Taxation Ruling TR 2005/4


Class of entities or scheme: 5. This Ruling applies to taxpayers who wish to claim deductions for amounts which are project amounts under subsection 40-840(2) which are allocated to project pools. | Legislative context: 6. The project pool provisions in Subdivision 40-I (sections 40-825 to 40-875 and section 40-885) were introduced to apply to expenditure incurred from 1 July 2001. [1] The provisions, in conjunction with section 40-880 on business related costs, provide deductions in specified circumstances in relation to some of the items of black hole expenditure identified in the Ralph Report. 7. What constitutes a project amount is set out in section 40-840. Project amounts fall into two broad categories. A common feature of the categories is that the expenditure must be of a capital nature. 8. The first category of project amounts is covered by subsection 40-840(1). It covers certain amounts that are mining capital expenditure or transport capital expenditure: see sections 40-860, 40-865, 40-870 and 40-875. 9. The second category of project amounts is detailed in subsection 40-840(2). It is this category with which the Ruling is concerned. This category is more general than the first and is not restricted to particular industries. The following four restrictions are placed on project amounts in this category. 10. First, the expenditure must be one of the seven specific types of expenditure set out in paragraph 40-840(2)(d) being: 11. Second, the amount must not form part of the cost of a depreciating asset held by the taxpayer: paragraph 40-840(2)(a). 12. Third, the amount must not be deductible to the taxpayer under a provision outside Subdivision 40-I: paragraph 40-840(2)(b). 13. Fourth, the amount must be directly connected with a project the taxpayer carries on or proposes to carry on for a taxable purpose: paragraph 40-840(2)(c). 14. If the capital expenditure incurred is a project amount, subsection 40-830(1) allows the taxpayer to allocate the project amount to a project pool. Each project has a separate project pool. The different types of project amounts within paragraph 40-840(2)(d) can be allocated to the project pool and project amounts incurred in different years can be allocated to the project pool. 15. Subsection 40-830(2) allows the deduction of an amount for project amounts that have been allocated to a project pool. The method of calculation of that deduction is found in subsection 40-830(3). The calculation is essentially a diminishing value one which multiplies the pool value for the year by 150% and divides the result by the project life. Under subsection 40-830(8), the deduction cannot exceed the pool value. 16. The project life of a project is defined in section 40-845. It is the period from when the project starts to operate until it stops operating. 17. 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 40-830(4) allows a deduction for the balance of the pool's value for the year in which the abandonment, sale, or other disposal occurs. Under subsection 40-830(5), any amount received for the abandonment, sale or other disposal must be included in assessable income for that year. 18. Under subsection 40-830(6), any capital amounts 'derived' in an income year in relation to a project amount allocated to a project pool or something on which the project amount is expended must be included in assessable income for that income year. 19. This Ruling applies both before and after its date of issue. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 and 22 of Taxation Ruling TR 92/20). | What is a project for the purposes of Subdivision 40-I?: 20. Since the word 'project' is not defined for the purposes of Subdivision 40-I it takes its ordinary meaning shaped by the context in which it is found. 21. The project, whether it is being carried on or is proposed to be carried on, must be of sufficient substance and be sufficiently identified that it can be shown that the capital expenditure said to be a project amount is directly connected with the project. These considerations require that a project be a plan, scheme or undertaking of some substance: that is, something more substantial than an idea or speculation. 22. Further, a project is an activity which is, or a set of related activities which are, distinct from any activity on which the capital expenditure which constitutes a project amount is incurred. For example, environmental assessments for a project must be directly connected with the project but they are not the project itself. | A project must be carried on: 23. Subdivision 40-I covers projects carried on or proposed to be carried on. 24. Since the term 'carry on' is not defined for the purposes of the Subdivision, it takes its ordinary meaning shaped by the context in which it is found. 25. The words 'carry on' in paragraph 40-840(2)(c) 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. A pause in activities which does not constitute an abandonment of the project will not lead to a conclusion that the project is not being carried on. 26. The holding of a passive investment would not have sufficient activity to constitute the carrying on of a project. 27. The words 'propose to carry on' in paragraph 40-840(2)(c) require a commitment of some substance to the activity or activities identified as constituting the project. For instance, the undertaking of a feasibility study for a project would demonstrate a commitment of some substance to the project. | A project must be carried on for a taxable purpose: 28. The definition of 'taxable purpose' in subsection 40-25(7) covers various purposes, including the purpose of producing assessable income. A project is carried on or proposed to be carried on for the 'purpose of producing assessable income' if it is carried on or proposed to be carried on: 29. In that context, a project that is, of itself, carried on or proposed to be carried on for the purpose of gaining or producing assessable income is one carried on or proposed to be carried on for a taxable purpose. 