Edited version of private advice

Authorisation Number: 1051985901247

Date of advice: 25 May 2022

Ruling

Subject: Instant asset write-off provisions

Question 1

Is a tax deduction able to be claimed for water facility assets purchased for a cost (based on market value) of less than $150,000 under the Instant Asset Write Off provisions of section 40-82 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Is a tax deduction able to be claimed for fencing assets purchased for a cost (based on market value) of less than $150,000 under the Instant Asset Write Off provisions of section 40-82 of the ITAA 1997?

Answer

No.

Question 3

Is the Applicant able to claim a tax deduction for the cost of the manager's residence under the Instant Asset Write Off provisions of section 40-82 of the ITAA 1997?

Answer

No.

This private ruling applies for the following period:

Year Ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Applicant is the head entity of a consolidated group.

Farming land and improvements are owned by members of the consolidated group and are leased at market rates to a partnership (the Partnership) which runs an agricultural business. Company X is one of the partners in the Partnership and also a member of the consolidated group.

The aggregated turnover of the Applicant is more than $10 million and less than $50 million.

Company Y, a member of the consolidated group, purchased an agricultural property which included farming land, plant and structural improvements in 2020. The contract was silent on apportionment of the purchase price, however a valuer was engaged to provide market valuations for water facilities, fencing assets and manager's residence.

The Partnership is leasing and using the property for their agricultural business. The lease was signed for five years starting around the settlement date with options to renew.

The Applicant believes that the previous owner of the property has claimed or could have claimed a deduction for the water facilities and fencing assets under Subdivision 40-F of the ITAA 1997.

Also included in the purchase of the agricultural property was a "manager's residence". This residence is used to provide accommodation to an employee who is engaged in the primary production business that is conducted on the land. The employee occupying the manager's residence is employed by a related company and charges a labour hire fee (at market rates) to the Partnership.

Company Y (the Lessor) is the owner of the assets and the Lessor has the right to remove or recover the asset.

Relevant legislative provisions

Income Tax Assessment Act 1997

Section 40-30

Section 40-45

Section 40-50

Section 40-82

Section 40-515

Section 43-10

Section 43-20

Section 43-70

Section 45-40

Section 701-1

Section 995-1

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.

Consolidated groups - single entity rule

Under the group consolidation regime in Division 700, a wholly owned group of companies may choose to consolidate for income tax purposes. The subsidiary members of a consolidated group are treated as parts of the head company for income tax purposes (section 701-1).

Taxation Ruling TR 2004/11 Income tax: consolidation: the meaning and application of the single entity rule in Part 3-90 of the Income Tax Assessment Act 1997 at paragraph 8 explains that this single entity rule has the effect that:

a)    the actions and transactions of a subsidiary member are treated as having been undertaken by the head company;

b)    the assets a subsidiary member of the group owns are taken to be owned by the head company (with the exception of intra-group assets) while the subsidiary remains a member of the consolidated group.

Under the single entity rule, the Applicant is treated as having acquired the property for taxation purposes.

Question 1

Summary

In accordance with subsection 40-50(1), Instant asset write off (IAWO) is not available to the Applicant for the water facilities under section 40-82.

Detailed reasoning

IAWO allows entities qualifying as "medium sized businesses" to immediately deduct the cost of certain depreciating assets for a limited time and was introduced as part of Subdivision 40-B.

Paragraphs 127 - 129 of Law Companion Ruling LCR 2021/3 Temporary full expensing provide a summary of how IAWO has evolved in terms of the various conditions and thresholds that need to be satisfied:

Instant asset write-off

127. Applicable to assets first acquired at or after the relevant time on 2 April 2019, IAWO under section 40-82 of the ITAA 1997 extended immediate write-off rules that previously had only applied to small business entities using simplified depreciation. Section 40-82 of the ITAA 1997 initially applied to entities with an aggregated turnover of $10 million or more but less than $50 million, and provided access to IAWO for depreciating assets covered by Division 40 of the ITAA 1997 with a cost of less than $30,000.

128. An eligible asset had to be first acquired after the relevant time on 2 April 2019 and before 12 March 2020. It also had to be first used, or installed ready for use, for a taxable purpose before 12 March 2020. The IAWO applied in the income year the asset was first used, or installed ready for use, for a taxable purpose.

Enhancement of instant asset write-off

129. During 2020, the law was amended to raise the cost threshold for assets covered by IAWO to $150,000 and extend eligibility to entities with an aggregated turnover of $10 million or more but less than $500 million. The changes applied to assets first acquired at or after the relevant time on 2 April 2019 and on or before 31 December 2020, and which an entity started to use, or had installed ready for use, for a taxable purpose on or after 12 March 2020 and on or before 30 June 2021.

[Footnotes omitted]

Whether IAWO is available under section 40-82 is subject to the other requirements of Subdivision 40-B.

Subsection 40-50(1) states:

You cannot deduct an amount, or work out a decline in value, for a depreciating asset under this Subdivision if you or another taxpayer has deducted or can deduct amounts for it under Subdivision 40-F (about primary production depreciating assets).

Subdivision 40-F covers such primary production assets as water facility, fodder storage asset, fencing asset or horticultural plant. As a result, if the Applicant or another taxpayer has deducted or can deduct an amount for a depreciating asset that is a water facility under Subdivision 40-F, the amount is not deductible under section 40-82.

