Edited version of private advice

Authorisation Number: 1052086970432

Date of advice: 13 February 2023

Ruling

Subject: Depreciating asset - capital works deductions

Question 1 Will the building being constructed by the partnership constitute a 'depreciating asset' as defined by section 40-30 of the Income Tax Assessment Act 1997?

Answer

Yes

Question 2 If the answer to Question 1 is 'yes', will the building qualify for 'full expensing' under subdivision 40-BB of the Income Tax (Transitional Provisions) Act 1997?

Answer

Yes

Question 3 Will any reduction to the deductible amount(s) be required pursuant to subsection 40-25(2) of the Income Tax Assessment Act 1997?

Answer

No

This ruling applies for the following period:

1 July XXXX to 30 June XXXX

The scheme commenced on:

1 July XXXX

Relevant facts and circumstances

This private ruling is based on the facts and circumstances set out below. If your facts and circumstances are different from those set out below, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

1.         The relevant farming business is run through a partnership.

2.         A company owns land. The company is an associate but not a member of the partnership. It owns over X hectares of land in a regional area somewhere in Australia. The partnership uses the land for agricultural operations for a primary production business. The operations cover both crops and livestock.

3.         The partnership employs a small number of permanent employees and a seasonally variable number of casual employees to help operate its primary production business.

4.         The partnership is a small business entity as defined by section 328-110 of the Income Tax Assessment Act 1997 as:

•                it carries on a business

•                its aggregated turnover for the income year ended 30 June 2022 was less than $10 million

•                its aggregated turnover for the income year ended 30 June 2023 is likely to be less than $10 million.

5.         There are currently multiple buildings on the land.

6.         On a date after 6 October 2020, the partnership entered into a contract for the construction of a building on the land.

7.         This building will be used as accommodation for the individuals involved in the primary production business carried on by the partnership, as well as their immediate family members. These individuals are together responsible for managing all aspects of the primary production business carried on by the partnership. The occupants will be two adults and one small child.

8.         Both adult occupants will carry out duties connected with the partnership's business operations. One adult occupant is a partner in the partnership and works full-time in carrying out the partnership's farming operations. The other adult occupant is the partners' spouse, is employed by the partnership part-time, and is responsible for the administration and management of the business. Both adult occupants are required to be physically present on the farm.

9.         [This paragraph has been deleted for privacy reasons.]

10.      The proposed occupants currently live with their parents (parents-in-law) on site, as no other accommodation is available for use on or nearby the farm.

11.      The current arrangements don't give the proposed occupants enough space - they are a family with one small child.

12.      A small number of permanent employees and a small number of casuals work on the farm during the year.

13.      These other employees mostly live on the farm where possible. A small number of buildings (on-site) house X families plus casual staff, whereas another building (also on-site) houses X single employees. One employee owns their own house approximately Xkm from the farm. Accommodation is extremely limited as there is no accommodation available in any town within a reasonable distance of the farm.

14.      The proposed building is a single storey dwelling with a total floor area of Xm2. The building comprises structural improvements to a former building that was effectively gutted due to asbestos, as well as a 'new' area. The only external facility is a car port.

15.      The approximate construction cost is $X, including GST.

16.      The building will be centrally located to the main farming hub, close to all workshops, machinery, chemical sheds, and the farm office.

17.      The applicant expects that the building will be completed on or before 30 June 20XX.

18.      One of the partners entered the contract to construct the building on behalf of the partnership.

19.      The partnership has an informal understanding with the landlord about using buildings on the land. The partnership pays for all outgoings including taxes and improvements on land, including the improvements to the building covered by this ruling. The partnership is responsible for providing accommodation to persons engaged in the farming activities carried on by the partnership.

Assumptions

The partnership won't stop holding the building or stop having it available for use during the 20XX income year.

The partnership won't choose not to apply the temporary full expensing rules.

The building will be completed on or before 30 June 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 40-25

Income Tax Assessment Act 1997 section 40-30

Income Tax Assessment Act 1997 section 40-40

Income Tax Assessment Act 1997 section 40-45

Income Tax Assessment Act 1997 section 40-295

Income Tax Assessment Act 1997 section 40-425

Income Tax Assessment Act 1997 section 43-15

Income Tax Assessment Act 1997 section 43-20

Income Tax Assessment Act 1997 section 43-70

Income Tax Assessment Act 1997 section 45-40

Income Tax Assessment Act 1997 section 328-110

Income Tax Assessment Act 1997 section 960-100

Income Tax Assessment Act 1997 section 995-1

Income Tax (Transitional Provisions) Act 1997 section 40-140

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

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

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

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

Income Tax (Transitional Provisions) Act 1997 section 40-160

Income Tax (Transitional Provisions) Act 1997 section 40-170

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

Reasons for decision

In these reasons:

•                ITAA 1997 means the Income Tax Assessment Act 1997

•                Division 40, Division 43, and Division 328 mean those divisions in the Income Tax Assessment Act 1997

•                ITTP means the Income Tax (Transitional Provisions) Act 1997

•                subdivision 40-BB means that subdivision in the Income Tax (Transitional Provisions) Act 1997.

