Private ruling: Water facilities
Date of advice: 26 May 2022
Published: August 2022
Ruling period: 1 July 20XX - 31 December 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will Company A qualify for a deduction under section 40-515 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of capital expenditure incurred on a pipeline and onsite storage tanks? | A1: Yes.

Relevant facts and circumstances: 1. Company A carries on a business of primary production in a recirculating aquaculture system (RAS). 2. Company A's site contains: (a) A structure which contains the RAS which consists of • Husbandry recirculating aquaculture units consisting of raceways connected to inflow pipes and outflow drains and pipes leading to a sump house and multistage filtration system. • Filtration units and ultrafiltration units (filtration units). (b) The storage tanks and haulage tankers (which convey water to the storage tanks from offsite). In the future an intake pipeline (pipeline) will be constructed which will be connected to the storage tanks and/or a reservoir. (c) Perimeter bund wall. 3. The water contained in the RAS is the water used for production and is constantly in motion. The water discharged from the RAS is cleaned and then removed from the site by discharge pipework connected to a sewerage treatment plant. This waste water does not enter the storage tanks. 4. The water in the storage tanks is stored in reserve to be moved to the RAS when required. 5. Currently, the water in the storage tanks is trucked in on water haulage tankers. 6. To circumvent reliance on an external source, Company A will build its own pipeline. The water from the pipeline will be pumped directly to the storage tanks for storage onsite. 7. This ruling relates to expenditure incurred or to be incurred in the ruling period on: (a) Acquisition or construction of the following specific depreciating assets: • A number of existing storage tanks, • the proposed pipeline, pump station and pump equipment and proposed storage tanks, (a) Costs of research, design and surveys pertaining to the construction of the pipeline, pump station and pump equipment (b) Costs of maintaining • the depreciating assets mentioned in (a) of this paragraph, and • other depreciating assets which Company A has already acquired outside of the ruling period which meet the definition of 'water facility'

Relevant legislative provisions: Section 40-515 of the Income Tax Assessment Act 1997

Reasons for decision: Summary: Company A qualifies for a deduction under section 40-515 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of capital expenditure incurred on the pipeline and onsite storage tanks. | Detailed Reasoning - Detailed reasoning: Subdivision 40-F of the ITAA 1997 allows immediate deductions for capital expenditure incurred on certain depreciating assets used in primary production. One of these depreciating assets is a 'water facility' (paragraph 40-515(1)(a) of the ITAA 1997). If the expenditure was incurred prior to 12 May 2015, but after 1 July 2004, it would have qualified for deduction spread over three years. Subsection 40-520(1) of the ITAA 1997 relevantly defines 'water facility' as: a) plant or a structural improvemen t,...that is primarily and principally for the purpose of conserving or conveying water; or b) a structural improvement ,...or an alteration, addition or extension, to a structural improvement, that is reasonably incidental to conserving or conveying water. The legislation provides examples of a water facility which include a dam, tank, tank stand, bore, well, irrigation, 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. In order to claim a deduction for the decline in value of a water facility, the conditions in subsection 40-525(1) of the ITAA 1997 must be satisfied. That is, the capital expenditure you incurred on the construction, 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. | Detailed Reasoning - Application to your circumstances: The first limb of the definition in paragraph 40-520(1)(a) sets the following requirements for the depreciating assets the subject of this ruling to be a water facility as relevant to your circumstances: | Detailed Reasoning - 'Plant or structural improvement': The ordinary meaning of 'plant' is extended by section 45-40. Relevantly, these extensions include 'articles, machinery, tools, rolling stock', fences, dams and structural improvements used in agricultural and pastoral operations. The ordinary meaning of the word 'plant' is considered in TR 1999/2: 20. '[Plant] in its ordinary sense... includes whatever apparatus is used by a business man for carrying on his business, - not his stock-in trade which he buys or makes for sale; but all goods and chattels, fixed or moveable, live or dead, which he keeps for permanent employment in his business': Lindley LJ in Yarmouth v. France (1887) 19 QBD 647 at 658. 21. However, if an item merely provides the setting in which income producing activities are conducted, it does not qualify as plant (J. Lyons & Co Ltd v. The Attorney-General [1944] 1 All ER 477 at 479). A permanent structure may be plant if 'it fulfils the function of plant in the trader's operations' (IRC v. Barclay Curle & Co. Ltd [1969] 1 All ER 732). 