Edited version of private advice

Authorisation Number: 1052395668729

Date of advice: 14 May 2025

Ruling

Subject: Division 40 capital allowance

Question

Will a house used as accommodation of employees in connection with agricultural or pastoral operations constitute a depreciating asset as defined in Division 40 of Income Tax Assessment Act 1997 (ITAA 1997) to enable capital allowance to be claimed under section 40-25 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

XX/XX/20XX

Relevant facts and circumstances

1.  The taxpayer carries on a farming business in remote area on land located several hundred of kilometres from a major urban area.

2.  In 20XX, the taxpayer signed employment contracts with 2 employees on a full-time basis (the full-time employees). Under the contracts, the employees and their family are to be provided with accommodation on the farm.

3.  The employees are responsible for the day to day running of the farming business as well as financial and administrative duties.

4.  The employees, who are married, currently living in a property situated adjacent to the main shed and farm office which is at the centre of the farming property and operation. As there is limited accommodation available locally, the property is provided rent-free to employees as long as they are employed on the farm and in accordance with their employment contract. Both employees along with their children are the only individuals living at this property.

5.  The taxpayer also employs additional employees on a seasonal basis to work on the farm. All employees are provided with accommodation, as the nearest town is XX kms away and there is no accommodation available in the local area. These employees are housed either in donga accommodation 100m away from the main shed and farm office or in a house on farmland XX kms away owned by a related entity.

Proposed new accommodation

6.  The house that the full-time employees are currently living in is a very old homestead that was built a long time ago when the farmland was first cleared. This house requires extensive repairs and is approximately 600m from the main sheds and farm office on the farm.

7.  The taxpayer is proposing to build a new house on the farming property. The 'new house', once constructed, is intended to serve as accommodation for the full-time employees and their family while the old homestead is undergoing repairs which require it to be vacant for extended period. Once the old homestead is repaired, it will be used as additional workers accommodation. Providing a proper house will help attract long-term employees who can settle on the farm with their families, rather than living in donga accommodation.

8.  The taxpayer received planning approval from the local shire council to construct transportable accommodation and associated works that is to be used for the accommodation of workers engaged in certain industries that included the agricultural industry.

9.  The taxpayer will provide the proposed house to employees in accordance with the shire approval. The location of the house is XX kms from the main shed and farm office and will be on the same farmland block as the sheds and farm office and can be accessed without crossing a public road.

10.  The house will have X bedrooms, X bathrooms and a lounge and living room. External features also include a carport and undercover entertaining area.

11.  The construction contract was signed for a contract price of $XX and construction has commenced.

12.  The taxpayer will be the owner of the house and will pay for the whole construction cost. As owner, the taxpayer will have the choice of who they allow to use the house for accommodation.

13.  The house will be located on the farm to allow easy access to the farm office, sheds and workshop and is central to the farming properties. The house will be provided to the full-time employees as their residential accommodation so long as they are working on the farm.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 section 40-25

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

Income Tax Assessment Act 1997 section 40-30

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 subsection 40-45(2)

Income Tax Assessment Act 1997 Division 42

Income Tax Assessment Act 1997 Division 43

Income Tax Assessment Act 1997 section 43-10

Income Tax Assessment Act 1997 section 43-20

Income Tax Assessment Act 1997 subsection 43-20(1)

Income Tax Assessment Act 1997 subsection 43-20(2)

Income Tax Assessment Act 1997 subsection 43-20(3)

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

Income Tax Assessment Act 1997 subsection 43-70(2)

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

Income Tax Assessment Act 1997 section 43-140

Income Tax Assessment Act 1997 section 45-40

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

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

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

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

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

Income Tax Assessment Act 1997 subsection 995-5(1)

Income Tax Assessment Act 1936 former section 54

Income Tax Assessment Act 1936 former paragraph 54(2)(b)

Income Tax Assessment Act 1936 former section 57AA

Income Tax Assessment Act 1936 former Division 10D

Income Tax Assessment Act 1936 former subsection 124ZG(3)

Income Tax Assessment Act 1936 former section 124ZFB

Income Tax Assessment Act 1936 former paragraph 124ZFB(1)(a)

Reasons for decision

1.  Under Division 40, you may claim deductions for the decline in value of depreciating assets that you hold, to the extent to which you use the assets for a taxable purpose. However, under subsection 40-45(2), Division 40 does not apply to capital works for which you could claim deductions under Division 43. It is therefore necessary to first determine whether an amount can be or could be deducted under Division 43.