Question 1

Will the building being constructed by the partnership constitute a 'depreciating asset' as defined by section 40-30 of the ITAA 1997?

Summary

20.      Yes. The building will be a depreciating asset. It will have a limited effective life and be reasonably expected to decline in value over time. It will be treated as a separate asset to the land for capital allowance deduction purposes.

Detailed reasoning

21.      Section 40-25 of the ITAA 1997 allows deductions for the decline in value of depreciating assets.

Depreciating assets are assets with limited life that decline in value, and aren't land, tangible assets, or trading stock.

22.      Depreciating asset is defined in section 40-30 of the ITAA 1997.

•                Subsection 40-30(1) says a depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it's used.

•                However, the definition excludes land, items of trading stock, and intangible assets, except intangible assets covered by subsection 40-30(2).

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

23.      Improvements and fixtures aren't defined in the ITAA 1997[1], so we've looked to other sources for guidance.

•                Typically, general terms that aren't defined take their ordinary and legal meaning as affected by the context in which they appear.[2]

•                Dictionaries suggest improvements are things, additions, or changes that increase the land's value, or under one definition, make the use of the land more efficient.[3]

•                Fixtures are chattels or articles attached to the land which are legally treated as being part of the land (rather than personal property of the person who attached it).[4]

•                Two legal reference works suggest whether a chattel has become a fixture depends on the circumstances; relevant factors include the degree of affixation and the purpose of affixation.[5] The ATO has similar guidance in TD 97/24.[6]

24.      The ATO view is that 'improvements' has a slightly different meaning in the Division 40 context. TR 2012/7[7] at paragraphs 9, and 89 to 92 says an improvement is simply an identifiable alteration to the land which enhances the land's usefulness to the user, even if it doesn't increase the land's value. Improvements excludes things that are fixtures in this context. ATO ID 2008/50[8] suggests an improvement needs to have a discrete and identifiable separate function to the land.

The accommodation building is a depreciating asset: it has a limited life, will decline in value, and will be treated separately to the land for Division 40 purposes.

25.      The accommodation building is a depreciating asset as defined. The accommodation building will have a limited useful life and will decline in value. All buildings deteriorate over time through natural wear and tear. None of the three exclusions apply as we explain in the following paragraphs.

26.      The exclusion for 'land' doesn't apply. The building isn't land, because it's treated as a separate asset to the land for Division 40 purposes. The building would either be a fixture or an improvement in the general meaning of those terms.

•                Buildings would generally be fixtures because they are fixed to the land through foundations and are intended to be permanent structures. The facts don't suggest this building will be any different.

•                However, if this accommodation building wasn't sufficiently permanent to be a fixture, it would at least be an improvement. Buildings have value and generally increase the land's value. This accommodation will make the land more useful to the partnership because it allows it to have workers living on site. The building will increase the land's usefulness to the user, so it would be an improvement, assuming it isn't a fixture.

•                We don't need to determine whether the building is a fixture or an improvement; both are treated as a separate asset to the land under subsection 40-30(3).

27.      The exclusions for intangible assets and trading stock aren't relevant. The building is a physical structure. The partnership runs a farm and will use the building as accommodation for workers who live on site in the business. It won't be bought and sold as part of ordinary business operations.

Conclusion on Question 1

28.      It follows that the accommodation building will be a depreciating asset for Division 40 purposes.[9]

Question 2

If the answer to Question 1 is 'yes', will the building qualify for 'full expensing' under subdivision 40-BB of the ITTP?

Summary

29.      Yes. In the circumstances of this case, we think the proposed building will meet all the conditions for temporary full expensing under subdivision 40-BB. The exclusion for capital works deductions won't apply because the building qualifies under the extended meaning of 'plant' as accommodation for farm workers.

30.      This is a decision on these facts, rather than a view that accommodation on farming land for farm workers will always qualify as 'plant'.

Detailed reasoning

Introduction to the temporary full expensing rules

31.      The temporary full expensing rules allow eligible entities to claim an upfront deduction for the cost of qualifying depreciating assets. The temporary full expensing rules in subdivision 40-BB modify the decline in value for which you claim a deduction under section 40-25 of the ITAA 1997. Very broadly, the entity must:

•                be a business with aggregated turnover under $5 billion (or meet an alternative test)

•                start to hold the depreciating asset after 6 October 2020, but on or before 30 June 2023

•                start to use the asset, or install it ready for use, for a taxable purpose.