22. In Wangaratta Woollen Mills v. FC of T 69 ATC 4095; (1969) 1 ATR 329, a dye house used in a business of dyeing and spinning worsted yarn, was held to be plant because it played a part itself in the manufacturing process and was more than a convenient setting for the taxpayer's operations. The dye house was part of a complex whole in which every piece was essential for the efficient operation of the manufacturing process and was itself an item of plant for depreciation purposes. The expression 'structural improvement' is not defined hence it is to take its meaning from the ordinary understanding of that expression. It is one of the categories covered under the broad umbrella term 'Capital works' which covers a range of structures, extensions, alterations and improvements to such structures for which deductions are available under Division 43. Some examples of structural improvements to which Division 43 of the ITAA 1997 applies are described in subsection 43-20(3) of the ITAA 1997. They include sealed roads, sealed driveways, sealed car parks, sealed airport runways, bridges, pipelines, lined road tunnels, retaining walls, fences, concrete or rock dams and artificial sports fields. Your existing and proposed storage tanks, pump station and pump equipment are considered to be depreciating assets which fall within the meaning of the ordinary meaning of the term 'plant' because these assets are or will be used in your business. While the pipeline is also used in your business, it is considered to be a depreciating asset in the nature of a structural improvement. You do not need to own the land on which the pipeline is constructed to be able to claim under Division 40-F and it is considered that you will have a sufficient 'quasi-ownership right' to hold the pipeline. In these circumstances, the assets the subject of this ruling are accepted to be depreciating assets which fall within the words 'plant or structural improvements' in the first limb of the definition of 'water facility' in paragraph 40-520(1)(a). | Detailed Reasoning - 'Primarily and principally for the purpose of conserving or conveying water': The meaning of the expression 'primarily and principally' has not been judicially considered in the context of section 40-520, however, the meaning of the expression 'primarily and principally' has been considered by Australian courts with respect to the purpose of the object, including in similar legislative contexts. In Parker Pen (Aust) Pty Ltd v. Export Development Grants Board (1983) FCA 77; (1983) 46 ALR 612, Lockhart J said, in considering whether advertising expenditure was incurred primarily and principally for the purpose of creating or seeking opportunities, or creating or increasing demand, for export sales by the entity incurring the expense (at ALR 619-20): Sub-s. 4(1) uses the adverbs 'primarily' and 'principally'. It is a curious use of language. The words have different derivations and sometimes different connotations. For example, one meaning of 'primarily' is at first or originally. 'Principally' does not bear this meaning. I have looked at various dictionaries. They all define the adjectives 'primary' and 'principal' and some define the adverbs 'primarily' and 'principally'. The modern meanings given in the dictionaries to these words is much the same. For example, Collins Dictionary of the English Language, Australian edition edited by G.A. Wilkes, defines 'primarily' so far as relevant, as 'principally; chiefly; mainly'. The Macquarie Dictionary defines the adverb 'principally' as 'chiefly; mainly'. It is in this sense that the words are to be understood in sub-s.4(1). Notwithstanding the tractability of the English language I do not think that the two adverbs have separate work to perform in the sub-section. In my view the draftsman used both words to emphasise that it is only where the Board is satisfied that expenditure has been incurred mainly or chiefly (to use neutral adverbs) for the required purpose that the expenditure answers the description of 'eligible expenditure'. The scope of the term 'primarily and principally' was considered in St George Leagues Club v. Commissioner of Land Tax (NSW) (1983) 14 ATR 826; 83 ATC 4736 ( St George ), where Lee J said, in considering whether a block of land was used primarily and principally for water skiing (at ATR 833; ATC 4743-4): The expression "primarily and principally" is not the same as "solely" and does not deny exemption in a case where there is some other user of the whole or part which, however, does not prevent a conclusion that the land is used "primarily and principally" for the purposes of the sport under consideration. This may give rise to questions of fact and degree in some cases... These cases indicate that the question of what the taxpayer's business primarily and principally is can be determined as the chief or main, but not necessarily the sole, business of the taxpayer. The St George case above indicates that land may have a primary and principal use notwithstanding that it is used for more than one purpose. This principle can equally be