Edited version of private advice

Authorisation Number: 1052296057484

Date of advice: 20 September 2024

Ruling

Subject: Deductions - temporary full expensing

Question 1:

Are the items of "Plant and equipment" eligible for the temporary full expensing rules in Subdivision 40-BB of the Income Tax (Transitional Provisions) Act 1997 (ITTPA 1997) in the income year of purchase (and is the full cost of the items deductible for income tax purposes)?

Answer 1

Yes, provided that the expense is not a primary production depreciation asset that can be deducted under 40-F of the Income Tax Assessment Act 1997 (ITAA 1997), or under the former provisions broadly equivalent to Subdivision 40-F.

Question 2:

Are you entitled to a deduction when the Plant A trees enter their first commercial season with a write-off rate of 7% under subsection 40-530(2) of the ITAA 1997?

Answer 2

Yes, provided you are running a horticulture business.

Question 3:

Are you entitled to a deduction when the Plant B trees enter their first commercial season with a write-off rate of 7% under subsection 40-530(2) of the ITAA 1997?

Answer 3

Yes, provided you are running a horticulture business.

Question 4:

Are you entitled to claim a deduction for the cost of the construction of the dam under section 40-515(1)(a) of the ITAA 1997?

Answer 4

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Background

Your trustee is Company A, with Person A being the sole director of Company A.

Person A is a health professional, who works as both an employee and runs her own health business. You provided details on the number of hours Person A works as an employee and in the health business.

Purchase of plantation

You purchased a plantation (the Plantation) and provided us with details on the purchase price and date. You purchased the Plantation from Person B and Person C. You commenced the Plantation from this date.

The purchase of the Plantation was formalised with a contract on a specified date. You provided us with a copy of the contract.

You provided us with details on where the Plantation is located.

You have provided details of the items in the purchase price which includes items of plant and equipment.

The simplified depreciation rules have not been applied to any of the plant and equipment items.

You provided us with details on the dates on when the plant and equipment were acquired.

The purchase of the Plantation did not include the land. The land is owned by Company B, which is controlled by Person B and Person C. You pay rent for the use of the land, which is a nominal amount which was agreed between you and the landowners.

Dam

You provided us with details on when the dam was first installed.

Person B and Person C did not claim the depreciation for the cost of the dam.

Plant A tree

You provided us with details on when sales from the Plant A commenced and that there were not sales during the ruling period due to unfavourable weather conditions.

Plant B tree

You provided us with details on when Plant B plantation commenced.

You provided us with an estimate on when the first commercial season for Plant B will commence, when they reach their intended maturity.

You provided a projection that showed revenue of insignificant amount from Plant B in the income year after the ruling period. These sales are from the young and developing Plant B.

History of the plantation prior to purchase

Person B and Person C are the parents of Person A, who ran the Plantation since a specified income year.

Person B and Person C did not make a profit from the Plantation.

Plant A and plant B experience

Person A undertook courses which includes visiting a Plant B farm to learn about Australian Plant B farming and finding Plant B through training and use of other means.

Running of the plantation

You do not employ any employees or contractors while you are growing the Plantation. When you require any additional assistance, you obtain the assistance of family and friends.

You provided us with an estimate on the number of hours Person A spends per month working on the Plantation, and the days of the week Person A works on the Plantation. The activities included watering, planting, trimming, pruning, picking of Plant A, mowing, weed and pest control, fence maintenance and maintenance of equipment.

Person A's experience in Plant A and Plant B is derived from helping their parents in setting up the farm since its inception. Prior to purchasing the Plantation, Person A sought available courses on the subject as well as utilising their parents' experience.

Person B and Person C are now of retirement age and desired to transfer the Plantation to younger members of the family so that the activity would continue and reach its full potential in the future. Person B and Person C can support and mentor Person A to continue the Plantation.

The business plan for the Plantation is aimed to develop the current olive plantation into a commercial entity. Further development of the farm and a Plant B plantation has been established. A maintenance plan is in place to prune the trees and protect the vermin and weeds, etc. To assist the watering, an irrigation system has been established which includes the development of the dam, a wastewater recycle plant, and a bore and pump system. Your profit and loss projection indicates that the revenue and profit peaking after 10 years from the date of the purchase of the Plantation.

