Private ruling: Capital allowances: subdivision 40-i – project pools – abandonment
Date of advice: 19 November 2018
Published: March 2019
Ruling period: 2019 income year
Date scheme commenced: 2010 income year

Ruling: Q1: Is the expenditure incurred a ‘project amount’ that can be allocated to a project pool under subsection 40-830(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: Has the project been ‘abandoned’ in the 2019 income year for the purposes of subsection 40-832(2) of the ITAA 1997? | A2: Yes | Q3: Is a deduction available under subsection 40-832(2) of the ITAA 1997 for the balance of the pool’s value in the 2019 income year? | A3: Yes

Relevant facts and circumstances: Company A initiated a terminal construction project for the purpose of increasing terminal capacity to meet the contracted long term demand of its clients. Capital expenditure in relation to prefeasibility and feasibility studies were incurred in respect of a project. Due to the lack of demand, Company A decided to no longer proceed with the project. Consequently, Company A carried out a series of closeout actions including: ● Notifying the Lessor by writing of its intention not to renew the lease of the project site; ● Advising Department of Planning and Environment of its intention not to proceed with the project; and ● Issuing a public statement in respect of its decision to terminate the project.

Relevant legislative provisions: All legislative references are to the Income Tax Assessment Act 1997 (the ITAA 1997) unless otherwise stated. Subdivision 40-I | Subsection 40-25(7) | Subsection 40-830(1) | Subsection 40-830(2) | Section 40-832 | Subsection 40-832(2) | Section 40-840 | Subsection 40-840(1) | Subsection 40-840(2) | Subparagraph 40-840(2)(d)(iii)

Reasons for decision: Detailed Reasoning - Is the expenditure incurred a ‘project amount’ that can be allocated to a project pool under subsection 40-830(1) of the ITAA 1997?: The meaning of ‘project amount’ is set out in section 40-840. It falls into two broad categories. A common feature of the categories is that the expenditure must be of a capital nature. Relevantly, subparagraph 40-840(2)(d)(iii) includes an amount incurred for feasibility studies provided that the cost: a. does not form part of the cost of a depreciating asset you hold or held; and b. cannot be deducted under another provision of the Act; and c. is directly connected with a project carried on or propose to carry on for a taxable purpose. | Detailed Reasoning - Project: The term ‘project’ is not defined in the ITAA 1997. However, Taxation Ruling TR 2005/4 Income Tax: capital allowances – project pool – core issues (TR 2005/4) sets out the Commissioner’s view in respect of what will constitute a project for the purposes of Subdivision 40-I for project amounts under subsection 40-840(2). It is considered that the principles in TR 2005/4 equally apply in identifying a project for which project amounts under subsection 40-840(1) can be allocated to a project pool in respect of the project which may be the case for the amounts incurred in this case. In summary, the Commissioner’s view is that a project: ● is a set of related activities ● must be more substantial than an idea or speculation ● would involve a plan, scheme or undertaking of some substance ● has a start and finish; and ● is an entirety in itself. Further, the Commissioner considers that a finite project life is an element of a Subdivision 40-I project and the project life of the project is a matter for objective determination. Based on the information provided by Company A, it is accepted that there is a project for which project amounts can be allocated. | Detailed Reasoning - Has the project been ‘abandoned’ in the 2019 income year for the purposes of subsection 40-832(2) of the ITAA 1997?: According to the decision in Kallooar v. R [1964] 50 WWR 602, something is considered to be abandoned if it is given up completely and finally. On that basis, the temporary cessation of a project will not constitute abandonment: the cessation must be permanent. Whether a project has been abandoned is a question of fact and degree that can only be determined in light of all the relevant circumstances of each case. It is considered that a project will be abandoned if it would be objectively determined that it will not proceed having regard to all the facts and circumstances surrounding the project The intention of the taxpayer alone would not be determinative. Factors that are outside the control of the taxpayer often provide objective evidence whether a project has been abandoned. In this case, there was a major capacity review in responding to the demand of a certain facility. As part of the review, it was determined that the additional capacity was no longer required therefore the construction project would cease. Following this decision, the focus was turned to achieving capacity through expansion of existing terminals. Thus, the project was terminated. A series of closeout actions were undertaken including: ● Notifying the Lessor by writing of its intention not to renew the lease of the project site; ● Advising Department of Planning and Environment of its intention not to proceed with the project; and ● Issuing a public statement in respect of its decision to terminate the project. After taking into account the relevant circumstances of this case, the Commissioner accepts that the project was abandoned in the 2019 income year for the purposes of subsection 40-832(2). | Detailed Reasoning - Is a deduction available under subsection 40-832(2) of the ITAA 1997 for the balance of the pool’s value in the 2019 income year?: As the Commissioner has accepted that the project has been abandoned for the purposes of subsection 40-832(2), Company A is entitled to a deduction under the subsection in ‘project amounts’ allocated to the project pool in the income year which it was abandoned.