ATO ID 2004/392: Deductions: water access expenses
Date of decision: 31 March 2004
Year of income: Year ended 30 June 2003
Business line: Private Groups and High Wealth Individuals

Issue
Is the taxpayer, a primary producer, allowed a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the cost of a water access fee?

Decision
No. The taxpayer is not allowed a deduction under section 8-1 of the ITAA 1997 for the cost of the water access fee.

Facts
The taxpayer operates a primary production business growing crops. The taxpayer enters into an agreement with a commercial water supplier for the supply of reclaimed water. The agreement covers a period of many years. Under the agreement, the taxpayer is required to pay a water access fee in each of the first 6 years of the agreement. After the sixth year no further water access fee is payable. The water access fee provides the taxpayer with access to a certain number of megalitres of water each year and compensates the water supplier for the cost of connecting pipes to the taxpayer's property. The taxpayer separately pays for the water actually used in each year. The first payment of the water access fee is payable on the signing of the agreement and is referred to by the parties to the agreement as a 'sign on' fee. The water access fee is not a water licence and is not a right attached to the land.

Reasons for decision
Summary: Section 8-1 of the ITAA 1997 allows a deduction for all losses or outgoings to the extent that they are incurred in gaining or producing assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. However, no deduction is allowed where the losses or outgoings are of a capital, private or domestic nature, or are incurred in gaining or producing exempt income, or another provision prevents the taxpayer from deducting them. The payment of the water access fee is clearly incurred in gaining or producing the assessable income of the taxpayer. This is because the payments are made to secure the right to access water necessary to irrigate the taxpayer's crop, and thereby earn assessable income from the crop. As such the payments are incidental and relevant to the income earning activities of the taxpayer ( Ronpibon Tin NL and Tongkah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431). The payments are not of a private or domestic nature or incurred in gaining or producing exempt income and no other provision prevents a deduction of the amount. Therefore, the amounts will be an allowable deduction under section 8-1 of the ITAA 1997 so long as the amounts are not capital or of a capital nature. When considering whether expenditure has the character of revenue or capital Brennan J in Magna Alloys & Research Pty Ltd v. Federal Commissioner of Taxation (1980) 11 ATR 276; 80 ATC 4542, said at ATR 283; ATC 4548: It is necessary to ascertain in each case what expenditure is for, because a "bare payment of money is itself devoid of character", as Stephen J said in Cliffs International Inc , supra, at p. 4071. When the question is whether expenditure has the character of capital or of a revenue payment, as in the two cases last cited, the advantage for which the expenditure was incurred must be identified and the manner in which it "is to be relied upon or enjoyed" must be considered ( Sun Newspapers Ltd v. FC of T ; Associated Newspapers Ltd v. FC of T (1938) 61 CLR 337 at 363). The role of the advantage in the income-earning undertaking requires examination. When determining whether an outgoing is of a capital nature it is the character of the advantage sought by the taxpayer, and not the description given to the outgoing by the parties, which is the relevant issue ( Federal Commissioner of Taxation v. South Australian Battery Makers Pty Ltd (1978) 140 CLR 645; 78 ATC 4412; (1978) 8 ATR 879). Therefore, in the current case it is necessary to examine the actual benefit obtained by the taxpayer on payment of the initial amount, rather than to rely on the description provided by the parties of the amount being a 'sign on' fee. In return for the payments the taxpayer receives access to a set number of megalitres of water each year for the life of the agreement. The payments secure for the taxpayer an enduring benefit - that is, access to a set number of megalitres of water for a number of years. As the payments secure an enduring benefit for the taxpayer, the payments are of a capital nature ( Bell & Moir Corporation Pty Ltd v. Federal Commissioner of Taxation (1999) 42 ATR 421; 99 ATC 4738). As the payments are of a capital nature, they will not be deductible under section 8-1 of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 section 8-1
Case references: Ronpibon Tin N.L. and Tongkah Compound N.L. v. Federal Commissioner of Taxation (1949) 78 CLR 47 (1949) 8 ATD 431
Related ATO interpretative decisions: ATO ID 2002/276 (Withdrawn)
Subject references: Capital expenditure Deductions & expenses