Person A's record keeping process includes maintaining bank records and a file of invoices for financial purposes. Person A also kept notes of work being carried out to ensure the Plantation remains resilient to weather conditions and survives. Notes include watering of plants, pruning and picking of Plant A, weeding and trimming of excess branches.

Assumptions

We have not made a determination on the following:

•                     if you were running a primary production business in the 2022-23 income year, and

•                     if the value of the assets are considered to be of a fair value.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 75B

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 Subdivision 40-B

Income Tax Assessment Act 1997 section 40-25

Income Tax Assessment Act 1997 section 40-45

Income Tax Assessment Act 1997 subsection 40-50(1)

Income tax Assessment Act 1997 Subdivision 40-E

Income Tax Assessment Act 1997 Subdivision 40-F

Income Tax Assessment Act 1997 subsection 40-515

Income Tax Assessment Act 1997 subsection 40-515(1)

Income Tax Assessment Act 1997 paragraph 40-515(1)(a)

Income Tax Assessment Act 1997 paragraph 40-515(1)(b)

Income Tax Assessment Act 1997 paragraph 40-515(1)(d)

Income Tax Assessment Act 1997 subsection 40-515(2)

Income Tax Assessment Act 1997 paragraph 40-515(3)(b)

Income Tax Assessment Act 1997 subsection 40-520(1)

Income Tax Assessment Act 1997 subsection 40-520(2)

Income Tax Assessment Act 1997 subsection 40-520(4)

Income Tax Assessment Act 1997 section 40-525

Income Tax Assessment Act 1997 subsection 40-525(2)

Income Tax Assessment Act 1997 subsection 40-530(2)

Income Tax Assessment Act 1997 subsection 40-535(1)

Income Tax Assessment Act 1997 subsection 40-535(2)

Income Tax Assessment Act 1997 section 40-540

Income Tax Assessment Act 1997 subsection 40-545(2)

Income Tax Assessment Act 1997 section 40-551

Income tax Assessment Act 1997 subsection 40-555(1)

Income tax Assessment Act 1997 section 40-575

Income tax Assessment Act 1997 subsection 40-575(1)

Income Tax Assessment Act 1997 Division 43

Income tax Assessment Act 1997 section 43-010

Income Tax Assessment Act 1997 Subdivision 328-C

Income Tax Assessment Act 1997 subsection 328-110(5)(b)

Income Tax Assessment Act 1997 Subdivision 387-B

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

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

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

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

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

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

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

Income Tax (Transitional Provisions) Act 1997 section 40-525

Detailed reasoning

Subdivision 40-F

Subdivision 40-F of the ITAA 1997 sets out special rules in relation to certain primary production depreciating assets, including water facilities, horticultural plants and fencing assets.

You can deduct an amount equal to the decline in value for an income year (as worked out under Subdivision 40-F of the ITAA 1997) of a depreciating asset for a water facility, a horticultural plant, a fodder storage asset or a fencing asset (subsection 40-515(1) of the ITAA 1997).

However, under subsection 40-515(2) of the ITAA 1997, a deduction is only allowable if the applicable condition in subsection 40-525(2) of the ITAA 1997 is satisfied for depreciating asset.

The definition of a depreciating asset is found in section 40-30 of the ITAA 1997. Subsection 40-30(1) of the ITAA 1997 broadly defines a depreciating asset 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 an intangible asset.

Horticultural plant

A horticultural plant is a live plant or fungus that is cultivated or propagated for any of its products or parts (subsection 40-520(2) of the ITAA 1997).

Subsection 40-535(1) of the ITAA 1997 states horticulture includes propagation and cultivation of a horticultural plant in any environment (whether natural or artificial); propagation and cultivation of seeds. Bulbs, spores and similar things; and propagation and cultivation of fungi. Subsection 40-535(2) of the ITAA 1997 goes on to explain that the phrase 'use in commercial horticulture' means as for the purpose of producing assessable income in a business of horticulture.

Subsection 995-1(1) of the ITAA 1997 defines 'business' to include 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'.