32.      We address the eligibility criteria for temporary full expensing in Table 1.

33.      There are many exclusions in the rules, including one for capital works. One exclusion in subsection 40-150(2) of the ITTP is that temporary full expensing isn't available where Division 40 deductions aren't available because section 40-45 of the ITAA 1997 applies. Subsection 40-45(2) denies Division 40 deductions where deductions are available under Division 43. Broadly, Division 43 allows deductions for capital works expenditure which meets requirements in that Division.

34.      The capital works deductions exclusion is most significant for this ruling. We discuss it at paragraphs 38 through 63.

35.      We conclude that the capital works deductions exclusion won't apply at paragraph 63.

36.      All the remaining conditions are met. We list and apply them in Table 1.

37.      Therefore, the proposed farming building will be eligible for temporary full expensing under subdivision 40-BB.

Table 1: TFE conditions from sections 40-160 and 40-170 of the ITTP

Table 2: Will the partnership 'hold' the building? Section 40-40 of the ITAA 1997

The capital works exclusion

38.      To repeat, TFE isn't available where capital works deductions are available.

39.      The TFE rules modify the decline in value you claim under Division 40. The effect of section 40-160 of the ITTP is that where you meet specified conditions, the decline in value of a depreciating asset for Division 40 purposes is the asset's cost.

40.      One of those conditions is that the asset must be 'covered' by section 40-150 of the ITTP. Subsection 40-150(2) says you aren't covered by that section if Division 40 doesn't apply because of section 40-45 of that Act. Subsection 40-45(2) of the ITAA 1997 says Division 40 doesn't apply to capital works for which you can deduct amounts under Division 43.[16]

41.      Therefore, we need to determine whether the partnership can claim capital works deductions for the building under Division 43.

42.      Broadly, that Division allows deductions for qualifying capital works. We won't detail all the conditions, as many aren't immediately relevant. As a threshold, section 43-20 says Division 43 applies to:

•                capital works being a building (or an extension, alteration, or improvement to a building)[17]

•                capital works that are structural improvements (or extensions, alterations, or improvements to structural improvements).[18]

43.      You deduct a portion of your construction expenditure: see section 43-15.

The proposed construction will be 'capital works' on a building or structural improvement: it's a project to construct a capital asset which will be applied to income producing or business purposes.

44.      Very briefly, the proposed accommodation construction seems to meet these threshold requirements in section 43-20.

45.      The terms 'building', 'structural improvement', and 'capital works' have self-evident meanings.

•                They aren't defined, so we look to ordinary and legal usage and context.

•                Dictionaries suggest 'building' means a substantial or permanent fixed structure.[19] They usually would have a roof and walls, and/or form an enclosure. Houses, factories, stables, and sheds are listed as examples.

•                'Structure' includes things which are built or constructed like buildings.[20]

•                'Improvements' are generally things that improve the value, or alternatively the use, of land. (We discuss this at paragraphs 23 and 24.)

•                Dictionaries suggest one meaning of 'capital' broadly means money or property directed to an income producing or business use.[21]

•                That's broadly consistent with case law in the tax context, which suggests 'capital' means something which produces a lasting advantage for a business. (We touch on this at paragraphs 48 and 49.)

•                Dictionaries show a wide range of meanings for 'work' - but they include tasks or undertakings, building operations, or engineering structures.[22]

46.      The proposed construction of the accommodation building meets the threshold requirements. The building is intended as a substantial structure because people will live in it. It would also improve the value and use of the land to the owner or occupant. It will produce a lasting benefit for the business because it will house people who will work on the farm. The construction operations to build it would qualify as capital works being a building or structural improvement.

The proposed construction can be described as capital expenditure in respect of the construction of capital works.

47.      'Construction expenditure' is a defined term. Subsection 43-70(1) says construction expenditure is capital expenditure incurred in respect of the construction of capital works. However, subsection 43-70(2) says construction expenditure doesn't include a list of types of expenditure. Relevantly, paragraph 43-70(2)(e) excludes expenditure on 'plant'.

48.      'Capital expenditure' broadly means expenditure which achieves a lasting advantage for a business. There's ATO guidance about this term (as used in section 40-880) in TR 2011/6. At paragraphs 13 and 64, it says that 'capital expenditure' isn't a defined term, but whether expenditure is capital in nature is determined on a case-by-case basis, considering principles from case law. At paragraph 66, it repeats Dixon J's commonly cited passage from Sun Newspapers[23], which highlights three considerations in distinguishing capital from revenue expenditure. They are:

•                the character of the advantage sought (lasting qualities and recurrence may be relevant)

•                the manner in which to be used, relied upon or enjoyed (recurrence may be relevant)

•                the means adopted to obtain it (periodical reward or outlay).

49.      Expenditure on the proposed building will be capital expenditure. The applicant is constructing the building as a permanent dwelling which will allow workers to live on-site to better carry out their business functions. It will be a once-off outlay or project which will secure a lasting advantage for the business.

