ATO ID 2009/96: Capital Works - reclaimed land - structural improvement
Date of decision: 24 August 2009
Year of income: Year ended 30 June 2009
Business line: Public Groups and International

Issue
Is the reclaimed land behind a seawall a capital work that is a structural improvement; or an extension, alteration or improvement to a structural improvement under section 43-20 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
No. The reclaimed land behind a seawall is not a capital work that is a structural improvement, or an extension, alteration or improvement to a structural improvement under section 43-20 of the ITAA 1997 because the reclaimed land does not constitute a building, construction or any kind of significant feature. It is improved land that can be used for many purposes.

Facts
The taxpayer operates a maritime port on land and in the immediately adjacent waters and channels. The taxpayer will undertake significant dredging works to deepen its shipping channel. In order to dispose of the resulting dredging waste and to increase the area of land to be employed in its future operations, the taxpayer will use that material dredged from the site of the shipping channel to reclaim submerged and semi-submerged land that is adjacent to its dry land. The taxpayer intends that buildings and transport facilities will eventually be constructed on the reclaimed land. To reclaim the submerged and semi-submerged land, the material dredged from the site of the shipping channel will be deposited on the sea bed in such a way that it will build up the area to the point of no longer being submerged, that is, it will exist as dry land. These works are to be controlled and overseen by engineers. The controlled placement of the various materials is critical to the permanent stability of the reclaimed land.

Reasons for decision
Summary: (All legislative references are to the ITAA 1997 unless otherwise stated). Subsection 43-20(2) provides that Division 43 applies to 'capital works' that are structural improvements, or extensions, alterations or improvements to those structural improvements. Subsection 43-20(3) provides the following examples of structural improvements to which Division 43 applies: sealed roads, sealed driveways, sealed car parks, sealed airport runways, bridges, pipelines, lined road tunnels, retaining walls, fences, concrete or rock dams and artificial sports fields; and.... earthworks that are integral to the construction of a structural improvement... The term structural improvement is not defined and the explanatory memorandum to the Bill that introduced Division 43 does not provide any guidance. The term 'structural' connotes some form of building or construction. This indicates the requirement for the creation of a significant feature. The term 'improvement' is not necessarily to be understood as indicating a qualitative character in the sense that it makes something better in some sense or more valuable. It equally applies to describe an alteration in characteristics ( NT86/8971 and Commissioner of Taxation [1988] AATA 220; (1988) 19 ATR 3691; 88 ATC 694). Section 124ZFB of the Income Tax Assessment Act 1936 (ITAA 1936) was the predecessor to section 43-20 and the Commissioner is of the view that the former and current provision express the same idea. Section 1-3 states that the ITAA 1997 contains provisions of the ITAA 1936 in a rewritten form and that if the ITAA 1997 appears to have expressed the same idea in a different form of words in order to use a clearer or simpler style, the ideas are not to be taken to be different. The explanatory memorandum to Taxation Laws Amendment Bill No 3 of 1992 (No. 93 of 1992), which introduced section 124ZFB of the ITAA 1936, states (at paragraph 9.18) that earthworks which affect the general usefulness of the land are not treated as integral to the construction of a structure. The reclaimed land will be land of improved general usefulness and suitable for many purposes. As such, the reclaimed land will not constitute a building, construction or any kind of significant feature. Although the works that will culminate in the reclaimed land are strictly supervised and controlled to achieve a stable and enduring result, the works objectively result in improvement to land alone, that is, merely land on which any type of construction may occur in the future. Therefore, the reclaimed land does not constitute a structural improvement as contemplated for the general purposes of Division 43. Furthermore, the reclaimed land, because of its usefulness for many purposes, will not be integral to the subsequent construction of any structures built on that land. It follows that the reclaimed land behind a seawall does not constitute a structural improvement or an extension, alteration or improvement to a structural improvement under section 43-20.

Legislative references: Income Tax Assessment Act 1997 section 1-3 section 43-20 subsection 43-20(2) subsection 43-20(3)
Case references: NT86/8971 and Commissioner of Taxation [1988] AATA 220 (1988) 19 ATR 3691 88 ATC 694
Related ATO interpretative decisions: ATO ID 2003/669 | ATO ID 2003/670
Other references: Explanatory memorandum to Taxation Laws Amendment Bill (No. 3) 1992
Subject references: Capital Works Deductions Structural improvement expenses Capital Allowances CoE