Edited version of private advice

Authorisation Number: 1052055333945

Date of advice: 23 February 2023

Ruling

Subject: Input tax credits and temporary full expensing

Issue 1

Income Tax - Temporary full expensing deduction for constructions of residence for a farm employee.

Question 1

Is the residential dwelling (the New Premises) you built on your farm property (your Property), plant, under section 45-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Can you claim an immediate deduction for the New Premises under the temporary full expensing measure?

Answer

Yes.

Issue 2

Question 1

Are you entitled to input tax credits under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), for the construction of New Premises to be leased to an employee?

Answer

No, you are not entitled to input tax credits under section 11-20 of the GST Act for acquisitions you made in relation to the construction of the New Premises.

Question 2

If the answer to question (1) is 'yes', do you attribute the input tax credits on a progressive or periodic basis in accordance with Division 156 of the GST Act?

Answer

Not applicable.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You have operated your farming business on your Property for more than 20 years. It is a pastoral operation.

You operate your farming business as a sole trader and are registered for GST.

You are a small business entity under subsection 328-110(1) of the ITAA 1997.

You have built the New Premises on your Property adjacent to your own existing residence.

You built the New Premises for a casual employee, who has worked for you in your farming business for an extensive period. Their spouse has also worked for you in your farming business in the past.

By building the New Premises, your employee and their spouse will be able to perform more work for you as you develop your farm business. Your employee will also be present on your farm in the event of frequent minor emergencies if you are absent.

You have previously found it extremely hard to find and retain farm labour, because of the nature of the work and relatively poor pay. Other previous employees left after a short period, just as they had acquired the requisite skills.

The New Premises is a standard residential dwelling including a kitchen, laundry, living area, bedrooms, toilets and bathrooms and is of sufficient size for the employee and their family.

As the New Premises is situated in front of the access to your residence you have built it to a similar standard to your existing residence.

The local council approved the construction of the New Premises as a dual occupancy with your existing residence.

Construction of the New Premises was slow, partly because of contractor and supply chain issues. Construction of the New Premises was recently practically completed, with minor work including landscaping and defect correction to be completed by 30 June 20XX.

You have provided a copy of a residential tenancy agreement for the New Premises, with your employee and their spouse as tenants. The term of the agreement is for several years starting recently with a weekly rent amount payable.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 subsection 40-25(2)

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

Income Tax Assessment Act 1997 subsection 40-30(2)

Income Tax Assessment Act 1997 subsection 40-30(3)

Income Tax Assessment Act 1997 section 40-45

Income Tax Assessment Act 1997 subsection 40-45(1)

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

Income Tax Assessment Act 1997 subsection 40-45(5)

Income Tax Assessment Act 1997 Subdivision 40-C

Income Tax Assessment Act 1997 subsection 40-185(1)

Income Tax Assessment Act 1997 section 40-190

Income Tax Assessment Act 1997 Subdivision 40-E

Income Tax Assessment Act 1997 Subdivision 40-F

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

Income Tax Assessment Act 1997 section 45-40

Income Tax Assessment Act 1997 paragraph 45-40(1)(f)

Income Tax Assessment Act 1997 Division 43

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

Income Tax Assessment Act 1997 Subdivision 328-C

Income Tax Assessment Act 1997 Subdivision 328-D

Income Tax Assessment Act 1997 subsection 328-110(1)

Income Tax Assessment Act 1997 subsection 328-175(1)

Income Tax Assessment Act 1997 subsection 328-175(6)

Income Tax Assessment Act 1997 subsection 995-1(1)

Income Tax (Transitional Provisions) Act 1997 IT(TP)A Subdivision 40-BB

Income Tax (Transitional Provisions) Act 1997 IT(TP)A section 40-145

Income Tax (Transitional Provisions) Act 1997 IT(TP)A section 40-150

Income Tax (Transitional Provisions) Act 1997 IT(TP)A subsection 40-150(1)

Income Tax (Transitional Provisions) Act 1997 IT(TP)A subsection 40-150(2)

Income Tax (Transitional Provisions) Act 1997 IT(TP)A subsection 40-150(3)

Income Tax (Transitional Provisions) Act 1997 IT(TP)A subsection 40-150(4)

Income Tax (Transitional Provisions) Act 1997 IT(TP)A section 40-155

Income Tax (Transitional Provisions) Act 1997 IT(TP)A section 40-157

Income Tax (Transitional Provisions) Act 1997 IT(TP)A subsection 40-160(1)

Income Tax (Transitional Provisions) Act 1997 IT(TP)A paragraph 40-160(1)(e)

Income Tax (Transitional Provisions) Act 1997 IT(TP)A paragraph 40-160(3)(a)