50.      Therefore, it will qualify as capital works unless the exception for 'plant' in paragraph 43-70(2)(e) applies.

The exception for 'plant'

The building won't fit the ordinary meaning of plant - it will be part of the premises and won't be closely related to the taxpayer's farming activities.

51.      Plant has an extended meaning in tax legislation. It extends beyond the ordinary meaning of plant to include certain structural improvements relevant to farming.

52.      The ATO view is that the meaning of 'plant' in section 45-40 doesn't displace the ordinary meaning. See TR 2004/16[24] at [27] and TR 2007/9[25] at [32].

53.      ATO rulings give some guidance about the ordinary meaning of plant. We'll summarise three propositions from those rulings.

•                Items aren't plant if they form part of the premises - this is a question of fact and degree. [TR 2004/16 at 12-13; TR 2007/9 at 8-9]

•                Items that aren't part of the premises might be plant if they are closely related to the taxpayer's income earning activities. [TR 2004/16 at 29, TR 2007/9 at 38-39]

•                Things that are merely the 'setting' for the taxpayer's income earning activities aren't plant. [TR 2004/16 at 29, TR 2007/9 at 33, TR 1999/2[26] at paragraph 21]

54.      We don't think that the proposed accommodation building will qualify as 'plant' under the ordinary meaning. An accommodation building would be part of the premises. In any event, accommodation isn't closely related to the taxpayer's business activities; accommodation serves a generic function which isn't unique or particularly adapted to farming.

55.      However, we need to consider whether the proposed accommodation building will nevertheless qualify as 'plant' under the extended meaning.

The building will qualify as 'plant' under the extended meaning because it will be accommodation for people working on the farm.

56.      'Plant' is given an extended meaning in tax legislation. Subsection 45-40(1) of the ITAA 1997 says plant 'includes' a list of items listed in subsection (1). Read together, paragraphs (c) and (f) have the effect of including structural improvements used to accommodate employees, tenants, or sharefarmers engaged in agricultural or pastoral operations:

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; and

...

(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.

57.      We think the proposed accommodation building will meet the extended meaning of 'plant'. Paragraph 45-40(1)(f) treats structural improvements used to accommodate tenants engaged in farm operations as plant. The proposed building will be used to house tenants who will work on the farm, so it qualifies. We break down and apply the elements of paragraph 45-40(1)(f) in more detail in Table 3. We also think the proposed accommodation will have enough of a connection to the farming operations to qualify for reasons we discuss at paragraphs 58 through 61.

Table 3: extended meaning of 'plant' for farm accommodation in paragraph 45-40(1)(f)

58.      But we also think the accommodation must relate to farming, not just be provided to farming workers. As we touched on in Table 3, the elements in paragraph (f) need to be read together and in context. Taking each element separately without considering them together may lead to error in some cases. If accommodation must be provided for workers engaged in certain activities, that implies that the purpose for the accommodation may still need to relate to those activities in some way. It might not be enough that the accommodation is on a farm, and the tenants or employees happen to work on that farm, if the accommodation, properly characterised, didn't have a direct connection to the farm but served a separate or collateral purpose.

59.      To elaborate, we can think of a few (not exhaustive) examples where accommodation arrangements for farm workers wouldn't be 'plant' for lack of a farming connection. Accommodation might not qualify as plant under paragraph (f) where it:

•                wasn't suitably designed or conveniently located to allow the workers to carry out their duties (for example, it was on a remote part of the property some distance from the core farming operations, and allowed the occupants ready access to non-farming duties or activities)

•                had features suggesting a dominant recreational or lifestyle character (for example, swimming pools, tennis courts, substantial entertaining areas, or entertainment facilities)

•                had a disproportionate cost, size, or value compared to the duties carried out by the occupants (for example, a mansion for a worker with token or occasional duties)

•                housed mainly family members who were non-workers (or had token or limited duties)

•                was provided to workers who had no objective need or reason to live on the farm (for example, they have duties which could be completed remotely, or only require occasional visits).

60.      In those cases, we don't think the accommodation would be provided for tenants or employees engaged in or in connection with farming operations. The connection to farming operations would be too remote.

61.      Here, we think the accommodation will have enough of a connection to the farming operations to qualify as plant. The accommodation is for two workers who are required to work on the farm, and their child. The two workers have significant responsibilities - one is a partner in the farming business who works full-time on the farming operations, and the other is a part-time employee with administration and management duties. We think the building will be conveniently located to allow them to carry out their duties because it's centrally located. While the building has a substantial cost, we haven't characterised it as being obviously or grossly disproportionate in these circumstances. See paragraph 80.

62.      Therefore, we accept the proposed accommodation building qualifies as plant under paragraph 45-40(1)(f).

63.      It follows that the capital works deduction exclusion won't apply. Section 40-45 excludes capital works for which you can deduct amounts under Division 43. Division 43 allows deductions for construction expenditure. Construction expenditure excludes capital expenditure on 'plant'. Since the building is plant, capital works deductions aren't available.