Subsections 40-535(2) and 40-545(2) of the ITAA 1997 limit the deduction available under section 40-515 of the ITAA 1997 to horticultural plants used for commercial horticulture, which means use for the purpose of producing assessable income in a business of horticulture.

Is the applicable ownership or use condition satisfied?

To be eligible to claim a deduction under paragraph 40-515(1)(b) of the ITAA 1997 for the horticultural plants, the taxpayer must satisfy one of the following conditions in the table in subsection 40-525(2) of the ITAA 1997 for the plants:

Paragraph 5.17 of the Explanatory Memorandum (EM) to the New Business Tax System (Capital Allowances) Bill 2001 (NBTS CA Bill 2001) explains the purpose of the rules in subsection 40-525(2) of the ITAA 1997 is to:

...ensure that the taxpayer who can claim is the taxpayer with the least interest in the land who carries on a business of horticulture using the plants.

Horticultural expenditure

Subdivision 40-F of the ITAA 1997 contemplates the transfer of deductions for a horticultural plant from one taxpayer to another in certain circumstances. Paragraphs 5.32 and 5.33 of the EM to the NBTS CA Bill 2001 relevantly state:

5.32 The deduction for a horticultural plant...can be transferred from one taxpayer to another. When a taxpayer acquires a horticultural plant...from another entity in circumstances that makes the taxpayer eligible to claim the deduction, section 40-575 assists with the implementation of these rules by ensuring sufficient information is given to a taxpayer who acquired a horticultural plant...from the last entity in the chain who satisfied a condition in subsection 40-525(2) in relation to that horticultural plant...

5.33 The inclusion of amounts of establishment expenditure used by the entity in calculating the asset's decline in value, as well as the period of effective life used in the calculations for horticultural plants, must continue to be applied by the taxpayer who acquired the horticultural plant....

As a horticultural plant is a depreciating asset, its effective life is measured in accordance with the general rules for determining the effective life of depreciating assets. The taxpayer is able to self-assess the effective life or rely on the Commissioner's determination for specified plants is set out in section 43-010 of the ITAA 1997.

Paragraph 40-515(3)(b) of the ITAA 1997 limits the total deductions under paragraph 40-515(1)(b) to the amount of capital expenditure incurred on the horticultural plant.

Section 40-575 of the ITAA 1997 sets out a procedure by which a taxpayer may obtain information from the previous holder of the horticultural plant for working out the deductions still available. Subsection 40-575(1) of the ITAA 1997 provides that a taxpayer begins to satisfy a condition in section 40-525 of the ITAA 1997 for a horticultural plant may give the last entity that satisfied such a condition for the plant a written notice requiring the entity to give the taxpayer the following information:

(a)          the amount of establishment expenditure for the plant;

(b)          if the entity used the plant's *effective life to work out the decline in value of the plant - its effective life and the day on which it could first be used for *commercial horticulture.

When the decline in value starts

Subsection 40-530(2) of the ITAA 1997 states that a horticultural plant starts to decline in value in:

(a) if you are the first entity to satisfy a condition in subsection 40-525(2) for the plant - the income year in which the first commercial season starts; or

(b) if not - the later of the income year in which you first satisfied that condition and the income year in which the first commercial season starts.

First commercial season

A commercial season refers to the first season of the year in which the plant produces a commercial quantity of fruit, in the sense that the taxpayer is likely to reap a profit from the produce of the plant.

Water facility

In order to determine if a deduction is allowed in a single income year or to be spread over multiple income years, consideration is required into the nature of the expenditure and when it was incurred.

Subsection 40-520(1) of the ITAA 1997 defines water facility as:

(a)          plant or a structural improvement, or a repair of a capital nature, or an alteration, addition or extension, to plant or a structural improvement, that is reasonably incidental to conserving or conveying water.

(b)          A structural improvement, or a repair of a capital nature, or an alteration, addition or extension, to a structural improvement, that is reasonably incidental to conserving or conveying water.

Examples of a water facility include a dam, tank, tank stand, bore, well, irrigation channel, pipe, pump, water tower and windmill. Examples of things reasonably incidental to conserving or conveying water include a culvert, a fence to prevent livestock entering an irrigation channel and a bridge over an irrigation channel.

