Private ruling: Project amount for purposes of Subdivision 40-I of the Income Tax Assessment Act 1997
Date of advice: 15 December 2015
Published: March 2016
Ruling period: Project Term
Date scheme commenced: Income year ending 30 June 2015

Ruling: Q1: Will the capital expenditure incurred by Company A on the Works Upgrade be a project amount under subsection 40-840(2) of the Income Tax Assessment Act 1997 ? | A1: Yes

Relevant facts and circumstances: Head Co is an Australian resident company and the head company of an income tax consolidated group (Head Co tax consolidated group). The Company is an Australian resident company and a subsidiary member of the Head Co tax consolidated group. The Company entered into an Agreement for the design, construction, maintenance and operation of certain infrastructure (the Project) for the Project Term. At the end of the Project Term, the Company will not own the infrastructure or continue to maintain and operate the infrastructure. Under the terms of the Agreement, the Company imposes and collects fees and charges for the use of the infrastructure. The infrastructure is used by the community. The rights and obligations of the parties in relation to the Project are governed by the Agreement. The Company and other parties to the Agreement subsequently entered into an amending deed to amend the Agreement to undertake certain works to upgrade the infrastructure. Under the Agreement, the Company undertakes certain works on land owned by other parties to the Agreement (Works Upgrade). The scope and criteria of the Works Upgrade are contained in the Agreement and specifies works physically connected to the infrastructure, including items affixed to land. Under the terms of the Agreement, a licence is granted to the Company to access the Works Upgrade area to undertake the Works Upgrade. The Company has engaged contractors to undertake the Works Upgrade. Assumption The Company incurs capital expenditure on the Works Upgrade.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 40-I | Income Tax Assessment Act 1997 section 40-830 | Income Tax Assessment Act 1997 section 40-840 | Income Tax Assessment Act 1997 subsection 40-840(2) | Income Tax Assessment Act 1997 paragraph 40-840(2)(a) | Income Tax Assessment Act 1997 paragraph 40-840(2)(b) | Income Tax Assessment Act 1997 paragraph 40-840(2)(c) | Income Tax Assessment Act 1997 paragraph 40-840(2)(d) | Income Tax Assessment Act 1997 subparagraph 40-840(2)(d)(i)

