ATO ID 2004/410: Capital Works: your area - earlier lessee's expenditure
Date of decision: 26 March 2004
Year of income: Year ended 30 June 2003
Business line: Private Groups and High Wealth Individuals

Issue
Does entering into a sublease of a structural improvement give the taxpayer an interest in a construction expenditure area that meets the definition of 'your area' contained in subsection 43-120(2) of the Income Tax Assessment Act 1997 (ITAA 1997) where the construction expenditure on the structural improvement was incurred by the sublessor?

Decision
No. The taxpayer's interest in a construction expenditure area does not meet the definition of 'your area' in subsection 43-120(2) of the ITAA 1997 because the interest was not acquired by way of assignment of a lease.

Facts
The taxpayer entered into a sublease of the sea bed that has a floating marina berth constructed upon it. The marina berth is part of a floating marina that was constructed by the sublessor of the sublease. The floating marina is a series of floating pontoons attached to concrete piles that are driven into the sea bed. The pontoons surround the concrete piles with heavy rubber rollers allowing the pontoons to rise and fall with the tide. The pontoons are prevented from moving horizontally by the piles. The pontoons form numerous berthing sections. Access to the berthing sections is provided by walkways. The pontoons are capital works to which Division 43 of the ITAA 1997 applies. The expenditure incurred by the sublessor to construct the marina is construction expenditure as defined in section 43-70 of the ITAA 1997. The capital works have a construction expenditure area and there is a pool of construction expenditure for that area as required under section 43-10 of the ITAA 1997. The taxpayer receives rental income from letting the marina berth.

Reasons for decision
Summary: Broadly speaking, Division 43 of the ITAA 1997 allows you to deduct an amount for construction expenditure on certain income producing capital works for an income year. More specifically, section 43-10 of the ITAA 1997 provides that an amount may be deducted for capital works for an income year if there is a construction expenditure area, a pool of construction expenditure for that area and you use 'your area' in a required way (including to produce assessable income; section 43-140 of the ITAA 1997). The first two conditions are satisfied in this case. 'Your area' has the meaning given in sections 43-115 and 43-120 of the ITAA 1997. How 'your area' is determined under those sections depends on whether you are an owner or lessee (or holder of a quasi-ownership right) of the part of the capital work on which the construction expenditure is incurred. For a lessee 'your area' is the part of the construction expenditure area that has been continuously leased from the time of completion by the lessee who incurred the expenditure. Subsection 43-120(2) of the ITAA 1997 provides that if an earlier lessee incurred the expenditure, 'your area' is that part of the construction expenditure area that has been continuously leased from the time of completion by that lessee or an assignee of that lessee's lease. It is only the original lessee who incurred the construction expenditure or an assignee of that lessee's lease that can have a 'your area'. The taxpayer did not obtain their lease by way of assignment from the sublessor who incurred the expenditure. The taxpayer is a sublessee, not an assignee of the sublessor's lease. Therefore, the acquisition of a sublease does not give the taxpayer an interest in a construction expenditure area that meets the definition of 'your area' contained in subsection 43-120(2) of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 section 43-10 section 43-70 section 43-115 section 43-120 subsection 43-120(2) section 43-140 Division 43
Subject references: Building depreciation Buildings Construction expenditure area Structural improvement expenses