Private ruling: Cost of a depreciating asset
Date of advice: 29 January 2018
Published: June 2018
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Do the costs necessarily incurred to support the development application for the material change of use for the construction of structures form part of the first element of the assets’ cost pursuant to section 40-180 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: If the answer to question 1 is no, will the same costs be deductable under section 40-880 of the ITAA 1997 as black hole expenditure? | A2: N/A

Relevant facts and circumstances: The entity purchased a property which did not have any existing structures on it. The entity has since built depreciable structures on the property. The entity uses the property to earn income. A primary production business is undertaken on the property. Before the structures could be established, there were a number of pre-construction plans and reports required to be completed. The costs incurred to complete the plans and reports were a precursor to the construction costs, as the structures could not advance without the plans approved by the council. Approval would not have been granted without the lodgement of the accompanying plans and reports. The structures were completed in early 20XX. The entity has since applied for more structures to be built, resulting in additional plans and reports for the council’s approval for the development and expansion of the farm.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 40-175 | Income Tax Assessment Act 1997 Section 40-180 | Income Tax Assessment Act 1997 Subsection 40-180(1) | Income Tax Assessment Act 1997 Subsection 40-180(2) | Income Tax Assessment Act 1997 Subsection 40-180(3) | Income Tax Assessment Act 1997 Section 40-185 | Income Tax Assessment Act 1997 Paragraph 40-185(1)(a) | Income Tax Assessment Act 1997 Paragraph 40-185(1)(b) | Income Tax Assessment Act 1997 Section 40-190

Reasons for decision: Summary: The amounts paid for the plans and reports form part of the first element of cost of the assets because there is a clear and direct link between the capital expenditure incurred and starting to hold the depreciating assets. | Detailed Reasoning - Detailed reasoning: The cost of a depreciating asset consists of two elements (section 40-175 of the ITAA 1997). The first element of cost is worked out as at the time when the holder of the asset starts to hold it (section 40-180 of the ITAA 1997) while the second element of cost is worked out by the holder after that time (section 40-190 of the ITAA 1997). Under subsection 40-180(1) of the ITAA 1997, the first element of cost of a depreciating asset is either the amount specified in an item in the table in subsection 40-180(2) or, if no item in that table applies, the amount a holder of the asset is taken to have paid to hold the asset under section 40-185 of the ITAA 1997. None of the items in that table apply in this case. Therefore, the first element of cost of the poultry housing structures is worked out under section 40-185 of the ITAA 1997. Under section 40-185, the first element of cost of a depreciating asset is taken to be the greater of the sum of the amounts specified in paragraph 40-185(1)(a) or the sum of the applicable amounts set out in the table in paragraph 40-185(1)(b) in relation to the holding of the asset. In this case, there is no applicable amount for the purposes of paragraph 40-185(1)(a). Item 1 of the table in paragraph 40-185(1)(b) specifies that if you pay an amount, the amount you are taken to have paid to hold a depreciating asset is the amount so paid. The entity is the holder of the depreciating assets. The entity has paid professionals for their services to generate plans and reports, which are required for the development application to be lodged with the council for approval. Council approval is compulsory for the assets to be legally constructed. To obtain council approval, the entity is required to submit various plans and reports. Therefore, there is a clear and direct connection between the capital expenditure incurred in obtaining the plans and reports and the entity holding the depreciating assets. Accordingly, the amounts paid for the plans and reports are amounts taken to have been paid to hold the assets pursuant to item 1 of the table in paragraph 40-185(1)(b). Subsection 40-180(3) of the ITAA 1997 includes in the first element of cost of a depreciating asset an amount the holder of the asset paid or is taken to have paid in relation to starting to hold the asset if that amount is directly connected with holding the asset. As the cost of the plans and reports are amounts the entity paid or are taken to have paid in relation to starting to hold the assets are directly connected with holding them, those amounts are included in the first element of cost. Accordingly, the first element of cost of the asset includes, pursuant to section 40-180 of the ITAA 1997, the capital expenditure incurred by the entity for the pre-construction plans and reports.