Private ruling: Electricity connection
Date of advice: 31 May 2016
Published: July 2016
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Are you entitled to a deduction for the cost of installing a power phase transformer? | A1: Yes.

Relevant facts and circumstances: You have been asked to pay for a power phase transformer. The transformer will be located next to your commercial building. The ownership rights to the transformer remain with the energy company. Whilst you will own the building, you will not have the right to own the transformer or lease it. The building is leased as a commercial property to a business (lessee) which will pay rent and use the building for its business operations.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 40-645 | Income Tax Assessment Act 1997 Section 40-655

Reasons for decision: Summary: Section 40-645 of the ITAA 1997 allows you to claim a deduction for capital expenditure you incur on connecting power to land if, when you incur the expenditure, (a) you have an interest in the land, and (b) you or another entity intend to use some or all of the electricity to be supplied as a result of the expenditure in carrying on a business on the land or for a taxable purpose at the time when you have an interest in the land. The deduction is spread over a period of ten income years. To determine if you will be entitled to claim a deduction for the capital expenditure incurred in connecting power to land, we will examine each component of section 40-645 of the ITAA 1997 and its application to your situation. Do you have an interest in the land? The transformer will be installed next to your commercial building. As the owner of the land you have an interest in the land. Are you or another entity carrying on a business on the land for a taxable purpose? You will lease the building to a business that will use the building as part of its business. It is accepted that this activity will be operated for a taxable purpose. Are you connecting power to the land? Subsection 40-655(1) of the ITAA 1997 states that each of the following operations is considered to be connecting power to land (a) work to increase the amount of electricity that can be supplied through a mains electricity cable to a metering point on the land (b) work to modify or replace equipment designed to measure the amount of electricity supplied through a mains electricity cable to a metering point on the land, if the modification or replacement results from increasing the amount of electricity supplied to the land, and (c) work to modify or replace equipment for use directly in connection with the supply of electricity through a mains electricity cable to the land, if the modification or replacement results from increasing the amount of electricity supplied to the land. A metering point on land is defined in subsection 40-655(3) of the ITAA 1997 as a point where the consumption of electricity supplied to the land through a mains electricity cable is measured. In your case, you have been asked to pay for a power phase transformer next to your commercial building. This will result in an increase in the amount of electricity supplied to the land. Therefore you are entitled to a deduction, over a period of ten income years, for the cost of installing a power phase transformer under section 40-645 of the ITAA 1997. Deduction The amount you can deduct is 10% of the expenditure for the financial year in which you incur it. You may claim 10% of the expenditure incurred in each of the next nine financial years provided you have an interest in the land in the financial year in which you claim the deduction and are using the land to carry on a business for a taxable purpose in that year.