Private ruling: Decline in value for water facilities
Date of advice: 11 October 2018
Published: December 2018
Ruling period: Income year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is Company X eligible to deduct an amount equal to the decline in value in respect of significant water facilities constructed and installed on a farm in pursuance of section 40-515 of the Income Tax Assessment Act 1997 (ITAA1997) for the year ended 30 June 20XX? | A1: Yes

Relevant facts and circumstances: Company X is a primary producer. Company X has incurred significant capital expenditure on the construction, installation and acquisition of component parts in respect of tanks. Expenditure on the tank construction and installation project commenced in July 20XX and has extended throughout the 20XX and 20XX financial years. The tanks are constructed of concrete and their primary purpose is conserving and conveying water. The tanks are designed so that water is retained within the concrete walls at each side of the tank and flows through the flat tank, exiting at the far end of the tank through an opening from which the slide gate has been removed. The tanks can be filled from either end and reversed as necessary. The water facilities will be used wholly for a taxable purpose. Company X has funded the project solely and no other entity can deduct an amount under Subdivision 40-F of the ITAA1997 for earlier capital expenditure of the water facility. There is no other party to the arrangement with whom Company X did not deal at arm’s length.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 40-F | Income Tax Assessment Act 1997 Section 40-515 | Income Tax Assessment Act 1997 Section 40 - 520 | Income Tax Assessment Act 1997 Section 40-525 | Income Tax Assessment Act 1997 Section 40-540 | Income Tax Assessment Act 1997 Section 995-1

Reasons for decision: Summary: Subdivision 40-F of the ITAA 1997 provides special rules for primary production depreciating assets. Paragraph 40-515(1)(a) of the ITAA 1997 provides that you can deduct an amount equal to the decline in value for an income year of a water facility. Section 40-540 states the decline in value of a water facility for the income year in which you incurred the expenditure is the amount of capital expenditure you incurred on the construction, manufacture, installation or acquisition of the water facility. Subsection 40-515(4) of ITAA 1997 requires that you must reduce your deduction for a water facility for an income year by the part of the facility’s decline in value that is attributable to the period (if any) in the income year when it was not wholly used: (a) in carrying on a primary production business on land in Australia; or (b) for a taxable purpose. Primary production business is defined in subsection 995-1(1) of the ITAA 1997. Subsection 995-1 lists the activities considered to be primary production activities. Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? states the Commissioners’ view of the factors used to determine if a taxpayer is carrying on a primary production business. A ‘taxable purpose’ is defined in section 40-25 of ITAA 1997 and includes under paragraph (a) the purpose of producing assessable income. Subsection 40-520(1) of the ITAA 1997 defines a water facility as: (a) 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; or (b) a structural improvement, or a repair of a capital nature, or an alteration, addition or extension to a structural improvement, that is reasonably incidental to conserving or conveying water. Examples of water facilities include a dam, tank, tank stand, bore, well, irrigation channel, pipe, pump, water tower and windmill. Subsection 40-525(1) of the ITAA 1997 requires that the capital expenditure you incurred on the construction, manufacture, installation or acquisition of the water facility must have been incurred primarily and principally for the purpose of conserving or conveying water for use in a primary production business that you conduct on land in Australia. The test ‘primarily and principally for the purpose of conserving or conveying water’ applies to tanks. In this case, Company X have constructed tanks for the primary purpose of conserving and conveying water on land in Australia. Company X use the water facility on a daily basis throughout the year wholly for a taxable purpose in their primary production business. Therefore, Company X is entitled to deduct the decline in value on the tanks which were constructed and installed on the farm.