30. Again in that context, a project that is not, of itself, carried on or proposed to be carried on for the purpose of gaining or producing assessable income is, nonetheless, one carried on or proposed to be carried on for a taxable purpose if it is carried on or proposed to be carried on in carrying on a business for the purpose of gaining or producing assessable income. It is not enough that the project merely be carried on or proposed to be carried on while the business is being carried on. Rather, the carrying on or proposed carrying on of the project must occur in the course of and as an integral part of carrying on the business. | A project must have a finite project life: 31. To constitute a project under Subdivision 40-I the activity or activities the taxpayer carries on or proposes to carry on for a taxable purpose must, on a reasonable and objective determination, have a finite project life (whether or not that project life has yet been quantified by estimation). 32. A finite project life, then, is an element of a Subdivision 40-I project, not merely a condition which must be present to enable a deduction to be claimed for project amounts allocated to a project pool. If the project is not identified to the point where it can be objectively and reasonably determined that it has a finite project life, there is no project for the purposes of the legislation. Similarly, if the project is identified and it can be objectively and reasonably determined that it does not have a finite project life, there is no project for the purposes of Subdivision 40-I. 33. It necessarily follows that for capital expenditure to be a project amount, a project with a finite project life must exist at or before the time at which the expenditure is incurred. If there is no finite project life, there is no project for the purposes of Subdivision 40-I. If there is no such project, it cannot be said that the expenditure incurred is directly connected with a project carried on or proposed to be carried on for a taxable purpose and the expenditure would not constitute a project amount. | Estimating project life: 34. Section 40-845 requires that the project life of a project be worked out by the taxpayer by estimating how long it will be, in years including fractions of years, from when the project starts to operate until it stops operating. 35. The project life of the taxpayer's project is estimated from when the taxpayer starts to operate that project. 36. To make an estimate of the project life objectively, the taxpayer must take all relevant factors into account. Factors that are personal only to the taxpayer, such as how long the taxpayer intends to carry on the project, would not of themselves be relevant. Factors outside the control of the taxpayer would be relevant. | Yearly estimate of project life: 37. A taxpayer must estimate the project life of their project each year. The project life may not change but the taxpayer must turn their mind to the question each year. | When do deductions commence?: 38. A taxpayer can commence to claim deductions for project amounts in a project pool for the income year in which the project starts to operate: section 40-855.

Ruling: What is a project for the purposes of Subdivision 40-I?: 20. Since the word 'project' is not defined for the purposes of Subdivision 40-I it takes its ordinary meaning shaped by the context in which it is found. 21. The project, whether it is being carried on or is proposed to be carried on, must be of sufficient substance and be sufficiently identified that it can be shown that the capital expenditure said to be a project amount is directly connected with the project. These considerations require that a project be a plan, scheme or undertaking of some substance: that is, something more substantial than an idea or speculation. 22. Further, a project is an activity which is, or a set of related activities which are, distinct from any activity on which the capital expenditure which constitutes a project amount is incurred. For example, environmental assessments for a project must be directly connected with the project but they are not the project itself. | A project must be carried on: 23. Subdivision 40-I covers projects carried on or proposed to be carried on. 24. Since the term 'carry on' is not defined for the purposes of the Subdivision, it takes its ordinary meaning shaped by the context in which it is found. 25. The words 'carry on' in paragraph 40-840(2)(c) 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. A pause in activities which does not constitute an abandonment of the project will not lead to a conclusion that the project is not being carried on. 26. The holding of a passive investment would not have sufficient activity to constitute the carrying on of a project. 