Income Tax (Transitional Provisions) Act 1997 IT(TP)A section 40-165

Income Tax (Transitional Provisions) Act 1997 IT(TP)A paragraph 40-170(1)(e)

Income Tax (Transitional Provisions) Act 1997 IT(TP)A section 40-190

Income Tax (Transitional Provisions) Act 1997 IT(TP)A section 328-181

A New Tax System (Goods and Services Tax) Act 1999 section 11-5

A New Tax System (Goods and Services Tax) Act 1999 paragraph 11-5(a)

A New Tax System (Goods and Services Tax) Act 1999 section 11-15

A New Tax System (Goods and Services Tax) Act 1999 paragraph 11-15(2)(a)

A New Tax System (Goods and Services Tax) Act 1999 section 11-20

A New Tax System (Goods and Services Tax) Act 1999 section 40-35

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

A New Tax System (Goods and Services Tax) Act 1999 Division 156

Fringe Benefits Tax Assessment Act 1986section 58X

Reasons for decision

Question 1

Summary

The New Residence is plant under section 45-40 of the ITAA 1997, as it is a structural improvement on land used for pastoral operations, where the improvement is used for residential purposes, providing accommodation for your farm employee.

Detailed reasoning

Plant has the meaning given by section 45-40 of the ITAA 1997. The definition of plant includes structural improvements on land that is used for agricultural or pastoral operations where that improvement is used for domestic or residential purposes, if it is provided for the accommodation of employees, tenants or sharefarmers engaged in or in connection with agricultural or pastoral activities (paragraph 45-40(1)(f) of the ITAA 1997).

Application to your circumstances

The New Premises is a structural improvement on land that you use for pastoral operations where the improvement is used for residential purpose, providing accommodation for your farm employee. The New Premises is therefore plant under section 45-40 of the ITAA 1997.

Question 2

The New Premises meets the definition of a depreciating asset as it has a limited useful life. As the New Premises is plant, a deduction for its decline in value is not excluded from the temporary full expensing (TFE) rules on the basis that it is capital works to which Division 43 applies. Although it is excluded from simplified depreciation rules because it is a leased asset, it is eligible for TFE under the modification to the general depreciation rules.

Summary

Rules for the deduction for the decline in value of depreciating assets

A depreciating asset is defined in subsection 40-30(1) of the ITAA 1997 as an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used except land, trading stock and intellectual property that is not listed in subsection 40-30(2) of the ITAA 1997.

Subsection 40-30(3) of the ITAA 1997 provides that Division 40 applies to improvements to land and fixtures on land as if they were separate assets from the land whether removable or not.

Buildings and structural improvements to which Division 43 of the ITAA 1997 (capital works deductions) applies are specifically excluded from Division 40 (section 40-45 of the ITAA 1997).

However, relevantly to this case, capital expenditure on plant is specially excluded from being construction expenditure by paragraph 43-70(2)(e) of the ITAA 1997.

Deductions for the decline in value of depreciating assets including plant are available under Division 40 of the ITAA 1997. Alternatively, small business entities have the choice to use the simplified depreciation rules in Subdivision 328-D of the ITAA 1997 to deduct the decline in value of eligible assets.

Application to your circumstances

The New Premises meets the definition of a depreciating asset on that basis that it is an asset that will have a limited useful life and will decline in value and the exclusions don't apply as it is not:

•         trading stock

•         an intangible asset

•         land given that it is treated separately to the land per subsection 40-30(3) of the ITAA 1997.

The New Premises is also not excluded from Division 40 or Subdivision 328-D of the ITAA 1997, on the basis of it being capital works to which Division 43 applies, given it is plant as per the answer to question 1.

Temporary full expensing (TFE)

TFE provides for the immediate write-off of the cost of depreciating assets. Law Companion Ruling LCR 2021/3 Temporary full expensing (LCR 2021/3) provides a relevant summary of the TFE rules and has provided the basis for this ruling.

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 Income Tax (Transitional Provisions) Act 1997 (IT(TP)A).

For entities other than small business entities using simplified depreciation, TFE is accessed through Subdivision 40-BB of the IT(TP)A).

Small businesses using the simplified depreciation rules

If you are a small business entity in an income year you can choose the simplified depreciation rules for all the depreciating assets you start to use or have installed ready for use, for a taxable purpose during or before that income year (subsection 328-175(1) of the ITAA 1997).

You will be a small business entity for an income year under 328-110(1) of the ITAA 1997 if you carry on business in that year and your aggregated turnover is less than $10 million.

Certain assets are excluded from the simplified depreciation rules. Assets leased or expected to be leased predominantly on a depreciating asset lease are excluded (subsection 328-175(6) of the ITAA 1997). A depreciating asset lease is an agreement under which the entity that holds the depreciating asset grants a right to use the asset to another entity (subsection 995-1(1) of the ITAA 1997).