Conclusion on Question 2

64.      The proposed building will qualify for temporary full expensing. The exclusion for capital works deductions isn't relevant: capital works deductions aren't available because the relevant expenditure is on structural improvements which qualify as 'plant'. The proposed building will meet all the remaining conditions for temporary full expensing.

Question 3

Will any reduction to the deductible amount(s) be required pursuant to subsection 40-25(2) of the ITAA 1997?

Summary

65.      No. The deduction for the proposed building won't need to be reduced on these facts. We accept that the proposed building will be used and installed for a wholly taxable purpose. We think it the cost and proposed use of the accommodation can be justified as a reasonable business judgment because there may be objective benefits for the business. Therefore, the taxpayer won't need to reduce or apportion the decline in value under subsection 40-25(2).

66.      This is a decision on these facts. Characterising the extent to which a farm accommodation building is used or installed for a taxable purpose will always turn on the facts and circumstances. While we don't see any circumstances which make it appropriate to reduce or deny the deduction here, slight changes in the facts may justify a different outcome.

Detailed reasoning

Temporary full expensing deductions must be reduced to the extent the asset is used or installed for a non-taxable purpose.

67.      Deductions for the decline in value of depreciating assets require that the asset must be used for a taxable purpose. Subsection 40-25(2) reduces your deduction to the extent the decline in value is attributable to a non-taxable purpose. It says:

You must reduce your deduction by the part of the asset' s decline in value that is attributable to your use of the asset, or your having it installed ready for use, for a purpose other than a taxable purpose.

68.      The example following that subsection suggests that an asset used partly for private purposes must be reduced to that extent (30% in the example).

69.      Analogous ATO guidance suggests this reduction needs to be done on a fair and reasonable basis. To apply subsection 40-25(2), you need to allocate the decline in value to taxable and non-taxable purposes. This can be described as 'apportionment' - a concept derived from general deductions, which the ATO has applied to depreciation provisions.[33] TR 2011/6 - in the context of business-related capital expenditure deductions in section 40-880 - says that legislation and extrinsic material doesn't prescribe a particular apportionment methodology, so the ATO will accept apportionment on a basis that's fair and reasonable under the circumstances and supported by the facts and evidence.[34] We think the same approach applies apply to working out deductions for the decline in value of depreciating assets under Division 40, including where the decline in value is worked out under the temporary full expensing rules.

70.      The concept of reducing deductions for the extent of any non-taxable purpose applies to temporary full expensing. The temporary full expensing rules in subdivision 40-BB interact with the standard capital allowance rules in Division 40. Section 40-25 of the ITAA 1997 allows a deduction for the decline in value of a depreciating asset. Sections 40-160 and 40-170 of the ITTP don't offer an alternative deduction. They simply modify how the decline in value under Division 40 is calculated. Since section 40-25 allows the deduction, it follows that the apportionment rule in subsection 40-25(2) continues to apply.

71.      We don't think the rule giving priority to the temporary full expensing rule excludes apportionment. Section 40-145 of the ITTP says that where temporary full expensing applies to an asset, you can't calculate the decline in value under other provisions:

If this Subdivision applies to work out the decline in value of a depreciating asset you hold for an income year, no other provision of this Act or the Income Tax Assessment Act 1997 applies to work out that decline in value.

As we've explained, subdivision 40-BB simply modifies the decline in value for the purpose of working out a Division 40 deduction. In contrast, the apportionment rule in subsection 40-25(2) reduces the deduction but isn't relevant to working out the asset's decline in value. While section 40-145 requires that sections 40-160 and 40-170 trump the standard rules for working out the decline in value, it doesn't exclude the requirement to apportion the primary Division 40 deduction to the extent of any non-taxable purpose.

72.      This interpretation is consistent with the ATO view and the relevant extrinsic material. See LCR 2021/3[35] at paragraph 73, which says that subsection 40-25(2) applies to reduce temporary full expensing deductions for non-taxable use:

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.

Similarly, paragraph 8.35 of the Explanatory Memorandum[36] which introduced subdivision 40-BB suggests the deduction should be reduced by any decline in value for non-taxable use.

73.      Since the apportionment rule applies to temporary full expensing, we need to determine if the proposal will apply the building partly for a non-taxable purpose.

We think providing accommodation for farm workers is a taxable purpose for a business entity running a farm.

74.      'Taxable purpose' includes things done for the purpose of producing income or carrying on business for that purpose. Paragraph 40-25(7)(a) says that taxable purpose includes the purpose of producing assessable income. Section 995-1 says something is done for 'the purpose of producing assessable income' if it's done:

•                for the purpose of gaining or producing assessable income, or

•                in carrying on a business for the purpose of gaining or producing assessable income.