27. The words 'propose to carry on' in paragraph 40-840(2)(c) require a commitment of some substance to the activity or activities identified as constituting the project. For instance, the undertaking of a feasibility study for a project would demonstrate a commitment of some substance to the project. | A project must be carried on for a taxable purpose: 28. The definition of 'taxable purpose' in subsection 40-25(7) covers various purposes, including the purpose of producing assessable income. A project is carried on or proposed to be carried on for the 'purpose of producing assessable income' if it is carried on or proposed to be carried on: 29. In that context, a project that is, of itself, carried on or proposed to be carried on for the purpose of gaining or producing assessable income is one carried on or proposed to be carried on for a taxable purpose. 30. Again in that context, a project that is not, of itself, carried on or proposed to be carried on for the purpose of gaining or producing assessable income is, nonetheless, one carried on or proposed to be carried on for a taxable purpose if it is carried on or proposed to be carried on in carrying on a business for the purpose of gaining or producing assessable income. It is not enough that the project merely be carried on or proposed to be carried on while the business is being carried on. Rather, the carrying on or proposed carrying on of the project must occur in the course of and as an integral part of carrying on the business. | A project must have a finite project life: 31. To constitute a project under Subdivision 40-I the activity or activities the taxpayer carries on or proposes to carry on for a taxable purpose must, on a reasonable and objective determination, have a finite project life (whether or not that project life has yet been quantified by estimation). 32. A finite project life, then, is an element of a Subdivision 40-I project, not merely a condition which must be present to enable a deduction to be claimed for project amounts allocated to a project pool. If the project is not identified to the point where it can be objectively and reasonably determined that it has a finite project life, there is no project for the purposes of the legislation. Similarly, if the project is identified and it can be objectively and reasonably determined that it does not have a finite project life, there is no project for the purposes of Subdivision 40-I. 33. It necessarily follows that for capital expenditure to be a project amount, a project with a finite project life must exist at or before the time at which the expenditure is incurred. If there is no finite project life, there is no project for the purposes of Subdivision 40-I. If there is no such project, it cannot be said that the expenditure incurred is directly connected with a project carried on or proposed to be carried on for a taxable purpose and the expenditure would not constitute a project amount. | Estimating project life: 34. Section 40-845 requires that the project life of a project be worked out by the taxpayer by estimating how long it will be, in years including fractions of years, from when the project starts to operate until it stops operating. 35. The project life of the taxpayer's project is estimated from when the taxpayer starts to operate that project. 36. To make an estimate of the project life objectively, the taxpayer must take all relevant factors into account. Factors that are personal only to the taxpayer, such as how long the taxpayer intends to carry on the project, would not of themselves be relevant. Factors outside the control of the taxpayer would be relevant. | Yearly estimate of project life: 37. A taxpayer must estimate the project life of their project each year. The project life may not change but the taxpayer must turn their mind to the question each year. | When do deductions commence?: 38. A taxpayer can commence to claim deductions for project amounts in a project pool for the income year in which the project starts to operate: section 40-855. | Example 1: 39. In carrying on business, a taxpayer undertakes a project to build and operate a depreciating asset for 30 years. Because of the peculiar nature of the activity the taxpayer receives a 30 year non-renewable and non-extendible licence from the relevant government in respect of this depreciating asset. The contractual arrangement with the government is that the taxpayer will build the depreciating asset in the first 2 years (the preparatory phase of the project) and will operate the depreciating asset for the next 28 years (the operational phase of the project) before surrendering the property to the government. The depreciating asset itself may have an effective life of 40 years or more. The taxpayer intends to operate the depreciating asset for only 8 years and then to sell the rights associated with the project to a third party. 40. In the first year of operation, the project life of the taxpayer's project is estimated at 28 years. That is the period over which the taxpayer can operate it. The taxpayer's intention to sell out is not relevant to working out the project life. All capital expenditures in terms of subparagraphs 40-840(2)(d)(i) to (vii) that qualify as project amounts can be allocated to a project pool and amounts can be deducted for them over the project life of 28 years. Neither the capital construction costs of the depreciating asset nor the cost of the licence would be a project amount however. | Example 2: 41. Assume the same facts as in Example 1 except that before the project starts to operate the taxpayer enters into a legally enforceable arm's length contract with an unrelated third party to sell the rights associated with the project to that entity 10 years after the licence commences. Consent to the contract was obtained from the relevant government. Based on the fact that the taxpayer will only be able to operate the project for 8 years, that will be the estimated project life in the first year of operation. | Example 