The annual depreciation deduction is equal to the amount of expenditure incurred on the water facility, ie the expenditure can be immediately deducted in the one year. This applies to water facilities a taxpayer starts to hold, or expenditure incurred on a facility at or after 7.30 pm (AEST) on 12 May 2015 (section 40-540 of the ITAA 1997).

If a taxpayer has already been eligible for a water facilities deduction for the acquisition, construction of manufacture of the facility, another taxpayer cannot claim the water facilities deduction for the cost of subsequently acquiring the facility (subsection 40-555(1) of the ITAA 1997). 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 (subsection 40-50(1) of the ITAA 1997).

Section 40-525 of the ITTPA 1997 provides that a taxpayer is taken as having deducted or being able to deduct an amount under Subdivision 40-F of the ITAA 1997 on a water facility if the taxpayer has deducted or could have deducted an amount for it under form Subdivision 387-B of the ITAA 1997 or section 75B of the Income Tax Assessment Act 1936 (ITAA 1936).

Fencing asset

Section 40-551 of the ITAA 1997 provides that the decline in value of a fencing asset for the year in which you incurred the expenditure is the amount of capital expenditure you incurred on the construction, manufacture, installation or acquisition of the fencing asset, which an entity starts to hold or incurs on or after 7.30pm (EAST) on 12 May 2015.

A fencing asset is defined in subsection 40-520(4) of the ITAA 1997 as:

(a)          an asset or a structural improvement that is a fence, or

(b)          a repair of a capital nature, or an alternation, addition or extension, to a fence.

The Explanatory Memorandum to the Tax Laws Amendment (Small Business Measures No 2) Bill 2015 states, at paragraph 2.40, that: 'A fencing asset is an asset or structural improvement that is a fence, or a repair, or an alternation, addition or extension to a fence.' Further, at paragraph 2.41 it states: 'The term 'fence' takes it ordinary meaning and includes an enclosure or barrier, usually of metal or wood, as around or along a field, or paddock. The term 'fence' extends to parts or components of a fence including, but not limited to, posts, rails, wire, droppers, gates, fittings and anchor assemblies.'

Temporary full expensing

Temporary Full Expensing (TFE) means the immediate deduction of the cost of depreciating assets in accordance with the provisions in Subdivision 40-BB of the ITTPA 1997. For the purposes of Division 40, the Temporary Full Expensing (TFE) rules in Subdivision 40-BB of the ITTPA 1997 modify the decline in value of qualifying depreciating assets held for an income year by allowing eligible entities to claim an upfront deduction for the cost of those depreciating assets. Temporary full expensing supports businesses and encourages investment, as eligible businesses can claim an immediate deduction for the business portion of the cost of an asset in the year it is first used or installed ready for use for a taxable purpose.

Section 40-25 of the ITAA 1997 allows deductions for the decline in value of depreciating assets to the extent the asset's decline in value is attributable to its use, or it being installed ready for use, for a taxable purpose.

Small business entity

Section 40-155 of the ITTPA 1997 provides for businesses with a turnover under $5 billion that the section covers you for an income year if:

You are a small business entity for an income year (the current year) if:

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

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

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

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

Eligible assets

Subsection 40-150 of the ITTPA 1997 provides to be eligible for temporary full expensing, the depreciating asset must be:

•                     new or second-hand (if it is a second-hand asset, only available for entities with an aggregated turnover of below $50 million)

•                     first held by the entity at or after 7.30pm AEDT on 6 October 2020

•                     first used or installed ready for use by you for a taxable purpose between 7.30pm AEDT on 6 October 2020 and 30 June 2023.

An asset is an eligible asset where the following requirements are satisfied:

•                     the asset is not covered under Division 43 of the ITAA 1997 for buildings and other capital works. It is also not an asset to which section 40-45 of the ITAA 1997 states is an asset Division 40 of the ITAA 1997 does not apply (subsection 40-150(2) of the ITTPA 1997),

•                     it is located in Australia and is used principally in Australia for the principal purposes of carrying on its business (subsection 40-150(3) of the ITTPA 1997), and

•                     it is not allocated to a low-value pool or software development pool under Subdivision 40-E of the ITAA 1997 or it is a primary production depreciation asset that can be deducted under Subdivision 40-F of the ITAA 1997 (subsection 40-150(4) of the ITTPA 1997).

