ATO ID 2015/12: Income tax: Capital Allowances: project pools - project amount - site preparation costs
Date of decision: 8 May 2015
Business line: Public Groups and International

Issue
Is the taxpayer's capital expenditure on relocating utilities, such as electricity lines and water pipelines from the construction site of a depreciating asset, an amount incurred for site preparation costs for depreciating assets for the purpose of subparagraph 40-840(2)(d)(ii) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes. The taxpayer's capital expenditure on relocating utilities, such as electricity lines and water pipelines is an amount incurred for site preparation costs for a depreciating asset for the purpose of subparagraph 40-840(2)(d)(ii) of the ITAA 1997, because this expenditure was necessary in making the site ready for the construction of the depreciating asset.

Facts
The taxpayer is undertaking a project of a finite life which involves the construction of a depreciating asset. The taxpayer will carry on the project for a taxable purpose. The construction of the depreciating asset was necessary before the project could start to operate. In order to commence construction of the depreciating asset, the taxpayer incurred expenditure on relocating existing utilities, such as electricity lines and water pipelines from the construction site. This expenditure does not form part of the cost of a depreciating asset that the taxpayer holds or held, and is not deductible outside of Subdivision 40-I of the ITAA 1997. The expenditure was incurred on or after 1 July 2005.

Reasons for decision
Summary: Broadly speaking, Subdivision 40-I of the ITAA 1997 allows a deduction over the project life for project amounts allocated to a project pool. To be a 'project amount' within subsection 40-840(2) of the ITAA 1997, the amount must be capital expenditure which, in addition to satisfying paragraphs 40-840(2)(a) to 40-840(2)(c) of the ITAA 1997, is one of the amounts specified in paragraph 40-840(2)(d) of the ITAA 1997. In order for the capital expenditure to be a project amount within subparagraph 40-840(2)(d)(ii) of the ITAA 1997, the amount must be incurred for site preparation costs for depreciating assets (except for horticultural plants, in draining swamp or low-lying land or in clearing land). The word 'preparation' is not defined for the purposes of Subdivision 40-I of the ITAA 1997 and therefore, will take its ordinary meaning shaped by the context in which it is found. The Australian Oxford Dictionary, 1999, Oxford University Press, Melbourne, relevantly defines the word 'preparation' as: n. The action or process of preparing or being prepared for use or consideration Similarly, the word 'prepare' is defined as: 1. Make (something) ready for use or consideration. Based on the ordinary meaning, the phrase 'site preparation' for the purposes of Subdivision 40-I of the ITAA 1997 includes doing things to make the site ready for its intended use. Therefore, capital expenditure incurred by a taxpayer to prepare a site for the construction of a depreciating asset may constitute site preparation costs for depreciating assets in accordance with subparagraph 40-840(2)(d)(ii) of the ITAA 1997 provided it is not for horticultural plants, in draining swamp or low-lying land or in clearing land. The expenditure is not for horticultural plants, or for draining swamp or low lying land. 'Clearing land' is not defined for the purposes of Subdivision 40-I of the ITAA 1997 and therefore, the words will take their ordinary meaning shaped by the context in which they are found. The Macquarie Dictionary Online defines 'clearing' as, inter alia: 35. To remove trees, undergrowth, etc., from (an area of land). As the expenditure was incurred in moving utilities, not trees or other items of undergrowth, it is not for clearing land. In this case, the taxpayer incurred capital expenditure on relocating utilities such as electricity lines and water pipelines. Without the taxpayer relocating the utilities from the construction site, the depreciating asset could not have been built. This expenditure was necessarily incurred to make the site ready for its intended use and accordingly such relocation expenses fall within the intended meaning of site preparation costs in subparagraph 40-840(2)(d)(ii) of the ITAA 1997. Accordingly, the capital expenditure constitutes an amount incurred for site preparation costs for a depreciating asset for the purpose of subparagraph 40-840(2)(d)(ii) of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 Subdivision 40-I section 40-830 section 40-840 subsection 40-840(2) paragraph 40-840(2)(a) paragraph 40-840(2)(b) paragraph 40-840(2)(c) paragraph 40-840(2)(d) subparagraph 40-840(2)(d)(ii)
Related ATO interpretative decisions: ATOID 2009/35
Other references: Australian Oxford Dictionary, 1999, Oxford University Press, Melbourne The Macquarie Dictionary Online, 2013, 6th edition, Macquarie Dictionary Publishers Pty Ltd
Subject references: Capital allowances Project pool Project amount Site preparation