Private ruling: Decline in value for Water facilities
Date of advice: 17 October 2017
Published: March 2018
Ruling period: Income year ended 30 June 2017
Date scheme commenced: 1 July 2017

Ruling: Q1: Is the company eligible to deduct an amount equal to the decline in value in respect of significant water facilities constructed and installed on an inland specific farm in pursuance of section 40-515 of the Income Tax Assessment Act 1997 (ITAA1997) for the year ended 30 June 2017? | A1: Yes

Relevant facts and circumstances: 1. The company is an inland primary producer, that farm the product through the whole life cycle. 2. The company constructed additional specific tanks in the income year ended 30 June 2017. This will increase overall production by approximately 35%. 3. The tanks are constructed of concrete and their primary purpose is conserving and conveying water over the product that lives in the tanks. 4. 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 and over the product, 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. 5. Expenditure on the tank construction and installation project commenced in July 2016 and has extended throughout the 2017 financial year. 6. The water facilities will be used wholly for a taxable purpose. 7. The company has funded the project solely and no other entity can deduct an amount under Subdivision 40-F of theITAA1997 for earlier capital expenditure of the water facility. 8. There is no other party to the arrangement with whom you did not deal at arm’s length.

Relevant legislative provisions: Subdivision 40-F of the Income Tax Assessment Act 1997 Section 40-515 of the Income Tax Assessment Act 1997 | Section 40-520 of the Income Tax Assessment Act 1997 | Section 40-540 of the Income Tax Assessment Act 1997

Reasons for decision: Summary: 9. Subdivision 40-F of the ITAA 1997 provides special rules for primary production depreciating assets. 10. 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. 11. Section 40-515(4) of ITAA1997 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: a. not wholly used in carrying on a primary production business on land in Australia; or b. not wholly used for a taxable purpose. 12. Primary production business is defined in subsection 995-1(1) of the ITAA 1997. 13. A taxable purpose is defined in section 40-25 of ITAA and includes under item (a) the purpose of producing assessable income. 14. 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. 15. Examples of water facilities include a dam, tank, tank stand, bore, well, irrigation channel, pipe, pump, water tower and windmill. 16. Subsection 40-525(1) of the ITAA 1997 requires that the capital expenditure the company 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. 17. As highlighted above, the test ‘primarily and principally for the purpose of conserving or conveying water’ applies to tanks. 18. Section 40-540 allows the decline in value of a water facility for the income year in which the company incurred the expenditure to be the amount of capital expenditure incurred on the construction, manufacture, installation or acquisition of the water facility. 19. In this case, the company have constructed tanks for the primary purpose of conserving and conveying water over the products that live in the tanks on land in Australia. They use the water facility on a daily basis throughout the year wholly for a taxable purpose. 20. Therefore, the company is entitled to deduct the decline in value on the specific tanks which were constructed and installed on the inland farm.

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