Division 43

2.  Broadly speaking, Division 43 provides a deduction for certain buildings and structural improvements (capital works).

3.  There are 2 categories of capital works that are deductible under Division 43:

•                     a building, or an extension, alteration or improvement to a building begun in Australia after 21 August 1979, or outside Australia after 21 August 1990[1]

•                     capital works (other than buildings and extensions, alterations or improvements covered above) that are structural improvements, or an extension, alteration or improvements to structural improvements begun after 26 February 1992 (whether in or outside Australia).[2]

4.  The terms 'building' and 'structural improvement' are not defined and therefore will take its ordinary meaning having regard to the statutory context in which it appears. Some examples of structural improvements to which Division 43 applies are listed in subsection 43-20(3) and include sealed roads, driveways, retaining walls and fences.

5.  The Macquarie dictionary[3] defines the relevant terms as follow:

'building' - a substantial or permanent fixed structure. They usually would have a roof and walls, and/or form an enclosure. Houses, factories, stables, and sheds are listed as examples.

'improvement' - are things, additions, or changes that increase the land's value, or make the use of the land more efficient.

6.  The proposed construction of the dwelling (henceforth referred to as house) that you used for accommodating your employees, being a building, would qualify as capital works.

Construction Expenditure

7.  Section 43-10 provides that an amount may be deducted for capital works for an income year if there is a construction expenditure area, a pool of construction expenditure for that area and you use 'your area' in the income year in a way set out in section 43-140.

8.  A pool of construction expenditure is so much of the construction expenditure incurred on capital works as is attributable to the construction expenditure area. Accordingly, a threshold requirement for a deduction in an income year under section 43-10 is that you incur 'construction expenditure'.

9.  'Construction expenditure' is defined in subsection 43-70(1) as capital expenditure incurred in respect of the construction of capital works, subject to the exclusions listed in subsection 43-70(2).

10.  Paragraph 43-70(2)(e) specifically excludes expenditure on 'plant' from being construction expenditure. As a result, where a capital work is also an item of plant, the capital work will not have a pool of construction expenditure area and will not be deductible under Division 43.

Meaning of plant

11. & Subsection 995-5(1) defines 'plant' as having the meaning given in section 45-40. Relevantly, subsection 45-40(1) states:

Plant includes:

(a)          articles, machinery, tools and rolling stock; and

(b)          animals used as beasts of burden or working beasts in a business, other than a primary production business; and

(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

(d)          structural improvements, other than a forestry road or structural improvements used for domestic or residential purposes, on land used in a business involving:

              (i)       planting or tending trees in a plantation or forest that are intended to be felled; or

              (ii)       felling trees in a plantation or forest; or

              (iii)       transporting trees, or parts of trees, that you felled in a plantation or forest to the place where they are first to be milled or processed, or from which they are to be transported to the place where they are first to be milled or processed; and

(e)          structural improvements, other than those used for domestic or residential purposes, that are used wholly for operations (carried out in the course of a business) relating directly to:

              (i)       taking or culturing pearls or pearl shell; or

              (ii)       taking or catching trochus, bêche-de-mer or green snails;

and that are situated at or near a port or harbour from which the business is conducted; 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.

12.  Notably, the extended meaning of 'plant' includes fences, dams and 'structural improvements' on land used in agricultural or pastoral operations.

13.  Paragraphs 45-40(1)(c) to (e) of the extended definition include 'structural improvements' other than those used for domestic or residential purposes (domestic or residential exclusion) on land used in carrying on agricultural or pastoral operations, forestry operations or pearling operations.

