Private ruling: Deduction-project pools-consultancy fees
Published: August 2011
Ruling period: Year ended 30 June 2009 Year ended 30 June 2010
Date scheme commenced: 1 July 2008

Ruling: Q1: Is the expenditure incurred on consultant fees eligible as a deduction as a project amount? | A1: 



Reasons for decision: Summary: Project pools Subdivision 40-I of the Income tax Assessment Act 1997 (ITAA 1997) allows you to claim deductions for certain capital expenses incurred after 30 June 2001. The capital expenses must be incurred in relation to a project. Deductions are spread over the life of a project using a project pool. Under section 40-830 of the ITAA 1997 you can claim deductions for project amounts allocated to a project pool. Section 40-840 of the ITAA 1997 provides a meaning for project amount. Subsections 40-840(1) and 40-820(2) of the ITAA 1997 define the types of expenditure that can be allocated to a project pool (that is the 'project amount'). These are: · mining capital expenditure incurred by the taxpayer and which is directly connected with carrying on the mining operations in relation to which the expenditure is incurred · transport capital expenditure incurred by the taxpayer and which is directly connected with carrying on the business in relation to which the expenditure is incurred, and · an amount of capital expenditure incurred by the taxpayer specifically listed under subsection 40-480(2) of the ITAA 1997. Subsection 40-480(2) of the ITAA 1997 provides: 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. Taxation Ruling TR 2005/4 provides the Commissioner's view regarding project pools. According to TR 2005/4 the words 'carry on' require some form of continuing activity. If project activity ceases, it is a question of fact whether the project is still being carried on or whether it has been abandoned. The holding of a passive investment would not have sufficient activity to constitute the carrying on of a project. The words 'propose to carry on' require a commitment of some substance to the activity or activities identified as constituting the project for example; the undertaking of a feasibility study for a project. To determine the entitlement to a deduction for a project amount it is a question of fact and determined by reference to the facts of the particular case. Application to your circumstances You hired a consultant and lodged a submission to include your property as land suitable for a proposed development plan. You believe the submission should be considered a feasibility study. To satisfy the requirement of paragraph 40-840(2)(d) of the ITAA 1997, a feasibility study must directly address the project itself (including its constituent activities) and that project must be one that is or is proposed to be carried on for a taxable purpose. The term 'feasibility studies' is not defined for the purposes of the project pooling provisions of Subdivision 40-I of the ITAA 1997 and is not otherwise defined in the income tax law. The Macquarie Dictionary (Revised Third Edition) 2001 defines feasibility study as a survey or analysis of the need, value and practicability of a proposed enterprise. The Oxford Dictionary of Business (Third Edition) 2002 defines feasibility study as an investigation to determine which of a range of decisions is likely to give a satisfactory return in a financial appraisal or economic appraisal of the alternatives. Broadly speaking then, a feasibility study may be described as a process to gather and analyse sufficient information to adequately consider technical, financial and economic or market viability factors in order to make an informed decision about the potential success of a proposed activity. A feasibility study may also have pre-determined criteria (such as level of investment, rate of return, operating costs) against which the viability of the activity is assessed. A review of the submission you provided does not consider technical, financial, and economic or market viability of the proposed activity of development. The submission only proposes that land owned by you and the other property owners be designated as land suitable for a proposed development plan. Therefore, the submission is not considered a feasibility study project amount or any other type of project expenditure amount and does not satisfy the requirements of paragraph 40-840(2)(d) of the ITAA 1997. In addition to be a project amount within the meaning of that term in subsection 40-840(2) of the ITAA 1997, the expenditure must, among other things, be directly connected with a project that is carried on or proposed to be carried on for a taxable purpose (paragraph 40-840(2)(c) of the ITAA 1997). So far as is relevant here, taxable purpose means the purpose of producing assessable income (subsection 40-25(7) of the ITAA 1997). Something is done for the purpose of producing assessable income if it is done for the purpose of gaining or producing assessable income or in carrying on a business for the purpose of gaining or producing assessable income (subsection 995-1(1) of the ITAA 1997). For a project to be carried on for a taxable purpose the project itself (including the activities constituting the project) must not only be carried on for that purpose but must be capable of income production. In your case, it is accepted that you have a genuine intention of subdividing land for resale in the future. The forming of the group and the activity of lodging a submission may be a project. However, it does not amount to a project that was carried on for a taxable purpose because the activities themselves are not capable of income production. At best, the activities were directed to, and may ultimately lead to, the mere realisation of a capital asset in the future. Such activities are too remote and too general to amount to a project that is carried on for a taxable purpose. In addition the fact that the submission was rejected and not included in the development plan also supports the view that currently the activity is not capable of producing assessable income at the present time. Therefore the activities undertaken do not amount to a project being carried on for a taxable purpose and as the submission is not considered a feasibility study project amount or any other type of project expenditure amount, no part of the consultant expenditure incurred qualifies as a project amount and is therefore not deductible under subsection 40-480(2) of the ITAA 1997.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns. | The business activity on the property has ceased. | The dwelling on the property has been available for rent for a number of years. | A group of landowners including you (the group) decided to form a partnership with the intention of subdividing the total land area for re-sale. | Before the subdivision could proceed the group hired a consultant to lodge a submission to a government department. | You stated that had the submission been successful the group were to go into partnership with a developer to subdivide the land for re-sale. | The submission requested that the land owned by the group be considered for a proposed development plan. | The submission was rejected by the government department. | There is no partnership agreement. | You are not in the business of property development. | You paid a fee to the consultant for the submission. | Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 40-25(7) Income Tax Assessment Act 1997 section 40-830. 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). 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 subsection 995-1(1). Reasons for decision