ATO ID 2009/134: Capital Works: your area - tax law partnership
Date of decision: 4 August 2009
Year of income: Year ending 30 June 2008 Year ending 30 June 2009 Year ending 30 June 2010
Business line: Private Groups and High Wealth Individuals

Issue
Does the entity, commonly referred to as a tax law partnership, 'own' part of the construction expenditure area under subsection 43-115(1) of the Income Tax Assessment Act 1997 (ITAA 1997) for the purpose of establishing whether the entity is entitled to a deduction for capital works under Division 43 of the ITAA 1997?

Decision
No. The entity, a tax law partnership, does not 'own' part of the construction expenditure area under subsection 43-115(1) of the ITAA 1997. Each joint owner of the capital works owns a part of the construction expenditure area for the purpose of establishing whether each of them is entitled to a deduction under Division 43 of the ITAA 1997.

Facts
A number of individuals own, as tenants in common, a single residential property from which they derive rental income. This association of individuals satisfies the definition of partnership in subsection 995-1(1) of the ITAA 1997 because they are in receipt of ordinary income jointly. The property is a building to which Division 43 of the ITAA 1997 applies.

Reasons for decision
Summary: (All legislative references are to the ITAA 1997) Section 43-110 provides that: 'You can only get a deduction under this Division for an income year if you own, lease or hold part of a construction expenditure area of capital works. The area you own, lease or hold is called your area.' 'Your area' is the means used to establish the required connection or interest that an entity must have in relation to the capital works in order to be entitled to a deduction. In respect of owners, subsection 43-115(1) provides that 'your area' is the part of the construction expenditure area that you 'own'. The issue arises whether the entity, a 'tax law partnership', is identified, for the purposes of having a 'your area' under subsection 43-115(1), as owning that part of the construction expenditure area or whether the provision applies to the owners of the residential property. A 'tax law partnership', as described in the second limb of paragraph (a) of the subsection 995-1(1) definition of partnership (an expansion of the legal meaning of the word) is 'an association of persons (other than a company or a *limited partnership) ... in receipt of *ordinary income or *statutory income jointly ...' (and not carrying on business as partners). It is considered that the expanded definition of partnership contained in subsection 995-1(1) does not make available to the ensuing statutory entity the connection or interest that an entity must have in relation to the capital works in order to 'own' part of the construction expenditure area. This view is consistent with the fact that the reference to 'in receipt of ordinary income or statutory income jointly' in the definition of 'partnership' in subsection 995-1(1) does not take into account ownership of an asset, but purely focuses on how the income from an asset is received by the tax law partnership. The assets (including the capital works) associated with the tax law partnership are owned distinctly as interests as tenants in common. These interests are capable of being dealt with by each owner at their liberty and are not interests that must be held and applied exclusively for the purposes of a partnership and in accordance with a partnership agreement. The owners are not partners at law, but instead owners whose income is derived jointly from their common possession, but individual ownership of the property. The requirement of Division 43 to 'own' their part of the construction expenditure area is therefore satisfied by the owners individually in respect of their legal interest and not by the tax law partnership. Accordingly, the 'tax law partnership', does not 'own' capital works for the purposes of having a 'your area' under subsection 43-115(1). Each joint owner of the capital works owns a part of the construction expenditure area for the purpose of establishing whether each of them is entitled to a deduction under Division 43.

Legislative references: Income Tax Assessment Act 1997 Division 43 section 43-110 subsection 43-115(1) subsection 995-1(1)
Related ATO interpretative decisions: ATO ID 2009/135
Subject references: Capital Works Deductions Construction expenditure area Legal owner Pool of construction expenditure Capital Allowances CoE