14.  However, under paragraph 45-40(1)(f) a structural improvement that falls within the domestic or residential exclusion might still qualify as plant where it is provided for the accommodation of employees, tenants or sharefarmers who are engaged in or in connection with the activities described in those paragraphs.

15.  The taxpayer is carrying on a grain and livestock business, so paragraph 45-40(1)(f) is the relevant provision that require consideration.

16.  In the context of paragraph 45-40(1)(c), the reference to 'fences, dams and other structural improvements might imply that the term 'other structural improvements' should be interpreted as improvements of a similar kind to fences and dams.

17.  However, the words need to be construed in the context of the surrounding provisions. The drafting of paragraph 45-40(1)(f) indicates 'structural improvements' has the same meaning across paragraphs

18.  45-40(1)(c) to (e). Its meaning must capture a structure of a kind that can provide accommodation to employees, tenants or sharefarmers engaged in the relevant activity referred to in that paragraph. A narrow reading of 'structural improvement' that excludes buildings would be incongruous with paragraph 45-40(1)(f) given it applies to improvements that are subject to the domestic or residential exclusion in paragraphs 45-40(1)(c), (d) and (e). Moreover, for the purposes of paragraph 45-40(1)(c), it is difficult to identify a 'structural improvement' in the nature of a 'fence or dam' that could be provided as residential accommodation.

Structural Improvements under Division 43 vs. section 45-40

19.  A review of the legislative history of Division 43 and Section 45-40 also support that structural improvements under these provisions can include a building.

Former paragraph 54(2)(b) of the Income Tax Assessment Act 1936 (ITAA 1936) and paragraph 45-40(1)(f) - 'plant' definition

20.  Former paragraph 54(2)(b) of the ITAA 1936[4] is the predecessor of paragraph 45-40(1)(f). When the provision was first introduced, accommodation provided to employees, tenants or sharefarmers was not carved out from the domestic or residential exclusion of structural improvements.[5]

21.  A specific amendment was made in 1952 to allow depreciation deductions for fences, dams and structural improvements that covered domestic or residential accommodation for employees, tenants or sharefarmers engaged in agricultural or pastoral pursuits.[6]

22.  At the same time, former section 57AA of the ITAA 1936 was introduced to allow a higher rate of depreciation for certain plant and improvements. Farm accommodation qualified for the higher depreciation rate. The Explanatory Memorandum to the Income Tax and Social Services Contribution Assessment Act (No 2) 1952[7] stated this would include buildings designed for accommodation. However, the amount that could be deducted was capped at a maximum amount of £pound;2,000 per person. For the purposes of applying the cap, a family was deemed to be one person (that is, accommodation provided to a family of 4 only qualified for £pound;2,000 not £pound;8,000). The balance of the cost of the farm accommodation was deductible under former section 54 of the ITAA 1936 at the normal depreciation rates.

23.  Thus, it was intended from the outset that 'structural improvements' in the context of the domestic or residential exclusion included buildings.

24.  The extended meaning of 'plant' in subsection 45-40(1) reflects the original provisions introduced in former paragraph 54(2)(b) of the ITAA 1936 and later amendments and there is nothing suggesting that there has been a change of the policy intent.

Structural improvements under Division 43

25.  The Explanatory Memorandum (EM) accompanying the Taxation Laws Amendment Act (No. 3) 1992 which introduced the former section 124ZFB of the ITAA 1936 (a predecessor provision of Division 43) noted that the ordinary meaning of the phrase 'structural improvement' is 'property constructed on land out of material or related parts which improves the land.' Therefore, the ordinary meaning of 'structural improvement' could include a house or other building.

26.  When deductions for structural improvements under subsection 43-20(2) were introduced in the predecessor provisions in the former paragraph 124ZFB(1)(a) of the ITAA 1936 in 1992 (i.e. the former Division 10D of the ITAA 1936), the legislature was conscious about the potential overlap between the existing category of buildings and the new category of structural improvements. Former paragraph 124ZFB(1)(a) stated:

This section applies to a structural improvement if (a) apart from this section, the structural improvement is not a building. (emphasis added)

27.  The provision had the effect of treating the structural improvement as a building for the purposes of allowing deductions for the original cost of certain income-producing structural improvements.