75.      The definition of 'purpose of producing assessable income' in section 995-1 resembles subsection 8-1(1) in the general deduction provision. Both provisions have two limbs: the purpose of gaining or producing assessable income, and carrying on a business for the same purpose.

76.      Case law has established many propositions, principles, or glosses to help explain, interpret, and apply those phrases in the general deduction context. Very broadly those glosses suggest:

•                the outlay must be relevant or appropriate for the purpose of producing assessable income[37]

•                outgoings can be deductible even if the income earning or business advantages are indirect and remote[38]

•                purpose is usually determined objectively[39]

•                generally, it isn't for the Commissioner to determine how the taxpayer should run their business - business taxpayers have some scope to make reasonable business judgments[40]

•                however, where there's no obvious link to income, or the expense is disproportionate to any related income, an expense may be at least partly explained as the pursuit of another purpose[41]

•                payments may need to be apportioned if a taxpayer has both deductible and non-deductible purposes.[42]

77.      The similarity between the 'taxable purpose' definition and subsection 8-1(1) suggests similar principles would be relevant to determining whether an asset is used for a taxable purpose.[43]

78.      In this case, we think that the proposed building will be used for a taxable purpose because there's an objective connection between the building and the taxpayer's business activity.

•                Purpose needs to be assessed from the taxpayer's perspective. While the accommodation has a private or domestic aspect for the occupants, that isn't decisive in characterising the partnership's purpose.

•                It's impractical for workers to live off-site because the farm is in a remote area with limited alternative accommodation nearby (only one employee currently commutes from a house about 20 km away).

•                Generally, farms benefit from having workers living on-site because they are better able to protect and maintain property and farm assets.

•                The proposed occupants have significant responsibilities: one is a partner in the farming business who works full-time on the farming operations, and the other is a part-time employee with administration and management duties.

•                The building will be conveniently located to allow the occupants to carry out their duties because it's centrally located to the core farming operations.

79.      We are conscious that there are circumstances showing a possible non-taxable purpose here. Accommodation also serves private and domestic purposes. Here, one of the occupants is a family member and partner in a family business, and the other two occupants are their spouse and child. The cost for the building is substantial at $X, and the building will have a significant floor area of Xm2. Those facts suggest the building is much more than a basic dwelling. One purpose for the building could be for the business to give a comfortable or high-quality lifestyle home to a family member and their family.

80.      We haven't chosen to characterise this accommodation building as having a significant non-taxable purpose here which would require apportionment. We think there are objective benefits to the farming business from giving the occupants a house. They have significant responsibilities on the farm. It's unsuitable for them to continue to live with their parents (or parents-in-law) because they have their own child now. The business may suffer if the occupants decided to leave the farm to seek alternative employment or occupations elsewhere. While the cost for the property is substantial, it isn't obviously grossly disproportionate to the practical benefits to the farming business. A comfortable, high-quality residence might encourage the occupants to remain working on the farm. Despite the high price, we think the building could be justified as a reasonable business judgment.

81.      Since we've characterised the building as having a wholly taxable purpose from the taxpayer's perspective, we don't need to apportion the deduction under subsection 40-25(2).

82.      But a farm accommodation building would sometimes be better characterised as having a non-taxable purpose. Deductions for its decline in value may sometimes be reduced or disallowed where the ostensible business benefits were illusory, inconsequential, or clearly disproportionate to the cost. The examples we gave at paragraph 59 in Question 2 demonstrate our point. Those examples can't be justified as reasonable business judgments and the cost can't be wholly explained by the purpose of producing assessable income. In cases where the building's use could be characterised as having partly taxable purposes, the decline in value would need to be apportioned on a fair and reasonable basis. Where the taxable purpose was negligible or spurious, the deduction would be reduced to nil.

Conclusion on Question 3

83.      The deduction for the proposed building won't need to be reduced. We accept that the proposed accommodation will be used and installed for a wholly taxable purpose. Therefore, the taxpayer won't need to reduce or apportion the decline in value under subsection 40-25(2).

84.      This is a decision on these facts. Characterising the extent to which a farm accommodation building is used or installed for a taxable purpose will always turn on the facts and circumstances. While we don't see any circumstances which make it appropriate to reduce or deny the deduction here, slight changes in the facts may justify a different outcome.

[1] 'Improvement' was defined in former section 82KZC of the Income Tax Assessment Act 1936, but the definition was repealed in 2006. Broadly, improvements to land included the constructing buildings or other structures on land, or extending, altering, or adding to them.

[2] See, eg, TR 2022/4 Income Tax: section 100A reimbursement agreements at paragraph 10; Pearce D (2019) Statutory Interpretation in Australia, 9^th edition, LexisNeis Australia, at [2.41-2.42] pp. 66-67.

