Private ruling: Capital allowances: Subdivision 40-I - project - abandonment
Published: September 2014

Ruling: Q1: Was an expansion project abandoned in the income year ended 30 June 2013 for the purposes of subsection 40-832(2) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: Company A initiated an expansion project for the purpose of increasing capacity to handle commodity exports. Expenditure incurred in respect of this project was allocated to a project pool. Company A decided to no longer proceed with the project. Consequently, Company A carried out a series closeout actions including: • termination of existing contracts in respect of the project, • further packages of work not awarded, and • redeployment of employees that were working on the project. However, Company A has retained the right to a defined area of land on which to carry out the project. This right was granted under an agreement with a government authority.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 40-I. | Income Tax Assessment Act 1997 Section 40-832 | Income Tax Assessment Act 1997 Subsection 40-832(2) | Income Tax Assessment Act 1997 Section 40-840 | Income Tax Assessment Act 1997 Subsection 40-840(1) | Income Tax Assessment Act 1997 Subsection 40-840(2)

Reasons for decision: Summary: All legislative references are to the ITAA 1997 unless otherwise stated. | Detailed Reasoning - Subsection 40-832(2) - abandonment: Broadly speaking, the project pool provisions of Subdivision 40-I allow a taxpayer to pool and deduct certain capital expenditure that qualifies under section 40-840 as a project amount, on the basis of the project life of the project. However, if a project is abandoned, sold or otherwise disposed of and the taxpayer has a project pool in respect of that project to which project amounts have been allocated, subsection 40-832(2) allows a deduction for the balance of the pool's value for the year in which the abandonment, sale, or other disposal occurs. A project can be abandoned before it starts to operate. 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. 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, a major capital review was carried out in responding to the subdued commodity prices. As part of the review, it was determined that certain capital intensive expenditure projects including the expansion project would cease. Following this decision, Company A turned its focus to achieving increased capacity through the expansion of an existing facility and a series of closeout actions were undertaken and these included: • termination of existing contracts, • further packages of work not awarded, and • redeployment of employees. Currently, there is nothing being done to continue or advance the work that was previously done in respect of the expansion project. Although the decision to cease the expansion project and to implement closeout actions indicate that a project has been abandoned, the existence of a contingent right to a defined area of land on which to carry out the project that has been granted to Company A under an agreement is also a factor to be considered in determining whether the project has been given up completely and finally. In considering this factor, it should be pointed out that under the agreement, the government authority has the obligation to provide the area of land. This obligation is contingent upon submission by Company A of detailed proposals by a certain date. An end to the right to an area of land identified under the agreement to carry out the relevant project is an objective factor which indicates that the project has been given up completely and finally. On the other hand, an extension or a renewal of this right may objectively indicate that the project has not been given up completely and finally. In this case, the Commissioner accepts that there is little prospect for Company A putting forward a proposal by the extended due date. While the future of this right is unclear, the Commissioner also accepts that the need to expand has been obviated for the foreseeable future due to other means. Therefore, it is considered that the existence of this right does not itself prevent a conclusion that the expansion project has been abandoned. After taking into account the economic conditions at the relevant time, the little prospect for Company A putting forward a proposal by the extended due date, the actions taken to close out the project, and the activities undertaken to increase capacity by other means the Commissioner accepts that Company A has given up completely and finally (from the point of view of the objectively foreseeable future at the time of the decision to close out all relevant activities was taken) the project that was to be carried on. Accordingly, the expansion project was abandoned in the income year ended 30 June 2013 for the purposes of subsection 40-832(2).