28.  The provision was re-written when Division 10D of the ITAA 1936 was re-written into Division 43 which states:

This Division also applies to capital works (other than capital works referred to in subsection (1))' begun after 26 February 1992 that are structural improvements ...(emphasis added)

29.  Whilst subsection 43-20(2) extends the scope of Division 43 deductions to structural improvements that are not buildings, it does not follow that structural improvements cannot include a building. The 1992 legislative amendments needed to exclude buildings begun after 26 February 1992 from the operation of subsection 43-20(2) so that all buildings could be dealt exclusively by subsection 43-20(1).

Case law in relation to the 'plant' definition

30.  The meaning of 'plant' under the former paragraph 54(2)(b) of the ITAA 1936 was considered in a number of cases.

31.  In Willeroo & Manbulloo Ltd v. Federal Commissioner of Taxation (1964) 111 CLR 336; 13 ATD 356, Kitto J considered the meaning of 'plant' under former section 54 of the ITAA 1936 and determined that a road train base consisting of:

•                     manager's quarters used to house a person who, in addition to being the manager of the road train, acted as a mechanic for the station's ordinary vehicles,

•                     staff quarters used for a part-time bookkeeper, a fitter, a handyman, a cook and five drivers,

•                     a garage used for the trains,

•                     a workshop and a store used in connection with the trains,

constituted structural improvements on the land used for the purposes of pastoral pursuits for which paragraph 54(2)(b) of the ITAA 1936 applied.

32.  In contrast, the taxpayer in Toomaroo Pty Ltd v Federal Commissioner of Taxation (1954) 10 ATD 421; (1954) 91 CLR 349 carried on a grazing business and purchased a building to accommodate its administrative function several hundred miles away from its pastoral property. The court found that the building was not a structural improvement on land used for pastoral operations as it was not on the pastoral property (i.e. it was located several hundred miles away from its pastoral property) and was for purposes that were only incidental to the taxpayer's pastoral operations.

33.  In W.F. Montague Pty. Ltd. V. FC of T 71 ATC 4048 at 4053, the Supreme Court of Victoria considered 'structural improvements' under paragraph 54(2)(b) of the ITAA 1936 extended to substantial variation of or addition to an existing building on land and therefore, would be deemed to constitute a unit of property for the purposes of section 54 of the ITAA 1936.

34.  It is also worth noting that in Case G76,[8] the Commissioner unsuccessfully argued the 'actual reality' was the taxpayer replaced the old house with a new and modern one for his and his family's personal use and that he had full control over the house and he was using the house for his own domestic or residential purposes.

35.  The Commissioner has also acknowledged through public rulings that buildings constitute a form of structural improvements. A notable example is in paragraph 31A of Taxation Ruling 97/25 - property development: deduction for capital expenditure on construction of income producing capital works, including buildings and structural improvements where the Commissioner considered expenditure on a cottage to be used for accommodation of farm employees. Paragraph 31A states:

... as the structural improvements, including the building,are provided for use as accommodation for employees engaged in agricultural or pastoral operations, they are 'plant' within the definition.

Application of paragraph 45-40(1)(f) to your circumstances

36.  Having regards to the above, the proposed house is a structural improvement for the purposes of paragraphs 45-40(1)(f) and 43-70(2)(e) as the extended meaning of structural improvements includes buildings and the broader statutory context does not suggest a contrary intention.

37.  The taxpayer is carrying on a grain and livestock business, making the house a structural improvement on land used for agricultural or pastoral operations.

38.  The house will be provided to the taxpayer's employees who are required to perform duties on the farm either full-time or part-time as a condition under their respective employment contract. Moreover, as a condition of the planning approval, the house can only be used as accommodation for the taxpayer's employees and cannot be used for any other purposes. It follows that the purpose of the house is to provide accommodation for employees of the farm.