3: 42. Assume the same facts as in Example 2 and that time has passed and the transfer to the third party has occurred. That entity has a right to operate the toll road for the next 20 years. When this taxpayer starts operating the project, the project life is estimated to be 20 years. That is the period that this taxpayer can operate the project based on an objective consideration of the factors external to the taxpayer at the time of the estimate of the project life. | Example 4: 43. Assume the same facts as in Example 1 except that, after operating the toll road for 5 years, the taxpayer enters into a government approved legally enforceable arm's length contract to sell the rights associated with the project to an unrelated third party in 2 years. In working out the deduction for project amounts in the year of entry into the contract, a project life of 7 years would be estimated based on factors external to the taxpayer (for instance, the legally binding contract to dispose of the rights associated with the project). Project life would be recalculated at 7 years for that income year. | What is a project for the purposes of Subdivision 40-I?: 44. The word 'project' is not defined for the purposes of Subdivision 40-I. It is appropriate, if they are not defined, that terms take their ordinary meaning shaped by the context in which they are found. 45. In The Australian Concise Oxford Dictionary (fourth edition, 2004), 'project' means: 46. In The Macquarie Dictionary (revised third edition, 2001 ) 'project' means: 47. In general terms then, a project is a plan, scheme or undertaking. 48. Subdivision 40-I, in referring to a project, refers to both a project you carry on and a project you propose to carry on. Whether it is being carried on or is proposed to be carried on, the project must be of sufficient substance and be sufficiently identified that it can be shown that the capital expenditure said to be a project amount is directly connected with the project. These considerations require that a project for the purposes of Subdivision 40-I must be something more substantial than an idea or speculation. A project you carry on or propose to carry on would involve a plan, scheme or undertaking of some substance. 49. A project is an activity or a set of related activities. The activities undertaken and the outcome or outcomes to which they are directed assist in the identification of the project. The following are some of the things that define a project: 50. The project that is carried on or proposed to be carried on is not the same activity as the activity on which the capital expenditure which constitutes a project amount (detailed in subparagraphs 40-840(2)(d)(i) through (vii)) is incurred. For example, environmental assessments under subparagraph 40-840(2)(d)(iv) must be 'directly connected with' the project but they are not the project itself. | A project must be carried on: 51. One of the tests that an amount of capital expenditure must satisfy to be a project amount is that it is 'directly connected with a project you carry on or propose to carry on for a taxable purpose': paragraph 40-840(2)(c). 52. There is no definition of 'carry on' for the purposes of Subdivision 40-I. The term should therefore take its ordinary meaning shaped by the context in which it is found. 53. In The Australian Concise Oxford Dictionary (fourth edition, 2004 ) 'carry on' relevantly means: 54. In The Macquarie Dictionary (revised third edition, 2001 ) 'carry on' relevantly means: 55. These meanings have a clear connotation 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. If there is a temporary pause in activities, it will not lead to a conclusion that the project is not being carried on. 56. Whether there is a project carried on will, of necessity, be determined by the facts and circumstances of the particular case. It is expected, though, that for there to be a project carried on for the purposes of Subdivision 40-I there must be some activity or set of related activities. The holding of a passive investment would not have sufficient activity to constitute the carrying on of a project, for example. 57. To 'propose to carry on' a project, there must be a commitment of some substance to the activity or activities identified as constituting the project. An example would be a decision by a board of directors to commit resources to the project. | A project must be carried on for a taxable purpose: 58. 'Taxable purpose' is defined in subsection 40-25(7) to be the purpose of producing assessable income, the purpose of exploration or prospecting, the purpose of mining site rehabilitation, or environmental protection activities. 59. Subsection 995-1(1) clarifies the meaning of the phrase 'purpose of producing assessable income'. It provides that something is done for the purpose of producing assessable income if it is done: 60. A project, then, is carried on or proposed to be carried on for the purpose of producing assessable income if it is carried on or proposed to be carried on: 61. A project that is, of itself, carried on or proposed to be carried on for the purpose of gaining or producing assessable income is a project carried on or proposed to be carried on for a taxable purpose. 62. A project that is not, of itself, carried on or proposed to be carried on for the purpose of gaining or producing assessable income is nonetheless a project carried on or proposed to be carried on for a taxable purpose if it is carried on or proposed to be carried on in carrying on a business for the purpose of gaining or producing assessable income. 