Private ruling: Capital Allowances and Division 40
Date of advice: 13 September 2016
Published: November 2016
Ruling period: 1 July 20XX - 30 June 20YY
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the amount of the property purchase proceeds attributable to the fencing on the property deductible under section 40-515, Subdivision 40F of the Income Tax Assessment Act 1997 in the year the property was acquired? | A1: No | Q2: If the answer to question 1 is no, is the amount of the property purchase proceeds attributable to the fencing on the property deductible over time under section 40-25, Subdivision 40-B of the Income Tax Assessment Act 1997? | A2: Yes | Q3: Is the amount of the property purchase proceeds attributable to the water facilities on the property deductible under section 40-515, Subdivision 40F of the Income Tax Assessment Act 1997 in the year the property was acquired? | A3: No | Q4: If the answer to question 3 is no, is the amount of the property purchase proceeds attributable to the fencing on the property deductible over time under section 40-25, Subdivision 40-B of the Income Tax Assessment Act 1997? | A4: Yes

Relevant facts and circumstances: The entity carries on the business of cattle grazing on the property. The property is surrounded by significant fencing including a dingo fence to prevent stock losses from dingo and wild dog attacks.

Relevant legislative provisions: Income Tax Assessment Act 1997 - paragraph 40-515 | Income Tax Assessment Act 1997 - subsection 40-520(1) | Income Tax Assessment Act 1997 - subsection 40-525(1) | Income Tax Assessment Act 1997 - subsection 40-530(1) | Income Tax Assessment Act 1997 - subsection 40-555