Application to your circumstances

As you are a small business entity under subsection 328-110(1) of the ITAA 1997, you will be able to choose whether or not you use the simplified depreciation rules in the 20XX-XX income year for all your eligible depreciating assets that you started to use or have installed ready for use, for a taxable purpose during or before that income year.

As the lease you have provided to your tenants confers upon them the right to use the New Premises, it falls within the definition of a depreciating asset lease for the purpose of the simplified depreciation rules and is therefore excluded from the simplified depreciation rules by subsection 328-175(6) of the ITAA 1997. Consequently, you will not be eligible for temporary full expending for the New Premises under the simplified depreciation rules.

However, the exclusion of certain assets from the simplified depreciation rules does not mean that decline in value deductions cannot be obtained for these assets under Subdivision 40-BB of the IT(TP)A if eligibility requirements are met (paragraph 145 of LCR 2021/3).

The general TFE rules under Subdivision 40-BB of the IT(TP)A

Eligible entities

An entity will be eligible for TFE if it:

•         satisfies a test based on aggregated turnover under section 40-155 of the IT(TP)A (eligible entity test); or

•         is a corporate tax entity and satisfies a test based on total income under section 40-157 of the IT(TP)A (alternative income test).

Under the eligible entity test, an entity must satisfy the definition of small business entity in Subdivision 328-C of the ITAA 1997 or satisfy it on the basis that each reference to $10 million was instead a reference to $5 billion (section 40-155 of the IT(TP)A).

For the 20XX-XX income year, an eligible entity can clam in its tax return, a deduction for the business portion of the cost of eligible new asset first held and first used or installed ready for use for a taxable purpose, from 20XX budget time to 30 June 20XX (subsections 40-150(1) and 40-160(1) of the IT(TP)A).

Eligible assets

TFE applies to depreciating assets, but not all depreciating assets are eligible. There are specific exclusions (in respect of both first and second element costs) under section 40-150 of the IT(TP)A for assets:

•         covered by section 40-45 of the ITAA 1997 (subsection 40-150(2) of the IT(TP)A) which are:

-       eligible work-related items (including portable electronic device, computer software, protective clothing, briefcases, and tools of trade) for the purposes of section 58X of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) where the relevant benefit provided by the employer is an expense payment benefit or a property benefit (within the meaning of that Act) (subsection 40-45(1) of the ITAA 1997)

-       capital works for which amounts can be deducted under Division 43 of the ITAA 1997 (or would be deductible but for timing of expenditure or use of capital works) (subsection 40-45(2) of the ITAA 1997)

-       deductible under former provisions of the income tax law relating to Australian films (subsection 40-45(5) of the ITAA 1997)

•         without the relevant connection to Australia, if the entity will not use that asset principally in Australia for the principal purpose of carrying on a business in Australia, or the asset will never be located in Australia (subsection 40-150(3) of the IT(TP)A)

•         whose decline in value is worked out under Subdivisions 40-E of the ITAA 1997 (about low-value pool and software development pools) or Subdivision 40-F of the ITAA 1997 (about primary production water facilities, horticultural plants, fodder and fencing assets) (subsection 40-150(4) of the IT(TP)A)

•         to which a balancing adjustment event happens to an asset in the same income year that TFE would otherwise apply to first or second elements of the asset's cost (paragraphs 40-160(1)(e) and 40-170(1)(e) of the IT(TP)A).

Additional exclusions apply where the asset is held by entities that have an aggregated turnover of $50 million or more and where the entities have needed to use the alternative income test for eligibility (section 40-165 of the IT(TP)A).

Full expensing of eligible asset

If an eligible entity starts to hold an eligible asset between 20XX Budget Time and 30 June 20XX, and starts to use the asset for a taxable purpose in that period, the decline in value under TFE for the income year in which the entity starts to use the asset for a taxable purpose will be the asset's cost as at the end of that income year (paragraph 40-160(3)(a) of the IT(TP)A)

Cost for the purposes of temporary full expensing is determined in accordance with the rules in Subdivision 40-C of the ITAA 1997. The first element of cost of a depreciating asset is generally the amount you have paid to start holding the asset (subsection 40-185(1) of the ITAA 1997). The second element costs are costs incurred after you hold the asset and include costs to bring it to its present condition and location (section 40-190 of the ITAA 1997).

The entity can only deduct the taxable use portion of that cost because of subsection 40-25(2) of the ITAA 1997 which reduces a deduction by the portion of the decline in value attributable to use for a purpose other than a taxable purpose.