63. A project is carried on or proposed to be carried on in carrying on a business for the purpose of gaining or producing assessable income if it is carried on or proposed to be carried on in the course of and as an integral part of carrying on an existing business. It is not enough that the project be carried on or proposed to be carried on while that business is being carried on. Rather, the carrying on or proposed carrying on of the project must occur in the course of carrying on that business. | A project must have a finite project life: 64. A further essential element of a project for the purposes of Subdivision 40-I is a finite project life which can be objectively and reasonably determined. 65. There is no explicit statement in the legislation or in the extrinsic material that accompanied it to the effect that, for an activity or activities to be a project, they must be carried on over a finite period: that is, they must have a finite project life. However, it is the Commissioner's view that this requirement is implied in the legislation. 66. There are several indicators to that end. The Guide to Subdivision 40-I (section 40-825) refers to deducting amounts for certain capital expenditure associated with a project 'over the life of the project using a pool'. The reason for the existence of these provisions, then, is to spread the deductions for the project amounts over a finite project life. 67. The concept of the project life of a project is referred to in paragraphs (a) and (b) of the definition of 'DV project pool life' in subsection 40-830(3) and in section 40-845. 68. Section 40-845 requires the taxpayer to work out the project life of a project by estimating how long (in years, including fractions of years) it will be from when the project starts to operate until it stops operating. 69. The project life estimated must be used in the formula in subsection 40-830(3) to calculate the yearly deduction for project amounts in a project pool. The denominator of that formula is 'DV project pool life' which is the project life. If the project life cannot be estimated, there can be no deduction. Because the provisions of Subdivision 40-I were introduced to provide deductions over the project life, there is little point in the provisions contemplating a project for which no project life can be estimated and for which there can be no deductions. 70. In the context of Subdivision 40-I, the various references to 'project life of the project' and the use of that concept as the central element to calculate the deductions over the project life clearly indicate that one of the qualities that defines an activity or activities as a project for the purposes of Subdivision 40-I is a finite project life. 71. A finite project life, then, is an element of a Subdivision 40-I project rather than merely a condition which must be present to enable a deduction to be claimed for project amounts allocated to a project pool. 72. If the project is not identified to the point where it can be objectively and reasonably determined that it has a finite project life, there is no project for the purposes of the legislation. Similarly, if the project is identified and it can be objectively and reasonably determined that it does not have a finite project life (for example, a business that can be carried on indefinitely), there is no project for the purposes of Subdivision 40-I. 73. To constitute a project for Subdivision 40-I purposes, then, the activity or activities the taxpayer carries on or proposes to carry on for a taxable purpose must, on a reasonable and objective determination, have a finite project life (whether or not that project life has yet been quantified by estimation). 74. It necessarily follows that for capital expenditure to be a project amount, a project with a finite project life must exist at or before the time at which the expenditure is incurred. If there is no finite project life, there is no project for the purposes of Subdivision 40-I. If there is no such project, it cannot be said that the expenditure incurred is directly connected with a project carried on or proposed to be carried on for a taxable purpose and the expenditure would not constitute a project amount. 75. The existence of this temporal requirement is reinforced by the inclusion of the reference to 'project' in subparagraphs 40-840(2)(d)(i), (iii), (iv) and (v). Subparagraph (iii), for example, refers to an amount incurred for feasibility studies for the project and the expenditure cannot be 'for the project' when it is incurred if there is no project being carried on or proposed to be carried on when it is incurred. Alternative view - a project need not have a finite project life 76. There is an alternative view that having a finite project life is not a requirement of a project for the purposes of Subdivision 40-I. That is, an activity or set of activities of indefinite or indeterminate duration is a project for the purposes of Subdivision 40-I if it has the other characteristics described in this ruling. Proponents of this view argue that the words of the legislation and available extrinsic materials are equivocal on this issue and that the policy and context does not require a more limited construction. 