Private ruling: Excavator
Date of advice: 26 August 2015
Published: August 2015
Ruling period: Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: 1 July 2014

Ruling: Q1: Is the excavator regarded as a water facility under subdivision 40-F of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 40-515 | Income Tax Assessment Act 1997 Section 40-520

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. 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. Examples of things reasonably incidental to conserving or conveying water include a culvert, a fence to prevent livestock entering an irrigation channel and a bridge over an irrigation channel. A deduction for the decline in value of a water facility is allowed in equal instalments over three income years (section 40-540 of the ITAA 1997), beginning in the year in which the expenditure is incurred. Tax Laws Amendment (2004 Measures No. 6) Act 2005 extended the meaning of a 'water facility'. Paragraph 6.14 and 6.15 of the Explanatory Memorandum states 6.14 Another amendment will be made to subsection 40-520(1) to clarify the term 'water facility'. This is because of uncertainty with the interpretation of the current provision in respect of whether the test of conserving or conveying water applies to capital expenditure on each individual component of a water facility or to the water facility as whole. Consequently, the term 'water facility' will be amended to include a structural improvement, or repair of a capital nature, or alteration, addition or extension to a structural improvement that is reasonably incidental to the purpose of conserving or conveying water. This amendment will apply to both water irrigation providers and primary producers. The test 'primarily and principally for the purpose of conserving or conveying water' is intended to apply to the expenditure itself rather than the purpose of the asset that may be modified to convey or conserve water. 6.15 The question of whether an item of capital expenditure is reasonably incidental to conserving and conveying water depends on the facts and circumstances. However, typical examples of expenditure meeting the reasonably incidental test could include a bridge over an irrigation channel, a culvert (a length of pipe or multiple pipes (usually concrete) that are laid under a road to allow the flow of water in a channel to pass under the road), or a fence preventing livestock entering an irrigation channel. An example of capital expenditure not falling within the reasonably incidental test is a bulldozer used to dig irrigation channels. [Schedule 6, item 3, subsection 40-520(1)] In this case, entity A wants to purchase an excavator. As highlighted above, the test 'primarily and principally for the purpose of conserving or conveying water' applies to the actual expenditure of purchasing the excavator rather than the purpose of the excavator. It is acknowledged, that the excavator will be used to maintain irrigation channels and re-battering slopes on dam walls and rebuilding irrigation channels. However, it is considered that an excavator is of a similar nature to a bulldozer and is not regarded as being reasonably incidental to conserving or conveying water. An excavator is not a dam or culvert or of a similar nature to conserve or convey water. Consequently, an excavator does not fall within the definition of 'water facility' in subsection 40-520(1) of the ITAA 1997. Therefore no deduction is allowable under section 40-515 of the ITAA 1997.

Relevant facts: Entity A operates a farming business. | Entity A would like to purchase an excavator. The excavator is to be used solely for maintaining the irrigation channels including re-battering slopes on dam walls and cleaning out and rebuilding irrigation channels all for the purpose of conserving and/or conveying water on the farm.