ATO ID 2007/3: Capital Allowances: project pools - project - carry on for a taxable purpose
Date of decision: 17 November 2006
Year of income: Year ended 30 June 2006
Business line: Public Groups and International

Issue
Do the taxpayer's activities in obtaining specific standards of treatment from certain sewerage treatment providers amount to carrying on a project for a taxable purpose within the project pool provisions of Subdivision 40-I of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes. The taxpayer's activities in obtaining specific standards of treatment from certain sewerage treatment providers amount to carrying on a project for a taxable purpose within the project pool provisions of Subdivision 40-I of the ITAA 1997.

Facts
The taxpayer's business is managing a water catchment area and supplying water that complies with specific standards of water quality. Water, below the standard required by the taxpayer, flowed through various shire council water reticulation systems either untreated or through shire council sewerage treatment plants into the taxpayer's water catchment infrastructure. The taxpayer identified that a contributing factor towards this sub standard water was a failure by certain sewerage treatment providers to both meet the taxpayer's water standards and address a backlog of required sewerage treatment plant upgrades. In order to achieve the higher standards of water treatment it required, the taxpayer entered into an agreement with the regulator of sewerage treatment providers. In return for the providers expediting a number of separately identified works aimed at improving water quality, the taxpayer would pay part of the cost of those works. An improvement in water quality was to be achieved by both the repair and upgrade of council sewage treatment infrastructure and by the creation of new council sewerage treatment infrastructure within the taxpayer's catchment area. The agreement required supervision by the taxpayer to ensure the completion of specified work targets and progress payments in line with the forecasted due dates. Each of the separate works to be undertaken had different start and end dates and were conducted in different localities. The taxpayer is considered to have paid an amount to create or upgrade community infrastructure within paragraph 40-840(2)(d) of the ITAA 1997.

Reasons for decision
Summary: All legislative references in this Interpretative Decision are to the Income Tax Assessment Act 1997 . Broadly speaking, section 40-830 allows a deduction over the project life for project amounts allocated to a project pool. To be a 'project amount' within subsection 40-840(2), the amount must be capital expenditure which, among other things, is directly connected with a project you carry on or propose to carry on for a taxable purpose (paragraph 40-840(2)(c)). Paragraph 40-840(2)(c) refers to projects that taxpayers 'carry on or propose to carry on'. This means that a 'project' for the purposes of the project pool provisions of Subdivision 40-I requires something more than a passive involvement. It requires some active participation by the taxpayer. Further, it is inherent in the meaning of 'project life' in section 40-845 and in the calculation of the amount of the deduction in subsection 40-830(3) that a 'project' for the purposes of the legislation is something that has a finite life - a finite period from when it starts to operate until it stops operating. Ordinarily, the nature of the project will establish whether the project will operate for a finite period. Despite there being a number of separately identifiable works undertaken, all of the separate works are aimed at obtaining specific standards of water treatment from the sewage treatment providers in the taxpayer's catchment area. This necessitated entering into the agreement and actively administering the performance of the agreement to ensure the achievement of the agreed outcomes. Therefore, the activities of supervising the completion of specific work targets and progress payments in line with the forecast due dates of the agreement are activities undertaken by the taxpayer for the one distinct project. That is, obtaining from certain sewerage treatment providers water treatment of a required standard. The project starts to operate when the agreement is executed. The project will stop operating when the standard of water treatment required under the agreement is achieved. A further aspect of paragraph 40-840(2)(c) is that the taxpayer must carry on or propose to carry on the project for a taxable purpose. So far as is relevant here, 'taxable purpose' is 'the purpose of producing assessable income' (subsection 40-25(7)). Something is done for the 'purpose of producing assessable income' (as defined in subsection 995-1(1)) if it is done: For a project to be carried on for the purpose of producing assessable income: A project is carried on in the course of carrying on an existing business for the purpose of gaining or producing assessable income if the carrying on of that project occurs in the course of and as an integral part of carrying on that business (paragraph 30 of Taxation Ruling TR 2005/4). In the present case, the taxpayer's activities in obtaining specific standards of treatment from certain sewerage treatment providers do not amount to a project that the taxpayer carries on for the purpose of gaining or producing assessable income because, of themselves, the activities are not capable of the production of assessable income. However, the taxpayer's activities do amount to a project that the taxpayer carries on in carrying on a business for the purpose of gaining or producing assessable income. The taxpayer's business includes ensuring the water quality of the water catchment area and it is part of the taxpayer's business to pay amounts to other entities for the purpose of improving the standard of water quality in its catchment and administering how that money is spent. Accordingly, the taxpayer's activities do amount to a project that the taxpayer carries on for a taxable purpose and that project ends when the higher treatment quality required by the taxpayer is achieved.

Legislative references: Income Tax Assessment Act 1997 subsection 40-25(7) section 40-830 subsection 40-830(3) subsection 40-840(2) paragraph 40-840(2)(c) paragraph 40-840(2)(d) section 40-845 subsection 995-1(1)
Related public rulings and determinations: Taxation Ruling TR 2005/4
Subject references: Project amount Project life Project pool Capital Allowances CoE Uniform capital allowances system Taxable purpose