ATO ID 2007/142: Capital Works: expenditure on acquiring land
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
Are the costs incurred in constructing the taxpayer's rock wall excluded from being 'construction expenditure' because they are 'expenditure on acquiring land' pursuant to paragraph 43-70(2)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
No. The costs incurred in constructing the rock wall are not 'expenditure on acquiring land' pursuant to paragraph 43-70(2)(a) of the ITAA 1997 as the rockwall is not 'land'.

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. The taxpayer previously held a right to occupy the areas (seabed) upon and around which the rock wall was constructed and held 'quasi-ownership rights' over that land. The rock wall is a structural improvement for the purposes of subsection 43-20(2) of the ITAA 1997 and the costs of constructing it are 'construction expenditure' under subsection 43-70(1) of the ITAA 1997.

Reasons for decision
Summary: While the costs of constructing the rock wall are 'construction expenditure' under subsection 43-70(1) of the ITAA 1997, paragraph 43-70(2)(a) excludes 'expenditure on acquiring land' from 'construction expenditure'. The term 'expenditure on acquiring land' is not defined in the ITAA 1997. 'Acquire' has the ordinary meanings 'to come into possession of; get as one's own; to gain for oneself through one's actions or efforts'. 'Land' has the ordinary meanings of 'the solid substance of the earth's surface; the exposed part of the earth's surface, as distinguished from the submerged part; ground.' (The Macquarie Dictionary, 2001, rev. 3rd edn, The Macquarie Library Pty Ltd, NSW) Expenditure is not incurred 'on' a certain thing unless there is a sufficient connection and close association between the expenditure and the purpose, object or effect of the expenditure (Robe River Mining Co Pty Ltd v. FC of T 89 ATC 4606; (1989) 20 ATR 768). Expenditure should not be taken to also be directed to other, quite separate, ends. Accordingly, for the purpose of paragraph 43-70(2)(a) of the ITAA 1997 the term 'on' takes a restrictive interpretation. That is, expenditure 'on acquiring' a nominated thing (here, 'land') means only expenditure directly associated with the act of acquiring a thing that is, when it is acquired, 'land' within its ordinary meaning. The taxpayer did not incur expenditure on acquiring a thing that can be understood as land in the process of constructing the rock wall. The rock wall construction costs comprised the purchase of rock, geotextile material, services of builders, services of transporters, and so on. By the combination of those purchased materials and services, the taxpayer purchased what was necessary to construct a rock wall. The taxpayer already held 'quasi-ownership rights' over the land. They did not incur any expenditure in acquiring the land on which the rock wall stands, or on acquiring (while either submerged or raised above sea level) the land the rock wall confines. The expenditure incurred in constructing the rock wall did not include any expenditure on acquiring land in the ordinary sense. What the taxpayer got or gained for itself by the act of constructing the rock wall was, fundamentally, the rock wall itself. On completion of its construction, the rock wall was not 'land' within the relevant ordinary meaning of that word ('the solid substance of the earth's surface'). It does not matter that the rock wall has a predominant function of allowing and facilitating future port expansion by its role in permanently enclosing any reclaimed land. Identifying that functionality does not give the rock wall the character of land. Nor does it mean that it is 'land' that the taxpayer has acquired, in the context of paragraph 43-70(2)(a) of the ITAA 1997. The reclaimed land at all stages is separate and distinct from the rock wall - those two things are separately identifiable as a matter of visual identity and as to the manner of their formation. The costs are so directly and wholly incurred to construct the rock wall that they cannot reasonably be said to be 'on acquiring land'. The better view is that they are expenditure on constructing a structural improvement, being expenditure on acquiring a rock wall. The fact that the wall permanently encloses reclaimed land within the future port expansion area does not cause a change in the character of the rock wall construction expenditure. No land was acquired for the purpose of paragraph 43-70(2)(a) of the ITAA 1997 by reason of expenditure incurred in creating the thing that is the rock wall. For the reasons outlined above, the expenditure incurred in constructing the rock wall is not excluded from being construction expenditure pursuant to paragraph 43-70(2)(a) of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 Division 43 subsection 43-20(2) subsection 43-70(1) paragraph 43-70(2)(a)
Case references: Robe River Mining Co Pty Ltd v. FC of T 89 ATC 4606 (1989) 20 ATR 768
Other references: The Macquarie Dictionary, 2001, rev. 3rd edn, The Macquarie Library Pty Ltd, NSW
Subject references: Capital Works Deductions Improvement to land Structural improvement expenses