[3] LexisNexis Australia (2022) Encyclopaedic Australian Legal Dictionary, (entry for 'improvement') accessed at https://advance.lexis.com on 15 December 2022; Macquarie Dictionary Publishers (2022) The Macquarie Dictionary online, (entry for 'improvement') accessed at www.macquariedictionary.com.au on 15 December 2022; Mann T (ed) (2018) Australian Law Dictionary, 3^rd edition, (entry for 'improve') accessed at www.oxfordreference.com on 15 December 2022; Oxford University Press (2004) Australian Oxford Dictionary, 2^nd edition, (entry for 'improvement') accessed at www.oxfordreference.com on 15 December 2022.

[4] LexisNexis Australia (2022) Encyclopaedic Australian Legal Dictionary, (entry 'fixture') accessed at https://advance.lexis.com on 15 December 2022; Macquarie Dictionary Publishers (2022) The Macquarie Dictionary online, (entry for 'fixture') accessed at www.macquariedictionary.com.au on 15 December 2022; Mann T (ed) (2018) Australian Law Dictionary, 3^rd edition, (entry for 'fixture') accessed at www.oxfordreference.com on 15 December 2022; Oxford University Press (2004) Australian Oxford Dictionary, 2^nd edition, (entry for 'fixture') accessed at www.oxfordreference.com on 15 December 2022.

[5] Carter J (2015) Halsbury's Laws of Australia, LexisNexis Australia at [355-2365 through 355-2400], accessed at https://advance.lexis.com on 15 December 2022; LexisNexis Australia (2022) Encyclopaedic Australian Legal Dictionary, (entry for 'fixture') accessed at https://advance.lexis.com on 15 December 2022.

[6] Taxation Determination TD 97/24 Income Tax: what types of accommodation units used in a caravan/tourist park business can a taxpayer depreciate under section 42-15 of the Income Tax Assessment Act 1997 ('the Act') and what depreciation rates should the taxpayer use?

[7] Taxation Ruling TR 2012/7 Income tax: capital allowances: treatment of open pit mine site improvements.

[8] ATO Interpretive Decision ATO ID 2008/50 Income tax Capital Allowances: depreciating asset - improvement to land - gully dam.

[9] Eligibility for Division 40 deductions depends on meeting other conditions. For example, section 40-45 denies Division 40 deductions where capital works deductions are available under Division 43. We discuss this in Question 2.

[10] This isn't a condition for full expensing of the eligible second element of cost under section 40-170 of the ITTP.

[11] The building would most likely be a fixture, so the landlord would most likely be the building's legal owner.

[12] For eligible second element expensing under section 40-170 of the ITTP, you can start to use the asset or have it installed in an earlier income year.

[13] Assets can only be allocated to a low-value pool if they cost less than $1,000: see section 40-425 of the ITAA 1997.

[14] Broadly, the primary production depreciation rules apply to water facilities, horticultural plants, fodder storage assets, and fencing assets: see section 40-515 of the ITAA 1997.

[15] Broadly, you're a small business if you carry on business, and either your aggregated turnover for the previous year is less than $10 million, or your aggregated turnover for the current year is likely to be less than $10 million. You can't rely on the projected turnover for the current year if your aggregated turnover exceeded the threshold in the two previous income years. See section 328-110 of the ITAA 1997.

[16] It also says Division 40 doesn't apply where you could deduct amounts under Division 43 had the expenditure been incurred earlier or the capital works been used for a different purpose.

[17] There are time conditions. Capital works in Australia must have started after 21 August 1979. Capital works outside Australia must have started after 21 August 1990.

[18] The structural improvements must have started after 26 February 1992.

[19] Macquarie Dictionary Publishers (2022) The Macquarie Dictionary online, (entry for 'building') accessed at https://www.macquariedictionary.com.au on 21 December 2022; Oxford University Press (2004) Australian Oxford Dictionary, 2^nd edition, (entry for 'building') accessed at https://www.oxfordreference.com on 4 January 2023.

[20] Macquarie Dictionary Publishers (2022) The Macquarie Dictionary online, (entry for 'structure') accessed at https://www.macquariedictionary.com.au on 22 December 2022; Oxford University Press (2004) Australian Oxford Dictionary, 2^nd edition, (entry for 'structure') accessed at https://www.oxfordreference.com on 11 January 2023.

[21] Macquarie Dictionary Publishers (2022) The Macquarie Dictionary online, (entry for 'capital') accessed at https://www.macquariedictionary.com.au on 11 January 2023; Oxford University Press (2004) Australian Oxford Dictionary, 2^nd edition, (entry for 'capital') accessed at https://www.oxfordreference.com on 11 January 2023.

[22] Macquarie Dictionary Publishers (2022) The Macquarie Dictionary online, (entry for 'work') accessed at https://www.macquariedictionary.com.au on 11 January 2023; Oxford University Press (2004) Australian Oxford Dictionary, 2^nd edition, (entry for 'work') accessed at https://www.oxfordreference.com on 11 January 2023.