Choice not to apply temporary full expensing

If Subdivision 40-BB of the IT(TP)A applies to work out the decline in value of a depreciating asset, then no other provision of the IT(TP)A or the ITAA 1997 applies for that purpose (section 40-145 of the IT(TP)A).

However, an entity may choose that the decline in value of an asset for an income year is not to be worked out under Subdivision 40-BB of the IT(TP)A (section 40-190 of the IT(TP)A).

Application to your circumstances

As you are a small business entity under subsection 328-110(1) of the ITAA 1997, you will therefor meet the eligible entity requirements for the general rules for TFE under Subdivision 40-BB of the IT(TP)A. That is, you carry on a small business with a turnover below $10 million.

The New Premises is an eligible asset under the general TFE rules as it is a depreciating asset to which none of the exclusions apply:

•         It is not covered by section 40-45 of the ITAA 1997 as it is not:

-       an eligible work-related item for the purposes of section 58X of the FBTAA

-       capital works for which amounts can be deducted under Division 43 of the ITAA 1997, as it is plant, per question 1

-       deductible under former provisions of the income tax law relating to Australian films.

•         It has a relevant connection to Australia as it is located in Australia and used in your business carried on in Australia.

•         Its decline in value is not worked out under Subdivision 40-E of the ITAA 1997 as it is not allocated to the low value pool or software development pool.

•         Its decline in value in not worked out under Subdivision 40-F of the ITAA 1997 as it is not a primary production water facility, horticultural plant, fodder or fencing asset.

•         The ruling is provided on the assumption that a balancing adjustment event will not occur to the New Premises in the 20XX-XX income year.

As you started to use the New Premises in the income year ending 30 June 20XX, which is within the relevant time period, and, you are an eligible entity, and, the asset is an eligible asset, you can choose to deduct the taxable use portion of the cost of the New Premises in the year ending 30 June 20XX under the general TFE rules.

Issue 2

Entitlement to GST input credits for the construction costs of a residence for a farm employee.

Question 1

Section 11-20 of the GST Act provides that an entity is entitled to the input tax credit for any creditable acquisition that it makes.

Section 11-5 of the GST Act lists the requirements that must be satisfied for an entity to make a creditable acquisition. One of the requirements is that the entity must acquire the thing solely or partly for a creditable purpose (paragraph 11-5(a) of the GST Act).

Section 11-15 defines the meaning of creditable purpose. Paragraph 11-15(2)(a) of the GST Act provides that an entity does not acquire a thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed.

Your acquisitions relate to the construction of a residence which you have leased to the employee. Therefore, it needs to be determined whether this supply of the residence by you to the employee is an input taxed supply.

Section 40-35 of the GST Act includes that a supply of premises by way of lease, hire or licence is input taxed where the supply is of residential premises (as defined in section 195-1 of the GST Act) to be used predominantly for residential accommodation.

Section 195-1 of the GST Act defines residential premises to include land or a building that is occupied as a residence, or for residential accommodation; or is intended to be occupied and is capable of being occupied, as a residence, or for residential accommodation.

Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) discusses supplies of residential premises to be used predominantly for residential accommodation.

The following paragraphs are extracted for your information:

9. The requirement in section 40-35, ...that premises be 'residential premises to be used predominantly for residential accommodation (regardless of the term of occupation)' is to be interpreted as a single test that looks to the physical characteristics of the property to determine the premises' suitability and capability for residential accommodation.

10. The requirement for residential premises to be used predominantly for residential accommodation does not require an examination of the subjective intention of, or use by, any particular person. Premises that display physical characteristics evidencing their suitability and capability to provide residential accommodation are residential premises even if they are used for a purpose other than to provide residential accommodation (for example, where the premises are used as a business office).

15. To satisfy the definition of residential premises, premises must provide shelter and basic living facilities. Premises that do not have the physical characteristics to provide these are not residential premises to be used predominantly for residential accommodation.

Application to your circumstances

The New Premises, in this instance, include a kitchen, laundry, living area, bedrooms, toilets and bathrooms to provide shelter and living facilities. The New Premises have the physical characteristics suitable and capable of providing residential accommodation.

Accordingly, you are supplying residential premises by way of lease to the employee which satisfies as an input taxed supply under section 40-35 of the GST Act.

As you are making an input taxed supply of the residential premises, the acquisitions you made to construct the residential premises are acquisitions that relate to the making of an input taxed supply. This means, you are not making the acquisitions for a creditable purpose pursuant to paragraph 11-15(2)(a) of the GST Act and the acquisitions are not creditable acquisitions under section 11-5 of the GST Act.

You are therefore not entitled to an input tax credit under section 11-20 of the GST Act for acquisitions made in relation to the construction of the New Premises.