ATO ID 2003/879: Capital Works: deductibility of levy paid for the cost of reinstalling overhead electricity cables underground
Date of decision: 23 September 2003
Year of income: Year ended 30 June 2001
Business line: Private Groups and High Wealth Individuals

Issue
Can a taxpayer claim a deduction under section 43-10 of the Income Tax Assessment Act 1997 (ITAA 1997) for a levy paid as a contribution towards the capital expenditure in respect of reinstalling overhead electricity cables underground?

Decision
No. The taxpayer is not entitled to a deduction under section 43-10 of the ITAA 1997, as the taxpayer does not own, lease or hold part of a construction expenditure area of capital works as prescribed by sections 43-115 and 43-120 of the ITAA 1997.

Facts
The taxpayer owned a rental property from which assessable income was earned. The electricity supply to the property was converted from overhead mains to underground power during the 2001 income year through a joint state government and local council project by the installation of underground cables. The underground cables were installed largely on council land and owned by the council. The taxpayer contributed to the cost of reinstalling overhead mains underground by way of a levy.

Reasons for decision
Summary: 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 'your area' is used in a deductible way (including the use of 'your area' to produce assessable income (section 43-140 of the ITAA 1997). Subsection 43-20(2) of the ITAA 1997 provides that Division 43 of the ITAA 1997 applies to capital works that are structural improvements or extensions, alterations, or improvements to structural improvements whose construction commenced after 26 February 1992. It is considered that the installation of underground electricity cables is a structural improvement and is therefore a capital work under subsection 43-20(2) of the ITAA 1997. Section 43-110 of the ITAA 1997 explains that a taxpayer can only get a deduction for an income year if the taxpayer owns, leases or holds part of a construction expenditure area of capital works. The area a taxpayer owns, leases or holds is called 'your area'. In this case, the taxpayer is not entitled to a deduction under Division 43 of the ITAA 1997 for the levy paid as the taxpayer did not own, lease or hold part of the construction expenditure area of capital works being the underground cables. In other words, the taxpayer did not own the underground cables attached to their rental property. Nor were they granted a lease of the cables or did they hold the cables under a quasi-ownership right over land granted by an exempt Australian government agency (sections 43-115 and 43-120 of the ITAA 1997).

Legislative references: Income Tax Assessment Act 1997 section 43-10 subsection 43-20(2). section 43-110. section 43-115. section 43-120.
Related ATO interpretative decisions: ATO ID 2012/46
Subject references: Capital expenditure Construction expenditure area Pool of construction expenditure Rental property