[23] Sun Newspapers Ltd and Associated Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337, at 363 per Dixon J.

[24] Taxation Ruling TR 2004/16 Income tax: plant in residential rental properties.

[25] Taxation Ruling TR 2007/9 Income tax: circumstances when an item used to create a particular atmosphere or ambience for premises used in a café, restaurant, licensed club, hotel, motel or retail shopping business constitutes an item of plant.

[26] Taxation Ruling TR 1999/2 Income tax: deductibility of expenditure incurred on tailings dams or similar mining residue, waste storage or disposal facilities.

[27] Macquarie Dictionary Publishers (2023) The Macquarie Dictionary online, (entries for 'domestic', 'residential', 'residence', and 'reside') accessed at https://www.macquariedictionary.com.au on 1 February 2023; Oxford University Press (2004) Australian Oxford Dictionary, 2^nd edition, (entries for 'domestic', 'residential', 'residence', and 'reside') accessed at https://www.oxfordreference.com on 1 February 2023.

[28] Macquarie Dictionary Publishers (2022) The Macquarie Dictionary online, (entry for 'tenant') accessed at https://www.macquariedictionary.com.au on 14 December 2022; Oxford University Press (2004) Australian Oxford Dictionary, 2^nd edition, (entry for 'tenant') accessed at https://www.oxfordreference.com on 14 December 2022.

[29] Macquarie Dictionary Publishers (2022) The Macquarie Dictionary online, (entry for 'sharefarmer') accessed at https://www.macquariedictionary.com.au on 14 December 2022; Oxford University Press (2004) Australian Oxford Dictionary, 2^nd edition, (entry for 'share') accessed at https://www.oxfordreference.com on 14 December 2022.

[30] Macquarie Dictionary Publishers (2022) The Macquarie Dictionary online, (entries for 'agricultural' and 'agriculture') accessed at https://www.macquariedictionary.com.au on 15 December 2022; Oxford University Press (2004) Australian Oxford Dictionary, 2^nd edition, (entries for 'agricultural' and 'agriculture') accessed at https://www.oxfordreference.com on 15 December 2022.

[31] Macquarie Dictionary Publishers (2022) The Macquarie Dictionary online, (entry for 'pastoral') accessed at https://www.macquariedictionary.com.au on 15 December 2022; Oxford University Press (2004) Australian Oxford Dictionary, 2^nd edition, (entry for 'pastoral') accessed at https://www.oxfordreference.com on 15 December 2022.

[32] Taxation Ruling TR 97/25 Income tax: property development: deduction for capital expenditure on construction of income producing capital works, including buildings and structural improvements.

[33] See, for example, Taxation Ruling TR 2020/1 Income tax: employees: deductions for work expenses under section 8-1 of the Income Tax Assessment Act 1997 at paragraph 45, which says that apportionment is necessary for depreciation claims on assets used for both producing assessable income and other purposes; Taxation Ruling TR 2019/4 Income tax: capital allowances: expenditure incurred by an entity that collects, processes, and provides multi-client seismic data at paragraph 17.

[34] See Taxation Ruling TR 2011/6 at paragraphs 24, 25, 34, and 161.

[35] Law Companion Ruling LCR 2021/3 Temporary full expensing.

[36] The Explanatory Memorandum (House of Representatives) to the Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Bill 2020.

[37] Ronpibon Tin No Liability; Tongkah Compound No Liability v Federal Commissioner of Taxation (1949) 78 CLR 47 at 56-57 per Latham CJ, Rich, Dixon, McTiernan and Webb JJ (High Court of Australia).

[38] Magna Alloys and Research Pty Ltd v Federal Commissioner of Taxation (1980) 49 FLR 183 at 208-209 per Deane and Fisher JJ (Federal Court of Australia - Full Court).

[39] See Robert G Nall Limited v Federal Commissioner of Taxation (1937) 57 CLR 695 at 711 per Dixon J (High Court of Australia); Magna Alloys and Research Pty Ltd v Federal Commissioner of Taxation (1980) 49 FLR 183 at 192 per Brennan J (Federal Court of Australia - Full Court).

[40] FCT v Snowden & Willson Pty Ltd (1958) 99 CLR 431 at 444 per Fullagar J (Williams J agreeing) (High Court of Australia).

[41] Fletcher v Commissioner of Taxation (1991) 173 CLR 1 at 17-19 per Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ (High Court of Australia).

[42] Fletcher v Commissioner of Taxation (1991) 173 CLR 1 at 17-19 per Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ (High Court of Australia).

[43] See the discussion in Pettigrew v FCT (1990) 20 ATR 1833 at pp.1849-1851 per Hill J (Federal Court of Australia - Full Court).