ATO ID 2014/37: Capital Allowances: capital works - construction expenditure - costs to build temporary roads and restoration costs
Date of decision: 27 November 2014
Business line: Private Groups and High Wealth Individuals

Issue
Is the capital expenditure incurred to build temporary roads and to restore the area afterwards pursuant to a development approval, 'construction expenditure' as defined in subsection 43-70(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes. The capital expenditure incurred to build temporary roads and restore the area afterwards pursuant to a development approval is 'construction expenditure' as defined in subsection 43-70(1) of the ITAA 1997.

Facts
The taxpayer derived assessable income from providing short-term accommodation in cabins constructed on their land. The taxpayer undertook a project to construct new cabins on their property. Based on the operation of paragraph 43-20(1)(a) of the ITAA 1997, the new cabins are capital works to which Division 43 of the ITAA 1997 applies. The taxpayer obtained a development approval (also known as a planning approval) from the council for the construction of the cabins. The development approval imposed a condition requiring the taxpayer to construct temporary roads to access the site during the construction period and to restore the area after used. The temporary roads are on public land adjoining the taxpayer's land. The taxpayer incurred capital expenditure on building the temporary roads and restoring the area afterwards as part of their project to construct new cabins.

Reasons for decision
Summary: All legislative references are to the ITAA 1997 unless expressed otherwise. A deduction for capital works under Division 43 is based on the amount of construction expenditure. 'Construction expenditure' is defined in subsection 43-70(1) as capital expenditure incurred in respect of the construction of capital works. Subsection 43-70(1) is a broad statement of inclusion, which is then subject to the specific exclusions set out in subsection 43-70(2). The costs for building temporary roads and restoring the area afterwards are not specifically excluded in subsection 43-70(2). Other than the specific exclusions in subsection 43-70(2), the phrase 'in respect of' in subsection 43-70(1) is another factor to take into account when determining if an amount qualifies as construction expenditure. The breadth of the words 'in respect of' indicates some connection or relation between the expenditure and the construction of the capital works. It is not only expenditure incurred in constructing the new cabins, but also expenditure incurred 'in respect of' the construction of the new cabins that will qualify for a deduction under Division 43. The Joint Explanatory Memorandum to the Income Tax Assessment Bill 1996 and Taxation Ruling TR 97/25 provide examples of construction expenditure that support this reading of subsection 43-70(1). For instance, preliminary expenses such as architects' fees, engineering fees and the cost of foundation excavation expenses are considered to be causally connected with, and therefore 'in respect of', the construction of the capital works. In the present case, the building of temporary roads and restoring the area afterwards are necessary conditions attached to the development approval. These enforceable requirements are set by council and must be completed as part of the taxpayer's cabins building project, thus are considered to be costs that flowed as a direct consequence of constructing the new cabins. There is a sufficient connection between the expenditure and the construction of the cabins. Accordingly, the capital expenditure is considered to be in respect of the construction of cabins, and is construction expenditure as defined in subsection 43-70(1). Note: Notwithstanding that the works on building temporary roads are on public land adjoining the taxpayer's land, the works are regarded as construction expenditure attributable to a 'construction expenditure area' in respect of that taxpayer under Division 43. Thus, any deductions that are allowable to the taxpayer will arise upon the completion of the construction of the cabins and apply for any income year during which the taxpayer uses the area for the purpose of producing assessable income.

Legislative references: Income Tax Assessment Act 1997 Division 43 paragraph 43-20(1)(a) subsection 43-70(1) subsection 43-70(2)
Related public rulings and determinations: Taxation Ruling TR 97/25
Related ATO interpretative decisions: ATO ID 2004/138 | ATO ID 2006/213 | ATO ID 2006/235
Other references: Joint Explanatory Memorandum to the Income Tax Assessment Bill 1996
Subject references: Capital Allowances Capital Works Deductions Capital expenditure