39.  The proposed house, therefore, qualifies as plant under paragraph 45-40(1)(f). Accordingly, the proposed house would be excluded from having 'construction expenditure' under paragraph 43-20(2)(e) and would not fall within Division 43. Therefore, the expenditure incurred can be considered for deduction under Division 40.

Definition of 'depreciating asset'

40.  The deduction for the decline in value of a depreciating asset under Division 40 replaces the deduction for depreciation of 'plant' which was previously available under former Division 42.

41.  Section 40-25 allows you to claim deductions for the decline in value of depreciating assets that you hold at any time during the year, to the extent that you use the asset for a taxable purpose.

42.  A depreciating asset is defined in subsection 40-30(1) as an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used.

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

44.  The EM to New Business Tax System (Capital Allowances) Act No. 76 of 2001 says that 'depreciating asset' includes what was covered by the concept of 'plant' under former Division 42 (e.g. machinery and equipment) as well as other assets that are wasting in nature, i.e. an item with a limited effective life that loses value over that life because it is effectively used up. The rules for calculating depreciation deductions are based on similar principles to those used for calculating deductions for plant under former Division 42.[9]

45.  Regarding the exclusion of land in the definition of depreciating asset, it is noted that subsection 40-30(3) provides Division 40 applies to improvements to land and fixtures on land as if they were separate assets from the land whether removable or not.

46.  As neither 'improvements to land' nor 'fixtures to land' are defined, it is appropriate to look to other sources for guidance. As discussed above, 'improvements' are things, additions, or changes that increase the land's value, or under one definition, make the use of the land more efficient.[10]

47.  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).[11]

48.  In Taxation Ruling TR 2012/7 - capital allowances: treatment of open pit mine site improvements an open pit mine site improvement is considered to be an improvement to land that meets the conditions to be a depreciating asset. Paragraph 91 in TR 2012/7 states:

The Commissioner's view is that an improvement, as that word appears in Division 40, would constitute any alteration to land that is considered an enhancement to the user even if the alteration has not, in fact, increased the value of the land.

49.  Finally, the test for determining what is a 'fixture on land' was established by Latham CJ in the New South Wales Supreme Court decision of Australian Provincial Assurance Co Ltd v Coroneo (1938) 38 SR (NSW) 700 at 712:

The test of whether a chattel which has been, to some extent, fixed to land is a fixture is whether it has been fixed with the intention that it shall remain in position permanently or for an indefinite or substantial period, or whether it has been fixed with the intent that it shall remain in position only for some temporary purpose.

50.  The house is considered to be either be a fixture on land or an improvement to land in the general meaning of those terms. Therefore, the house is deemed to be a separate asset to the land for Division 40 purposes. The house meets the definition of a depreciating asset as it is an asset that will have a limited useful life and will decline in value and the exclusions don't apply.

51.  As the house the taxpayer is constructing falls within the definition of a depreciating asset in section 40-30 and it is not otherwise excluded under subsection 40-45(2), the taxpayer is entitled to claim a deduction under section 40-25 provided all other requirements in Division 40 are satisfied.

[1] Subsection 43-20(1).

[2] Subsection 43-20(2).

[3] Macquarie Dictionary Publishers (2022). Accessed at https://www.macquariedictionary.com.au

[4] According to IT 2308 - depreciation of plant acquired otherwise than by purchase, section 54 of the ITAA 1936 deals with the deprivation of 'plant or articles'.

[5] See Income Tax and Social Services Contribution Assessment Act (No 2) 1952.

[6] Ibid.

[7] EM to the Income Tax and Social Services Contribution Assessment Bill (No.2) 1952, Clauses 4 & 5.

[8] 75 ATC 548.

[9] Explanatory Memorandum to New Business Tax System (Capital Allowances) Act No. 76 of 2001, paragraph 1.7 and 1.13.

[10] Macquarie Dictionary Publishers (2022) The Macquarie Dictionary online.

[11] Macquarie Dictionary Publishers (2022) The Macquarie Dictionary online.