ATO ID 2003/1086: Capital Works: whether pool of construction expenditure reduced by grants received
Date of decision: 6 November 2003
Year of income: Year ended 30 June 2002
Business line: Private Groups and High Wealth Individuals

Issue
Is the pool of construction expenditure for the taxpayer's construction expenditure area, for the purposes of Division 43 of the Income Tax Assessment Act 1997 (ITAA 1997), reduced by an appropriate portion of the grants the taxpayer received to finance the construction of such capital works?

Decision
No. The pool of construction expenditure for the taxpayer's construction expenditure area is, pursuant to section 43-70 of the ITAA 1997, the capital expenditure the taxpayer incurred in respect of the construction of the capital works and is not reduced by any portion of the grants the taxpayer received to finance the construction of such capital works.

Facts
The taxpayer received a number of grants from a state government body for the specific purpose of constructing certain capital works used in the course of and for the purposes of their business. The taxpayer complied with the strict requirement that the grants only be expended for the specific purpose for which they were paid. The grants are included in the assessable income of the taxpayer as ordinary income. The amount of each grant is determined strictly on an objective basis. That is, although there are general rules that guide the taxpayer's decisions in respect of capital works, the grants are not specifically linked to the quantity or quality of the capital works constructed, their cost or to any particular capital works. The grants simply provide a source of finance from which capital works are constructed. The capital works the taxpayer constructs otherwise qualify for deduction under Division 43 of the ITAA 1997.

Reasons for decision
Summary: Broadly speaking, Division 43 of the ITAA 1997 allows a deduction for certain capital expenditure on qualifying capital works that are owned, leased or held by an entity to the extent that the works are used by the entity for the purpose of producing assessable income. The deduction is based, at least in part, on a pool of construction expenditure for the entity's particular area. This is defined in section 43-85 of the ITAA 1997 as 'so much of the construction expenditure incurred by an entity .....as is attributable to the construction expenditure area'. A separate construction expenditure area is created each time an entity undertakes the construction of capital works (subsection 43-75(6) of the ITAA 1997). 'Construction expenditure' is capital expenditure incurred in respect of the construction of capital works (section 43-70(1) of the ITAA 1997). Construction expenditure is determined on the basis of the actual cost incurred in respect of the construction of the capital works (Taxation Ruling TR 97/25). There is no basis in Division 43 of the ITAA 1997 on which the taxpayer must reduce a pool of construction expenditure for capital works it constructed by any portion of the grants it received to finance the construction of such capital works. Therefore, deductions allowable under Division 43 of the ITAA 1997 in respect of the amounts of construction expenditure the taxpayer incurred on capital works can be calculated without applying any portion of the grants to reduce those amounts.

Legislative references: Income Tax Assessment Act 1997 section 43-70 section 43-75 subsection 43-75(6) section 43-85
Related public rulings and determinations: Taxation Ruling TR 97/25
Related ATO interpretative decisions: ATO ID 2003/1085
Subject references: Building depreciation Capital allowances Construction expenditure area Government grants income Pool of construction expenditure Structural improvement expenses Uniform capital allowances system