77. Under this view, the concept of finite project life is only relevant for calculating a progressive deduction under subsection 40-830(3). However, as the deduction under subsection 40-830(4) is independent of project life, it is inappropriate to import the concept of a finite project life into the meaning of 'project' itself. Thus, it is argued, capital expenditure directly connected with the project can constitute a project amount and be allocated to a project pool even if there is no finite project life. In such a case, no deduction would arise each year over the project life unless or until a project life is able to be estimated. However, if a project life is able to be estimated in any year during the life of the project, deductions can be calculated under subsection 40-830(3) from that year forward in relation to the project pool, with the amount not deducted progressively in relation to the earlier years of the project being able to be deducted under subsection 40-830(4) on abandonment, sale or other disposal of the project. Further, if no project life is able to be estimated before the project is abandoned, sold or otherwise disposed of, a deduction could then be claimed for the pool value under subsection 40-830(4). 78. One effect of this view would be that otherwise black hole expenditure on a feasibility study or an environmental assessment associated with an activity that does not have a finite life which is carried on or proposed to be carried on for a taxable purpose would be a project amount which may be deductible upon the abandonment, sale or other disposal of the project. This view would also have the effect that expenditure on, say, a feasibility study to determine whether a set of activities has a finite life could be a project amount even if the study revealed that the project does not have a finite life. 79. However, it is not considered that the alternative view looks to the concept of 'project' in the context of Subdivision 40-I. As specified in section 40-825, the provisions were introduced to allow a deduction for project amounts over a project life which is estimated. In that context, the 'abandonment, sale or other disposal' provision in subsection 40-830(4) has a reasonable and obvious function. Its function is merely to deal with situations where deductions for project amounts allocated to a project pool in a previous income year or in the current income year could have been claimed over the project life but for the abandonment, sale or other disposal of the project that truncates the project. | Estimating project life: 80. Section 40-845 requires that the project life of a project be worked out by the taxpayer 'by estimating how long (in years, including fractions of years) it will be from when the project starts to operate until it stops operating'. 81. A project for the purposes of Subdivision 40-I is considered in relation to the taxpayer carrying on or proposing to carry on the activity or activities. It is the taxpayer's project and not another party's project that is the relevant project. For example, an activity that is a project which is carried on by three taxpayers consecutively is not one project carried on by three different taxpayers at different times but three different projects. 82. This view is supported by the legislation. The Guide in section 40-825 specifies that 'you can deduct amounts for certain capital expenditure associated with projects you carry on' (emphasis added). Also, in paragraph 40-840(2)(c), one of the requirements of the definition of 'project amount' is that the amount must be 'directly connected with a project you carry on or propose to carry on for a taxable purpose' (emphasis added). 83. Accordingly, the project life for each taxpayer's project is estimated from when the taxpayer starts to operate that project. 84. Neither the legislation nor the extrinsic material which accompanied it provides any assistance in terms of the criteria necessary for estimating the project life for the taxpayer's project. The period of time that the taxpayer intends to carry on the activity or activities would not be a determining factor. The intention of the taxpayer is not a suitable basis for working out a statutory write-off period. 85. It is expected that to estimate the project life the taxpayer would need to have regard to factors outside their control. The factors to be considered by the taxpayer would vary from case to case. An example of a relevant factor would be something inherent in the project itself, such as a legislative or environmental restriction limiting the period of operation or normal commercial practices in relation to the activity or activities. | Yearly estimate of project life: 86. The project life estimated under section 40-845 is used in the formula in subsection 40-830(3) to calculate the deduction for the income year. The project life estimate must be undertaken each year in calculating the deduction for project amounts allocated to a project pool. 87. This annual estimate may result in a conclusion that the project life is the same as that estimated in the previous year. If the estimate results in a longer or shorter project life, however, the recalculated figure is the one which is used in the formula in subsection 40-830(3) to calculate the deduction for the income year. That is why there is a reference to 'recalculated project life' in paragraph (b) of the meaning of 'DV project pool life' in subsection 40-830(3). 88. The taxpayer continues to use the recalculated project life unless or until the annual estimate of project life results in a different project life. 89. As pointed out in paragraphs 84 and 85, it is expected that factors outside the control of the taxpayer rather than factors personal to the taxpayer would be considered to estimate the project life each year. 90. Factors taken into consideration in the yearly estimate may include a change in demand or changes in the regulatory environment in which the project operates. | When do deductions commence?: 91. Project amounts can be allocated to a project pool at any time, including before a project starts to operate. For example, a feasibility study on whether or not to conduct a project would necessarily be undertaken when it is proposed to carry on the project. Capital expenditure on that feasibility study could be a project amount which can be allocated to a project pool. 92. However, no deduction for any project amounts could be claimed under subsection 40-830(2) until the first year the project starts to operate: section 40-855. 93. Below is a detailed contents list for this Taxation Ruling: Commissioner of Taxation 9 March 2005 Previously released in draft form as TR 2004/D15