Reasons for decision: Summary: All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated. Section 40-830 allows a deduction over the project life for project amounts allocated to a project pool. The meaning of project amount is defined in section 40-840. Subsection 40-840(2) states: Another amount of capital expenditure you incur is also a project amount so far as: (a) it does not form part of the *cost of a *depreciating asset you *hold or held; and (b) you cannot deduct it under a provision of this Act outside this Subdivision; and (c) it is directly connected with a project you carry on or propose to carry on for a *taxable purpose; and (d) it is one of these: (i) an amount paid to create or upgrade community infrastructure for a community associated with the project; or (ii) an amount incurred for site preparation costs for depreciating assets (except, for *horticultural plants, in draining swamp or low-lying land or in clearing land); or (iii) an amount incurred for feasibility studies for the project; or (iv) an amount incurred for environmental assessments for the project; or (v) an amount incurred to obtain information associated with the project; or (vi) an amount incurred in seeking to obtain a right to *intellectual property; or (vii) an amount incurred for ornamental trees or shrubs. Subparagraph 40-840(2)(d)(i) is relevant to the facts and circumstances of this case. In this case, the capital expenditure the Company will incur on the Works Upgrade will be a project amount if it: • does not form part of the cost of a depreciating asset the Company holds • cannot be deducted under a provision of the Income Tax Assessment Acts outside of Subdivision 40-I • is directly connected with a project carried on for a taxable purpose, and • is paid to create or upgrade community infrastructure for a community associated with the project. Each of these elements is considered in turn below. | Detailed Reasoning - Cost of a depreciating asset: Under section 40-30, a depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used. Although, paragraph 40-30(1(a) excludes land from being a depreciating asset, subsection 40-30(3) provides that an improvement to land or fixture on land, whether or not the fixture is removable or not, is taken to be an asset separate from the land. Based on the scope of the Works Upgrade, the capital expenditure the Company will incur on the Works Upgrade will include expenditure on assets including improvements to land or fixtures on land that have a limited effective life and can reasonably be expected to decline in value over time. However, the Company cannot deduct an amount for decline in value of a depreciating asset unless it holds the depreciating asset. Section 40-40 determines who holds a depreciating asset. In this case, the Company does not own, lease or have any quasi-ownership right over the assets comprising the Works Upgrade. Accordingly, the relevant expenditure cannot form part of the cost of a depreciating asset that the Company holds or will hold. | Detailed Reasoning - Deductible under another provision outside Subdivision 40-I: Section 40-25 allows a deduction for the decline in value of a depreciating asset that an entity holds during an income year. As the Company, in this case, does not and will not hold any of the depreciating assets to which the expenditure relates because it does not own, lease or have any other quasi-ownership right over the depreciating assets, the expenditure will not be deductible under section 40-25. Division 43 provides a deduction for capital works if those capital works have a construction expenditure area that the entity owns. Based on the scope of the Works Upgrade, some of the expenditure the Company will incur relates to structural improvements under subsection 43-20(3). However, the Company does not own, lease or have any other quasi-ownership right over the land on which the Works Upgrade will be carried out. Accordingly, the Company will not be entitled to a deduction for any amount for capital works under Division 43. Therefore, the capital expenditure on the Works Upgrade will not be deductible under another provision outside of Subdivision 40-I. | Detailed Reasoning - Directly connected with a project carried on for a taxable purpose: The requirement in paragraph 40-840(2)(c) will be satisfied if the capital expenditure the Company incurs is directly connected with a project that the Company carries on for a taxable purpose. The identification of a project is necessary for the purposes of identifying whether an amount of capital expenditure is a project amount. A project may be described as an activity or a series of related activities undertaken to achieve a specific purpose or outcome. Identifying the business undertaking or activities that are directly connected to the capital expenditure for the purposes of qualifying the expenditure as a project amount therefore identifies the undertaking to which the expenditure belongs. In this case, the Company will incur capital expenditure on the Works Upgrade as part of the Project that the Company carries on. The Company is required under the terms of the Agreement to complete the Works Upgrade. The scope of the Works Upgrade specifies works physically connected to the infrastructure. The facts in this case show that the Works Upgrade will be physically connected to the infrastructure. Accordingly, it can be concluded that the capital expenditure the Company will incur on the Works Upgrade belongs to or is connected to activities relating to the maintenance and operation of the Project. Under the Agreement, the Company is contractually obligated to design, construct, maintain, operate and impose fees and charges on the use of the infrastructure. Accordingly, it can be concluded that the Company derives income from the activities it carries on in relation to the Project. Therefore, based on the facts in this case, a direct connection between the capital expenditure the Company will incur on the Works Upgrade and the Project, which the Company carries on for a taxable purpose, is established. | Detailed Reasoning - Community infrastructure: As 'community infrastructure' is not defined term in the ITAA 1997, reference is made to the ordinary meaning of the words. According to The Butterworths Australian Legal Dictionary (1997), the word 'infrastructure' refers to 'the framework of key facilities which supports communities and their industrial and commercial activities'. More specifically, it states that 'infrastructure' 'comprises communications, transportation systems, electricity generation and distribution, water supply networks, sewerage, roads, housing, schools and universities, health services, entertainment facilities and community support services'. The Australian Oxford Dictionary (1999),Oxford University Press, Melbourne relevantly states that the word 'community' means 'all the people living in a specified locality', 'a specific locality, including its inhabitants', 'a body of people having a religion, a profession, etc., in common ( Melbourne's large Greek community )', and 'a monastic, socialistic, etc. body practising common ownership'. In Hollow & Kaye v State Planning Authority (1983) 45 LGRA 39 at 45, Wells J commented that the word 'community' has a much wider significance than the word 'locality'. Wells J also commented that whilst in its widest sense the word 'community' could embrace the entire population of a particular State, it could also apply to a much smaller population such as the people residing within a particular locality. In this case, the Project relates to certain infrastructure which is used by the community. The Works Upgrade will directly benefit the infrastructure to which the Project relates. Accordingly, the capital expenditure to be incurred by the Company on the Works Upgrade will be an amount paid to create or upgrade community infrastructure for a community associated with the project. | Detailed Reasoning - Conclusion: For the reasons outlined above, the capital expenditure the Company will incur on the Works Upgrade is an amount directly connected with the Project that the Company carries on for a taxable purpose, and paid to create or upgrade community infrastructure for a community. Accordingly, the capital expenditure the Company will incur is a project amount under subsection 40-840(2).