Question 1

Are the items of "Plant and equipment" eligible for the temporary full expensing rules in Subdivision 40-BB of the Income Tax (Transitional Provisions) Act 1997 (ITTPA 1997) in the income year of purchase (and is the full cost of the items deductible for income tax purposes)?

Application to your circumstances

Providing that your activities would constitute that of a business, and your activity commenced during the ruling period, with an aggregated turnover of less than $10 million, you are considered to be a business in relation to section 328-110 of the ITAA 1997 and Subdivision 40-BB of the ITTPA 1997.

You acquired all the assets on a specified date when you entered into a formal contract to purchase the Plantation, which was before 30 June 2023.

We provided you with the expenses which are considered to be primary production depreciating assets that have been deducted or being able to be deducted under Subdivision 40-F of the ITAA 1997 (or under the former provisions broadly equivalent to Subdivision 40-F).

The Commissioner has concluded that there was a previous entitlement for the depreciating assets to claim a deduction under the former provisions broadly equivalent to Subdivision 40-F. Therefore, you are not entitled to a deduction for the above-mentioned expenses under either Subdivision 40-BB of the ITTPA 1997 or 40-F of the ITAA 1997.

The other items of plant and equipment would qualify under the temporary full expensing provisions provided they have been used for a taxable purpose. Temporary full expensing deductions are to be reduced to the extent that the asset is installed or used for a non-taxable purpose.

Question 2

Are you entitled to a deduction when the Plant A trees enter their first commercial season with a write-off rate of 7% under subsection 40-530(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Application to your circumstances

The Plant A trees were acquired by you when you purchase the Plantation. You purchase the Plant A tree for the written down value from the previous owners. The previous owners did not produce a profit from the Plant A trees.

Providing you carry on a primary production business when the Plant A enter their first commercial season, you will be considered to be carrying on a business of horticulture on the property within the meaning of subsection 40-525(2) of the ITAA 1997. Consequently, it will be considered that you will meet the requirement in paragraph (a) of the condition at item 2 of the table in subsection 40-525(2).

The Commissioner accepts that the Plant A trees have an effective life of 30 years or more for the purposes of section 40-545, this results in a straight-line write-off at a rate of 7%. A deduction of 7% would be allowable under section 40-515(1)(b) when the Plant A enter their first commercial season provided you are running a business of horticulture (subsection 40-530(2) of the ITAA 1997).

Question 3

Are you entitled to a deduction when the Plant B trees enter their first commercial season with a write-off rate of 7% under subsection 40-530(2) of the ITAA 1997?

Application to your circumstances

The Plant B trees were acquired by you when you purchase the Plantation.

Providing you carry on a primary production business when the Plant B enter their first commercial season, you will be considered to be carrying on a business of horticulture on the property within the meaning of subsection 40-525(2) of the ITAA 1997. Consequently, it will be considered that you will meet the requirement in paragraph (a) of the condition at item 2 of the table in subsection 40-525(2).

The Commissioner accepts that the Plant B trees have an effective life of 30 years or more for the purposes of section 40-545, this results in a straight-line write-off at a rate of 7%. A deduction of 7% would be allowable under section 40-515(1)(b) when the Plant B enter their first commercial season (subsection 40-530(2) of the ITAA 1997), provided you are running a business of horticulture.

Question 4

Are you entitled to claim a deduction for the cost of the construction of the dam under section 40-515(1)(a) of the ITAA 1997?

Application to your circumstances

The dam was installed in a specified year by the previous owners. The Commissioner has concluded that there was a previous entitlement for the dam by the previous owners under the former provisions broadly equivalent to Subdivision 40-F. Therefore, you are not entitled to a deduction under section 40-515(1)(a) for the cost of the dam in the purchase of the Plantation, nor are you entitled to a deduction under Subdivision 40-B.