Examples: Example 1: 39. In carrying on business, a taxpayer undertakes a project to build and operate a depreciating asset for 30 years. Because of the peculiar nature of the activity the taxpayer receives a 30 year non-renewable and non-extendible licence from the relevant government in respect of this depreciating asset. The contractual arrangement with the government is that the taxpayer will build the depreciating asset in the first 2 years (the preparatory phase of the project) and will operate the depreciating asset for the next 28 years (the operational phase of the project) before surrendering the property to the government. The depreciating asset itself may have an effective life of 40 years or more. The taxpayer intends to operate the depreciating asset for only 8 years and then to sell the rights associated with the project to a third party. 40. In the first year of operation, the project life of the taxpayer's project is estimated at 28 years. That is the period over which the taxpayer can operate it. The taxpayer's intention to sell out is not relevant to working out the project life. All capital expenditures in terms of subparagraphs 40-840(2)(d)(i) to (vii) that qualify as project amounts can be allocated to a project pool and amounts can be deducted for them over the project life of 28 years. Neither the capital construction costs of the depreciating asset nor the cost of the licence would be a project amount however. | Example 2: 41. Assume the same facts as in Example 1 except that before the project starts to operate the taxpayer enters into a legally enforceable arm's length contract with an unrelated third party to sell the rights associated with the project to that entity 10 years after the licence commences. Consent to the contract was obtained from the relevant government. Based on the fact that the taxpayer will only be able to operate the project for 8 years, that will be the estimated project life in the first year of operation. | Example 3: 42. Assume the same facts as in Example 2 and that time has passed and the transfer to the third party has occurred. That entity has a right to operate the toll road for the next 20 years. When this taxpayer starts operating the project, the project life is estimated to be 20 years. That is the period that this taxpayer can operate the project based on an objective consideration of the factors external to the taxpayer at the time of the estimate of the project life. | Example 4: 43. Assume the same facts as in Example 1 except that, after operating the toll road for 5 years, the taxpayer enters into a government approved legally enforceable arm's length contract to sell the rights associated with the project to an unrelated third party in 2 years. In working out the deduction for project amounts in the year of entry into the contract, a project life of 7 years would be estimated based on factors external to the taxpayer (for instance, the legally binding contract to dispose of the rights associated with the project). Project life would be recalculated at 7 years for that income year. What is a project for the purposes of Subdivision 40-I? 44. The word 'project' is not defined for the purposes of Subdivision 40-I. It is appropriate, if they are not defined, that terms take their ordinary meaning shaped by the context in which they are found. 45. In The Australian Concise Oxford Dictionary (fourth edition, 2004), 'project' means: 46. In The Macquarie Dictionary (revised third edition, 2001 ) 'project' means: 47. In general terms then, a project is a plan, scheme or undertaking. 48. Subdivision 40-I, in referring to a project, refers to both a project you carry on and a project you propose to carry on. Whether it is being carried on or is proposed to be carried on, the project must be of sufficient substance and be sufficiently identified that it can be shown that the capital expenditure said to be a project amount is directly connected with the project. These considerations require that a project for the purposes of Subdivision 40-I must be something more substantial than an idea or speculation. A project you carry on or propose to carry on would involve a plan, scheme or undertaking of some substance. 49. A project is an activity or a set of related activities. The activities undertaken and the outcome or outcomes to which they are directed assist in the identification of the project. The following are some of the things that define a project: 50. The project that is carried on or proposed to be carried on is not the same activity as the activity on which the capital expenditure which constitutes a project amount (detailed in subparagraphs 40-840(2)(d)(i) through (vii)) is incurred. For example, environmental assessments under subparagraph 40-840(2)(d)(iv) must be 'directly connected with' the project but they are not the project itself. A project must be carried on 51. One of the tests that an amount of capital expenditure must satisfy to be a project amount is that it is 'directly connected with a project you carry on or propose to carry on for a taxable purpose': paragraph 40-840(2)(c). 