ATO ID 2007/160: Capital Works: plant - rock wall
Date of decision: 31 May 2007
Year of income: Year ended 30 June 2004 Year ended 30 June 2005 Year ended 30 June 2006
Business line: Private Groups and High Wealth Individuals

Issue
Is the taxpayer's rock wall "plant" within the meaning of that term in section 45-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
No. The rock wall is not plant within the meaning of that term in section 45-40 of the ITAA 1997. The rock wall is part of the setting within which the taxpayer's income producing activities are undertaken.

Facts
The taxpayer's business is the provision of port facilities for shipping vessels for the purpose of loading and unloading goods, including providing facilities (such as leased land) and services supporting that activity. The taxpayer constructed a substantial rock wall enclosing an area of the seabed adjacent to an existing area of reclaimed port land used by the taxpayer. Over time substantial amounts of material dredged from shipping channels that are maintained by the taxpayer are permanently placed within the confines of the rock wall as a means of disposing of the material. The taxpayer will use the area enclosed by the rock wall as the basis for reclaimed land (port expansion land). Over time, the level of the retained material rises to the extent planned above the enclosed area's sea level. After water extraction and compaction, separately walled-off areas within the rock wall are sequentially capped with additional sand to become port expansion land that the taxpayer uses wholly for a taxable purpose in its business. The port expansion land substantially increases the capacity of the taxpayer to effectively and efficiently provide the facilities and services by which it derives income.

Reasons for decision
Summary: The rock wall is a structural improvement that qualifies as capital works for the purposes of Division 43 of the ITAA 1997. That Division allows a deduction for construction expenditure incurred in respect of the construction of capital works. However, construction expenditure excludes, among other things, expenditure on plant (paragraph 43-70(2)(e) of the ITAA 1997). 'Plant' is defined in section 45-40 of the ITAA 1997 to take its ordinary meaning and to include certain other things. None of the inclusions are applicable to the rock wall being considered here. This means that for the capital expenditure on the rock wall to be excluded from being construction expenditure, it would need to be expenditure on plant within the ordinary meaning of that term. Taxation Ruling TR 1999/2 provides the following overview of the ordinary meaning of plant: 20. '[Plant] in its ordinary sense...includes whatever apparatus is used by a business man for carrying on his business, - not his stock-in-trade which he buys or makes for sale; but all goods and chattels, fixed or moveable, live or dead, which he keeps for permanent employment in his business': Lindley LJ in Yarmouth v. France (1887) 19 QBD 647 at 658. Using capital works for the purpose of the taxpayer's income producing activities does not, of itself, make the capital works plant. For something that is a structural improvement to constitute plant, it must not merely be a setting in which the income producing activities are carried on ( J. Lyons & Co Ltd v. The Attorney-General (1944) 1 All ER 477, [1944] Ch 281). Where the function of the structural improvement is no more than to provide a location on which income producing activities can be carried on, then this will be another form of setting which indicates that the item is not plant. As noted in the UK case of Benson (Inspector of Taxes) v. Yard Arm Club Ltd [1979] 2 All ER 336; (1979) 1 WLR 347; (1979) 53 TC 67, per Buckley LJ (endorsing Templeman J in St John's School (Mountford and Knibbs) v. Ward (Inspector of Taxes) [1974] STC 69 at 77; 49 Tax Cas 524 at 533): If one asks the same question here - namely whether the chemistry laboratory and the gymnasium are the premises in which the business is carried on or are part of the plant with which the business is carried on - the answer must be the former. Education is not carried out with these particular buildings but in these particular buildings... In those cases where structural improvements have been held to be plant, the improvements were significantly integrated with the income producing operations. They played an active part in an industrial process and often were physically integrated with items of machinery. For example: In this case, the predominant function of the rock wall is to provide a 'setting' that: is concerned with protection of the site of the dredged material; and facilitates creation of land that will expand the location upon which the taxpayer's business is carried on. The rock wall is a necessary adjunct of a dredged material disposal process but that process has secondary relevance to the predominant function of the rock wall, which delineates and protects the site of the dredged material that is the basis for port expansion land. Accordingly, the capital expenditure incurred in constructing the rock wall is not expenditure on plant of the taxpayer within the meaning of that term in section 45-40 of the ITAA 1997. Division 40 of the ITAA 1997 does not apply to the structural improvement because subsection 40-45(2) of the ITAA 1997 excludes capital works for which you can deduct amounts under Division 43 of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 Division 40 subsection 40-45(2) Division 43 paragraph 43-70(2)(e) section 45-40
Case references: Yarmouth v. France (1887) 19 QBD 647
Related public rulings and determinations: Taxation Ruling TR 1999/2
Related ATO interpretative decisions: ATO ID 2007/142
Subject references: Capital Works Deductions Plant attached to land