricultural or pastoral operations other than those used for domestic or residential purposes.

The term 'agricultural or pastoral operations' is not defined and so takes its ordinary meaning. In this case, we consider that livestock grazing activities constitute the carrying on of agricultural or pastoral operations.

The term 'Structural improvements' is not defined for the purposes of paragraph 45-40(1)(c) of the ITAA 1997 and will consequently take its ordinary meaning in the absence of a contrary intention. The term 'structural' connotes some form of building or construction. This indicates the requirement for the creation of a significant feature.

Section 82AE of the Income Tax Assessment Act 1936 used the term, 'Structural improvements', in its general sense. Senior member P.M. Roach in NT86/8971 and Commissioner of Taxation [1988] AATA 220; (1988) 19 ATR 3691 at 3694-11; 88 ATC 694) said:

... I am satisfied that the phrase ''structural improvements'' is a phrase which relates to the development of land. The phrase is not used to identify things, such as large machines, which are or may be elaborate structures in themselves but which are recognised as having an existence independently of the land on which they stand. As to the word ''improvement'' I am not persuaded that it is to be understood as indicating a qualitative character: something which renders land better in some sense or more valuable than before; but rather as a phrase referring to land which has been altered in its characteristics by some development. As appears from the words of exception in sec. 82AE, ''structural improvements'' may extend to fences; earth tanks; underground tanks; irrigation channels; underground piping and also buildings or other structural improvements used for the storage of grain, hay or fodder.

Subsection 43-20(3) of the ITAA 1997 also employs the term 'structural improvements' in its general sense and gives some examples of structural improvements. Relevantly, paragraph 43-20(3)(a) of the ITAA 1997 lists sealed roads, sealed driveways, sealed car parks, sealed airport runways, bridges, pipelines, lined road tunnels, retaining walls, fences, concrete or rock dams and artificial sports fields as examples of structural improvements.

Consequently, in accordance with the meaning of the term 'structural improvement' as set out in paragraph 45-40(1)(c) of the ITAA 1997 and in NT86/8971 and Commissioner of Taxation, we consider that the bridge is a structural improvement. Further we consider that it is within the definition of 'plant' as set out in subsection 45-40(1) of the ITAA 1997 as it is a structural improvement on land that is used for pastoral operations and that is not used for domestic or residential purposes. Hence the bridge will be 'plant' for the purposes of section 45-40 of the ITAA 1997. As this is the case, the expenditure on constructing the bridge will be excluded from the definition of construction expenditure for the purposes of Division 43.

It follows that the bridge is not a capital work to which Division 43 applies. This means section 40-45 of the ITAA 1997 does not apply to the expenditure on the bridge, and the decline in value of the depreciating asset (the bridge) is deductible under Division 40. Hence, the bridge is a depreciating asset pursuant to section 40-30.

Further Guidance

Temporary full expensing

In your submission you refer to Subdivision 328-D. This subdivision provides simplified depreciation rules for depreciating assets of Small Business entities (with an 'aggregate turnover' of less than $5 billion during the period to 30 June 2023 (section 40-155 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A)). The assets that can be depreciated by a small business have been increased by the temporary full expensing measures (TFE) which provides for the immediate write-off of the cost of depreciating assets and relevant additional expenditure in accordance with the rules in:

• Subdivision 40-BB of the IT(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 of the ITAA 1997, applicable to small business entities choosing simplified depreciation.

For entities other than small business entities using simplified depreciation, TFE is accessed through Subdivision 40-BB of the IT(TP)A. This Subdivision provides for full expensing of eligible depreciating assets that eligible entities start to hold in the period beginning from 7.30 pm AEDT on X October 20XX to 30 June 20XX.

For small business entities using the simplified depreciation rules in Subdivision 328-D of the ITAA 1997, TFE is provided through modifications to those rules by section 328-181 of the IT(TP)A. The rules provide for full expensing of first and second element costs. An entity cannot opt out of temporary full expensing for assets that the simplified depreciation rules apply to. The entity is required to immediately deduct the business portion of the asset's cost for assets you start to hold, and first use (or have installed ready for use) for a taxable purpose for the period beginning from 7.30 pm AEDT on X October 20XX to 30 June 20XX. These assets are not added to the small business pool. Further, the balance of the small business pool at the end of an income year ending between period beginning from 7.30 pm AEDT on X October 20XX to 30 June 20XX will also be immediately deducted.

There is no limit on the cost of the depreciating asset during this period (section 328-181 of the IT(TP)A).

Where a Small Business Entity (SBE) has chosen to claim amounts for depreciating assets under Subdivision 328-D instead of under Division 40 for the income year and the depreciating asset (the bridge) started to be used, or is installed ready for use, for a taxable purpose in the period beginning from 7.30 pm AEDT on 6 October 2020 to 30 June 2023 the entire cost of the bridge must be deducted in the relevant year pursuant to section 328-181 of the Income Tax (Transitional Provisions) Act 1997.

Law Companion Rulings LCR 2021/3: Temporary full expensing provides further explanation of the temporary full expensing measures.