ATO ID 2004/15 Income Tax Capital allowances: second hand commercial water facilities deals with the entitlement to a deduction under section 40-515 for capital expenditure incurred on the acquisition of a second hand water facility and confirms the application of section 40-50 in this context:

In some instances a taxpayer who acquires a second hand water facility, particularly one not permanently affixed to land, will not know and will not be able to find out whether the previous owner claimed or was entitled to a deduction under Subdivision 40-F of the ITAA 1997. In such a case the onus of proof would be on the taxpayer to prove that a previous entitlement had not existed if they wish to claim a deduction for the decline in value of a water facility.

In certain circumstances it may not be unreasonable to conclude that an entitlement has previously existed for a water facility based on the facts and balance of probabilities.

...

Furthermore, subsection 40-50(1) of the ITAA 1997 provides that no deduction for the decline in value of a depreciating asset is allowed under Subdivision 40-B of the ITAA 1997 where you or another taxpayer has deducted or can deduct an amount under Subdivision 40-F of the ITAA 1997.

Application to your circumstances:

The Applicant believes that the previous owner of the land has claimed or could have claimed a deduction for the water facilities under Subdivision 40-F. Therefore, in accordance with subsection 40-50(1), IAWO is not available to the applicant for the water facilities under section 40-82.

Question 2

Summary

In accordance with subsection 40-50(1), IAWO is not available to the applicant for the fencing assets under section 40-82.

Detailed reasoning

For the same reasons under question 1, the Applicant believes that the previous owner of the land has claimed or could have claimed a deduction for the fencing assets under Subdivision 40-F. It is considered that the principles in ATO ID 2004/15 may be relied on in relation to fencing assets. Therefore, in accordance with subsection 40-50(1), IAWO is not available to the applicant for the fencing assets under section 40-82.

Question 3

Summary

The manager's residence is not considered to be a depreciating asset under subsection 40-30(1) by the operation of subsection 40-45(2) and therefore is ineligible for IAWO under section 40-82.

Detailed reasoning

As explained above, whether IAWO is available under section 40-82 is subject to the other requirements of Subdivision 40-B.

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 the manager's residence will be deductible under Division 43 and consequently, cannot be deductible under IAWO.

A deduction can be claimed for capital works under section 43-10.

Section 43-20 contains the following relevant definitions and examples of capital works to which Division 43 applies:

Buildings

(1) This Division applies to capital works being a building, or an extension, alteration or improvement to a building:

....

Structural improvements

(2) This Division also applies to capital works (other than capital works referred to in subsection (1)) begun after 26 February 1992 that are structural improvements, or extensions, alterations or improvements to structural improvements, whether they are in or outside Australia.

(3) Some examples of structural improvements are:

(a) 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; and

(b) earthworks that are integral to the construction of a structural improvement (other than a structural improvement described in subsection (4)), for example, embankments, culverts and tunnels associated with a runway, road or railway.

According to paragraph 43-70(2)(e), expenditure on 'plant' is not deductible under Division 43, and may, therefore, be deductible under Division 40 provisions.

The term 'plant' for the purposes of Division 43 is defined under section 995-1, which provides that it has the meaning given by section 45-40 - which defines it to take its ordinary meaning and to include certain other things.

Taxation Ruling TR 1999/2 provides the following overview of the ordinary meaning of plant:

20. '[Plant] in its ordinary sense...includes whatever apparatus is used by a business man for carrying on his business, - not his stock-in-trade which he buys or makes for sale; but all goods and chattels, fixed or moveable, live or dead, which he keeps for permanent employment in his business': Lindley LJ in Yarmouth v. France (1887) 19 QBD 647 at 658.

The Commissioner considers that whether a 'building', 'structural improvements' or 'environmental protection earthworks' is plant within the ordinary meaning for the purposes of section 45-40 will depend on:

a)      whether it is more than a mere setting for the taxpayer's operations; and if it is

b)      whether the function performed by the thing is so related to the taxpayer's operations or special that it warrants it being held to be plant (see for example Macquarie Worsteds Pty Ltd v. FC of T 74 ATC 4121 at 4125; (1974) 4 ATR 334).

Relevantly, paragraphs 45-40(1)(c) and (f) extends the ordinary meaning of 'plant' to include:

(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;

...

(f) structural improvements that are excluded from paragraph (c), (d) or (e) because they are used for domestic or residential purposes if they are provided for the accommodation of employees, tenants or sharefarmers who are engaged in or in connection with the activities referred to in that paragraph.

As the term 'structural improvements' is not defined in the ITAA 1997, it will take its ordinary meaning.

In Willeroo & Manbulloo Ltd v. Federal Commissioner of Taxation (1964) 111 CLR 336; 13 ATD 356, Kitto J 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.

Application to your circumstances:

The Commissioner does not consider the manager's residence to be 'plant' under its ordinary meaning. Therefore, it is necessary to consider whether it is plant under its extended meaning. Paragraphs 45-40(1)(c) or (f) may be relevant however the plant needs to be on land that is used for agricultural or pastoral operations. In your case, the property which includes the manager's residence was leased to the partnership for the partnership's own use in their agricultural operations. Further, the employee who resides at the manager's residence was engaged in the agricultural activities of the partnership. This is further supported by the fact that it is the partnership that pays the employee's labour hire fee to their employer and not the Applicant. Therefore, it cannot be said that the manager's residence falls within the definition of plant under paragraph 45-40(1)(c) or (f).

Consequently, the manager's residence is not considered to be a depreciating asset under subsection 40-30(1) by the operation of subsection 40-45(2) and therefore is ineligible for IAWO under section 40-82.