ATO ID 2012/17: Capital Allowances: project pools - project - transport capital expenditure
Date of decision: 9 February 2012
Year of income: Year ended 30 June 2010
Business line: Public Groups and International

Issue
For the purposes of the project pool provisions of Subdivision 40-I of the Income Tax Assessment Act 1997 (ITAA 1997), do the taxpayer's mining operations that are designed to take advantage of enhancements to a shipping channel, which in turn are, along with other works, designed specifically to accommodate the bulk transport of the products on the taxpayer's mining operations, carried out by a Port Authority for the exportation of minerals constitute a project for which its contribution to the Port Authority's earthworks expenditure can be allocated to a project pool?

Decision
Yes. For the purposes of the project pool provisions of Subdivision 40-I of the ITAA 1997, the taxpayer's mining operations that are designed to take advantage of enhancements to a shipping channel, which in turn are, along with other works, designed specifically to accommodate the bulk transport of the products on the taxpayer's mining operations, carried out by a Port Authority for the exportation of minerals constitutes a project for which its contribution to the Port Authority's earthworks expenditure can be allocated to a project pool.

Facts
All legislative references are to the ITAA 1997 unless otherwise stated. The taxpayer's business is mining operations as defined in subsection 40-730(7). In order to export minerals extracted from its mining operations, the taxpayer entered into arrangements with a Port Authority to establish structural improvements to facilitate the overseas shipment of the minerals extracted from its mine. Subsequently, the Port Authority undertook earthworks specifically designed in combination with other works to enhance the shipping channel to accommodate large ships employed for the bulk transportation of minerals extracted from the taxpayer's mine. The taxpayer made a contribution to the Port Authority's costs in carrying out its earthworks. The taxpayer's contribution to the costs of the Port Authority in carrying out its earthworks qualifies as transport capital expenditure because it satisfies the tests established by the combination of paragraphs 40-865(1)(d) and 40-865(2)(a). The nexus that exists between the payment of the contribution and the benefit accruing to the taxpayer's mining operations resultant from the earthworks undertaken by the Port Authority provides the relevant connection necessarily required by section 40-865 for the earthworks contribution to be incurred in carrying on of the taxpayer's business for a taxable purpose (mining operations as defined in subsection 40-730(7) must be carried on for the purpose of producing assessable income which is, as defined in subsection 40-25(7), a taxable purpose). The taxpayer expects that its mining operations will have a finite commercial life.

Reasons for decision
Summary: Broadly speaking, the project pool provisions of Subdivision 40-I allow a taxpayer to deduct certain capital expenditure that qualifies under section 40-840 as a project amount, to be pooled and written off on the basis of the effective life of the project. For mining capital expenditure (section 40-860) or transport capital expenditure (section 40-865) to be a project amount, subsection 40-840(1) requires that a direct connection with carrying on of the mining operations in relation to which the mining capital expenditure or with the business in relation to which the transport capital expenditure is incurred. For other amounts of capital expenditure to be a project amount, paragraph 40-840(2)(c) requires a direct connection between the expenditure and the project you carry on or propose to carry on for a taxable purpose. If the capital expenditure is a project amount, subsection 40-830(1) allows the taxpayer to allocate the project amount to the project pool for that project. Once allocated, subsection 40-830(2) allows the taxpayer to deduct amounts for the project amount over the life of that project by applying the formula in subsection 40-830(3). To constitute a project for this purpose, the project must have a finite life. Consistent with this legislative design, for a project amount to be allocated to a project pool it must be directly connected with a project it carries on. Identifying the business undertaking or activities of the taxpayer that is directly connected to transport capital expenditure for the purposes of qualifying the expenditure as a project amount therefore identifies the undertaking to which the transport capital expenditure belongs. Provided this undertaking can be objectively determined to have a finite life and therefore meets the requirements of a project for the purposes of Subdivision 40-I, the project pool that belongs to this project is the relevant project pool to which the project amount can be allocated. In this case, the taxpayer can objectively determine that its business activities of mining operations will have a finite commercial life. Further, the expenditure contribution the taxpayer incurs is incurred in carrying on a business of mining operations, for the purpose of the project pool provisions, and is transport capital expenditure within the meaning of paragraphs 40-865(1)(d) and 40-865(2)(a) - that is, by way of contribution to the port authority's capital expenditure on structural improvements that are necessarily constructed for the port authority's transport facility. Consequently, identifying the project for which the taxpayer's expenditure contribution can satisfy the requirement for a project amount within subparagraph 40-840(1)(c)(ii) involves identifying the relevant business undertaking or activities of the taxpayer to which the expenditure contribution is directly connected. Despite the taxpayer's passive involvement in undertaking the earthworks that are necessary for the export shipping capacity its business ultimately requires, the earthworks carried out by the Port Authority is not a business undertaking or activity carried out by the taxpayer. In contrast, the mining operation of the taxpayer that export of the minerals extracted through the port is clearly a business undertaking or activity carried out by the taxpayer. The enhancements to the port's shipping channel, made possible by the earthworks carried out by the Port Authority, were deliberately designed to facilitate the export of minerals extracted from the taxpayer's mining operations. The expenditure contribution is, for that reason, directly connected to the taxpayer's mining operations that profit from the advantage this contribution produces. Pursuant to subparagraph 40-840(1)(c)(ii), the taxpayer's mining operations advantaged by incurring the earthworks contribution is therefore activities capable of being carried on in a project the taxpayer operates in relation to which it could allocate the earthworks contribution to a pool. These activities have a finite project life. Accordingly the taxpayer's mining operations that are designed to take advantage from enhancements to a shipping channel, which in turn are, along with other works, designed specifically to accommodate the bulk transport of the products on the taxpayer's mining operations, carried out specifically by the Port Authority for the purpose of facilitating the exportation of the taxpayer's minerals, constitute a project for which the taxpayer's contribution to the Port Authority's earthworks expenditure can be allocated to the taxpayer's mining project's project pool.

Legislative references: Income Tax Assessment Act 1997 Subdivision 40-I subsection 40-25(7) subsection 40-730(7) subsection 40-830(1) section 40-840 subsection 40-840(1) subparagraph 40-840(1)(c)(ii) paragraph 40-840(2)(c) section 40-860 section 40-865 paragraph 40-865(1)(d) paragraph 40-865(2)(a)
Subject references: Minerals & quarry materials transport Mining expenses Project amount Project pool Taxable purpose Uniform capital allowances system