applied to determining what the primary and principle purpose of the expenditure incurred by a taxpayer is. The phrase 'primarily and principally' has also been used in sales tax and depreciation contexts. Its interpretation appears to be fairly uniform. Courts read it to have a meaning which is synonymous with words like chiefly, mainly and predominantly (see Parker Pen (Australia) Pty Ltd v Export Developments Grant Board (1983) 67 FLR 234, 240 - 241. In the legislative context of Subdivision 40-F, there is nothing to indicate this meaning is inappropriate. In respect of the purpose which must be primary and principal, cases indicate that the purpose is not the purpose of any particular person. It is instead the characteristic purpose which such an item would be dedicated to (see Kearney v Federal Commissioner of Taxation (1984) 15 ATR 564; Federal Commissioner of Taxation v Kearney (1985) 16 ATR 351; National Mutual Life Association of Australasia Ltd v Federal Commissioner of Taxation (1970) 122 CLR 13; Smith v Federal Commissioner of Taxation (1982) 13 ATR 115, 118; Sunchen Pty Ltd v Federal Commissioner of Taxation (2010) 190 FCR 38, 45 - 46 [38] - [41] (Edmonds and Gilmour JJ). In your case, it is noted that the depreciating assets the subject of this ruling are distinguishable from the assets in the RAS. The assets in the RAS are not claimed as 'water facilities'. In your case, we note that your current process involves water haulage tankers owned by you being filled up offsite and returned to the site to fill a number of existing tanks. The water is stored in the tanks until it is needed by the RAS. It is accepted that the water haulage tankers, the proposed pipeline and the existing and proposed tanks constitute a system for the conserving and conveying of water to where it will be used by your business. As such it is considered that these assets are used by you primarily and principally for the purpose of conserving or conveying water. Likewise, it is also accepted that the conditions in subsection 40-525(1) of the ITAA 1997 are satisfied. That is, the capital expenditure incurred on the construction, installation or acquisition of the water facility will be 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. | Detailed Reasoning - Cost of research, design, survey and construction of the pipeline, pump station and pump equipment: The cost of a depreciating asset consists of both first and second elements (section 40-175 of the ITAA 1997). The first element of cost is worked out as at the time you begin to hold the asset. Generally the first element of cost is the amount paid, or taken to have been paid, to hold the asset (sections 40-180 and 40-185 of the ITAA 1997). The second element of cost is worked out after you have begun to hold the asset and includes the amount you are taken to have paid for economic benefits that have contributed to bringing the asset to its present condition and location (section 40-190 of the ITAA 1997). The means by which a taxpayer may hold a depreciating asset may vary. In this case you hold the pipeline, pump station and equipment through having constructed it. The expenses that are incurred by you to research, design, survey and construct the pipeline, pump station and equipment are first elements of cost because they are amounts you paid to hold these assets. Where you have already incurred costs which fall into the first or second element of cost of the depreciating assets the subject of this ruling and claimed them as a deduction in your income tax returns in previous years, you cannot deduct these amounts again under section 40-515 of the ITAA 1997. | Detailed Reasoning - Maintenance and repair costs: Where the expenditure incurred in the repair to any of the depreciating assets the subject of this ruling and the expenditure is not capital in nature, the expenditure is deductible under section 25-10. Whether a particular expense qualifies as a repair is considered by Taxation Ruling TR 97/23. That ruling states at paragraph 15: Repair for the most part is occasional and partial. It involves restoration of the efficiency of function of the property being repaired without changing its character and may include restoration to its former appearance, form, state or condition. In the High Court decision in W Thomas & Co Pty Ltd v. FC of T (1965) 115 CLR 58 Windeyer J commented at 72 that: Repair involves a restoration of a thing to a condition it formerly had without changing its character. Where there is a repair of a capital nature, or an alteration, addition or extension, to one of the assets the subject of this ruling, the repair, alternation, addition or extension is treated as a depreciating asset, separate to the depreciating asset being repaired or altered (section 40-53). In these circumstances, repair of a capital nature, or an alteration, addition or extension is immediately deductible in the year it is incurred under section 40-515 provided it meets the definition of 'water facility'.

these assets must be 'plant or a structural improvement', and | these assets must be 'primarily and principally for the purpose of conserving water or conveying water'.