ATO ID 2011/3: Capital allowances: primary production - water facilities - sprinkler system used for frost protection
Date of decision: 19 March 2010
Year of income: Year ended 30 June 2009 Year ended 30 June 2010
Business line: Private Groups and High Wealth Individuals

Issue
Is an overhead sprinkler system used by the taxpayer solely for frost protection a 'water facility' as defined in paragraph 40-520(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes. An overhead sprinkler system used by the taxpayer solely for frost protection is a water facility as defined in paragraph 40-520(1)(a) of the ITAA 1997 because the system is plant that is primarily and principally for the purpose of conveying water.

Facts
The taxpayer carries on a primary production business of growing orchards on land in Australia. The taxpayer installed an overhead sprinkler system consisting of pipes, pumps and sprinklers. The sprinkler system is an item of plant. The system can be used for both regular irrigation and frost protection. The taxpayer uses the system solely for frost protection. An existing under tree irrigation system is used for regular watering of the orchards. An overhead sprinkler system is commonly used as a method of frost protection. The overhead sprinkler system supplies water to the surface of the ice-coated plant tissue at regular rapid intervals to maintain an ice/water interface until the temperature of the surrounding air has risen above 0º C and all ice formations on the plants have melted. As long as a film of water surrounds the surface of the ice-coated plant tissue, the release of heat in the transformation of water into ice ensures that the temperature of the plant tissue would not drop below 0º C (most plants do not suffer frost damage until the temperature drops below 0º C because the freezing point of the plant tissue liquid is below that of water). The design of the overhead sprinkler system, including sprinkler rotation speed, water application rate and uniformity of water distribution over the orchard ensures that the system is able to provide maximum protection using a minimum amount of water by supplying just the right amount of water at the right frequency to ensure a continuous ice/water interface over the required area.

Reasons for decision
Summary: The term 'water facility' is defined in subsection 40-520(1) of the ITAA 1997 to include plant or a structural improvement, or a repair of a capital nature, or an alteration, addition or extension, to plant or a structural improvement, that is primarily and principally for the purpose of conserving or conveying water (paragraph 40-520(1)(a)). As the overhead sprinkler system is an item of plant, the relevant issue here is whether the system is 'primarily and principally for the purpose of conserving or conveying water'. The predecessors of Subdivision 40-F of the ITAA 1997 [note that the provisions of Subdivision 40-F recast in a condensed form, and with minimal alteration, the rules of Subdivision 387-B of the ITAA 1997 (repealed as of 30 June 2001) that were previously transitioned into the ITAA 1997 from section 75B of the Income Tax Assessment Act 1936 (ITAA 1936) (repealed as of 14 September 2006)], required that a taxpayer must have incurred the expenditure on a water facility 'primarily and principally for the purpose of conserving or conveying water' (emphasis added). In considering this term for the purposes of former section 75B of the ITAA 1936, Taxation Determination TD 94/9 considers the test requires an examination of the primary and principal function or purpose of the result produced by incurring the expenditure where the expenditure is incurred for a dual purpose. Subdivision 40-F of the ITAA 1997 has retained this test in stating the conditions that must be satisfied for a deduction to be allowed (subsection 40-525(1) of the ITAA 1997). However, the current definition also separately specifies that in order to be considered to be a water facility, plant must be primarily and principally for the purpose of conserving or conveying water. In spite of this change, there has been no change in the threshold purpose required under each of these provisions. Accordingly, it is considered that the principles stated in TD 94/9 applies equally to paragraph 40-520(1)(a) of the ITAA 1997. Further, the principles can be applied to any expenditure incurred (not just where the expenditure is incurred for a dual purpose) to determine whether the expenditure meets the threshold purpose. An overhead sprinkler system can be used to convey water for use in different ways. The carrying of water through the pumps and network of pipes, the uniformity of the distribution of the water, the water application rate and the frequency of the wetting are different aspects of conveying and delivering water. For any particular system of conveying water, these aspects could vary to suit the use for which the water is conveyed. That is, an overhead sprinkler system can be used to both water plants and prevent frost damage. If the former is the relevant use, the system would have a certain water application rate and frequency of wetting to convey and deliver water in a way that is appropriate for the needs of the plants at various stages of growth taking into account the climatic and seasonal conditions. If frost protection is the relevant use, the system would have a different water application rate and frequency of wetting to convey and deliver water in a way that is appropriate for that use. In either case, the primary and principal function of the overhead sprinkler system is to convey water and deliver it for a particular use. In this case, the expenditure incurred by the taxpayer was to acquire the sprinkler system for the primary and principal purpose of conveying water to the orchard in a way that is appropriate for frost protection. Frost protection is a result produced by the application of water in a certain way when the temperature reaches a certain point. The sprinkler system provides the mechanism for which water can be conveyed and used in a particular way so that a particular result can be achieved by the application of water. It follows that the result produced by the expenditure is the conveyance of water for a particular use. It is of no difference that the taxpayer uses the sprinkler system to deliver water for frost protection rather than irrigation as both uses satisfy the test specified in paragraph 40-520(1)(a) of the ITAA 1997. Therefore, an overhead sprinkler system to convey water to the orchard in a way that is appropriate for frost protection and used by the taxpayer solely for frost protection is a 'water facility' as defined in paragraph 40-520(1)(a) of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1936 former section 75B
Related public rulings and determinations: Taxation Determination TD 94/9
Subject references: Irrigation & water supply equipment Primary production expenses Primary production structural improvement expenses Water conservation & conveying expenses