Reasons for decision: Detailed Reasoning - Detailed reasoning: Paragraph 40-515(1)(d) of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for an income year equal to the decline in value of a primary production depreciating asset that is a fencing asset. A 'fencing asset' is defined under subsection 40-520(4) of the ITAA 1997 as: (a) an asset that is a structural improvement that is a fence (b) a repair of a capital nature, or an alteration, addition or extension, to a fence Subsection 40-525(4) states that the capital expenditure you incurred on the construction, manufacture, installation or acquisition of the fencing asset must have been incurred primarily and principally for use in a primary production business that you conduct on land in Australia. The deduction is only available if the asset has started to decline in value as specified in subsection 40-530(1) which states: A *water facility, *fodder storage asset or *fencing asset starts to decline in value in the income year in which you first incur expenditure on the facility or asset. The entity is in the business of primary production being cattle grazing. As discussed earlier, the expenditure has been incurred on fencing as part of the purchase of a property according to subsection 40-520(4) of the ITAA 1997. However, subsection 40-555(5) of the ITAA 1997 states: You cannot deduct an amount for any income year for capital expenditure on the acquisition of a fencing asset if any entity has deducted or can deduct an amount under this Subdivision for any income year for earlier capital expenditure on: (a) the construction or manufacture of the fencing asset; or (b) a previous acquisition of the fencing asset. The previous owner of the property did not claim a deduction under Subdivision 40F, but they could have, meaning the current owner cannot deduct an amount attributable to the fencing assets under section 40-515. | Detailed Reasoning - Detailed reasoning: Division 40 of the ITAA 1997 allows a deduction for the cost of a depreciating asset by spreading the deduction over the effective life of the asset, and subdivision 40-B provides the rules for making this deduction. Subsection 40-25(1) states that: You can deduct an amount equal to the decline in value for an income year (as worked out under this Division) of a *depreciating asset that you *held for any time during the year. Section 40-30 provides the definition of a 'depreciating asset': • It is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used, except land, trading stock and an intangible asset (subsection 40-30(1)). • Subsection 40-30(3) states that this Division also applies to an improvement to land, or a fixture on land, whether the improvement or fixture is removable or not, as if it were an asset separate from the land. Fencing is treated as being an asset separate from the land. These assets have a limited effective life and can reasonably be expected to decline in value over the time they are used. They are not land, trading stock or intangible assets. They are depreciating assets for the purposes of section 40-30 of the ITAA 1997. You are entitled to deduct the decline in value of the fences over the effective life. Taxation Ruling 2016/1 sets out the effective life of depreciating assets which includes fences. Where a depreciating asset is purchased with, or attached to, other assets and no separate value is allocated to the asset (ie only one amount is paid), the cost of the asset is essentially the part of the purchase price that is reasonably attributable to the asset (section 40-195 of the ITAA 1997). This provision is particularly relevant where land is purchased. In these cases, it is common for specific values to be attributed in the contract of purchase to depreciable fixtures or, in the case of agricultural or pastoral land, to improvements such as fences and dams, even though at common law there can be no separate purchase of the fixtures. | Detailed Reasoning - Detailed reasoning: Paragraph 40-515(1)(a) of the ITAA 1997 allows a deduction for an income year equal to the decline in value of a primary production depreciating asset that is a water facility. A 'water facility' is defined under subsection 40-520(1) of the ITAA 1997 as: (a) * plant or a structural improvement, or a repair of a capital nature, or an alteration, addition or extension, to plant or a structural improvement, that is primarily and principally for the purpose of conserving or conveying water; or (b) a structural improvement, or a repair of a capital nature, or an alteration, addition or extension, to a structural improvement, that is reasonably incidental to conserving or conveying water. | Detailed Reasoning - Example:: Examples of a water facility include a dam, tank, tank stand, bore, well, irrigation channel, 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: The capital expenditure you incurred on the construction, manufacture, installation or acquisition of the water facility must have been incurred: (a) 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; or (b) ... The deduction is only available if the asset has started to decline in value as specified in subsection 40-530(1) which states: A *water facility, *fodder storage asset or *fencing asset starts to decline in value in the income year in which you first incur expenditure on the facility or asset. Section 40-540 of the ITAA 1997 states the deduction for the decline in value of a water facility is worked out for the income year in which the expenditure is incurred and is the amount of capital expenditure on the construction, manufacture, installation or acquisition of the water facility. The Trust is in the business of primary production being cattle grazing. As discussed earlier, the expenditure incurred related to water facilities according to subsection 40-520(1) of the ITAA 1997. However, subsection 40-555(1) of the ITAA 1997 states: You cannot deduct an amount for any income year for capital expenditure on the acquisition of a *water facility if any entity has deducted or can deduct an amount under this Subdivision for any income year for earlier capital expenditure on: (a) the construction or manufacture of the facility; or (b) a previous acquisition of the facility. The previous owner of the property did not claim deductions under Subdivision 40F, but they could have, meaning the current owner cannot deduct an amount attributable to the water facilities under section 40-515. | Detailed Reasoning - Detailed reasoning: Division 40 allows a deduction for the cost of a depreciating asset by spreading the deduction over the effective life of the asset, and subdivision 40-B provides the rules for making this deduction. Subsection 40-25(1) states that: You can deduct an amount equal to the decline in value for an income year (as worked out under this Division) of a *depreciating asset that you *held for any time during the year. Section 40-30 provides the definition of a 'depreciating asset': • It is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used, except land, trading stock and an intangible asset (subsection 40-30(1)). • Subsection 40-30(3) states that this Division also applies to an improvement to land, or a fixture on land, whether the improvement or fixture is removable or not, as if it were an asset separate from the land. A depreciating asset would include water facilities which have a limited effective life and can reasonably be expected to decline in value over the time they are used. They are not land, trading stock or intangible assets. They are depreciating assets for the purposes of section 40-30 of the ITAA 1997. You are entitled to deduct the decline in value of water facilities over their effective life. Taxation Ruling 2016/1 sets out the effective life of depreciating assets which includes water facilities. Where a depreciating asset is purchased with, or attached to, other assets and no separate value is allocated to the asset (ie only one amount is paid), the cost of the asset is essentially the part of the purchase price that is reasonably attributable to the asset (section 40-195 of the ITAA 1997). This provision is particularly relevant where land is purchased. In these cases, it is common for specific values to be attributed in the contract of purchase to depreciable fixtures or, in the case of agricultural or pastoral land, to improvements such as fences and dams, even though at common law there can be no separate purchase of the fixtures.