52. There is no definition of 'carry on' for the purposes of Subdivision 40-I. The term should therefore take its ordinary meaning shaped by the context in which it is found. 53. In The Australian Concise Oxford Dictionary (fourth edition, 2004 ) 'carry on' relevantly means: 54. In The Macquarie Dictionary (revised third edition, 2001 ) 'carry on' relevantly means: 55. These meanings have a clear connotation 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. If there is a temporary pause in activities, it will not lead to a conclusion that the project is not being carried on. 56. Whether there is a project carried on will, of necessity, be determined by the facts and circumstances of the particular case. It is expected, though, that for there to be a project carried on for the purposes of Subdivision 40-I there must be some activity or set of related activities. The holding of a passive investment would not have sufficient activity to constitute the carrying on of a project, for example. 57. To 'propose to carry on' a project, there must be a commitment of some substance to the activity or activities identified as constituting the project. An example would be a decision by a board of directors to commit resources to the project. A project must be carried on for a taxable purpose 58. 'Taxable purpose' is defined in subsection 40-25(7) to be the purpose of producing assessable income, the purpose of exploration or prospecting, the purpose of mining site rehabilitation, or environmental protection activities. 59. Subsection 995-1(1) clarifies the meaning of the phrase 'purpose of producing assessable income'. It provides that something is done for the purpose of producing assessable income if it is done: 60. A project, then, is carried on or proposed to be carried on for the purpose of producing assessable income if it is carried on or proposed to be carried on: 61. A project that is, of itself, carried on or proposed to be carried on for the purpose of gaining or producing assessable income is a project carried on or proposed to be carried on for a taxable purpose. 62. A project that is not, of itself, carried on or proposed to be carried on for the purpose of gaining or producing assessable income is nonetheless a project carried on or proposed to be carried on for a taxable purpose if it is carried on or proposed to be carried on in carrying on a business for the purpose of gaining or producing assessable income. 63. A project is carried on or proposed to be carried on in carrying on a business for the purpose of gaining or producing assessable income if it is carried on or proposed to be carried on in the course of and as an integral part of carrying on an existing business. It is not enough that the project be carried on or proposed to be carried on while that business is being carried on. Rather, the carrying on or proposed carrying on of the project must occur in the course of carrying on that business. A project must have a finite project life 64. A further essential element of a project for the purposes of Subdivision 40-I is a finite project life which can be objectively and reasonably determined. 65. There is no explicit statement in the legislation or in the extrinsic material that accompanied it to the effect that, for an activity or activities to be a project, they must be carried on over a finite period: that is, they must have a finite project life. However, it is the Commissioner's view that this requirement is implied in the legislation. 66. There are several indicators to that end. The Guide to Subdivision 40-I (section 40-825) refers to deducting amounts for certain capital expenditure associated with a project 'over the life of the project using a pool'. The reason for the existence of these provisions, then, is to spread the deductions for the project amounts over a finite project life. 67. The concept of the project life of a project is referred to in paragraphs (a) and (b) of the definition of 'DV project pool life' in subsection 40-830(3) and in section 40-845. 68. Section 40-845 requires the taxpayer to work out the project life of a project by estimating how long (in years, including fractions of years) it will be from when the project starts to operate until it stops operating. 69. The project life estimated must be used in the formula in subsection 40-830(3) to calculate the yearly deduction for project amounts in a project pool. The denominator of that formula is 'DV project pool life' which is the project life. If the project life cannot be estimated, there can be no deduction. Because the provisions of Subdivision 40-I were introduced to provide deductions over the project life, there is little point in the provisions contemplating a project for which no project life can be estimated and for which there can be no deductions. 70. In the context of Subdivision 40-I, the various references to 'project life of the project' and the use of that concept as the central element to calculate the deductions over the project life clearly indicate that one of the qualities that defines an activity or activities as a project for the purposes of Subdivision 40-I is a finite project life. 71. A finite project life, then, is an element of a Subdivision 40-I project rather than merely a condition which must be present to enable a deduction to be claimed for project amounts allocated to a project pool. 72. If the project is not identified to the point where it can be objectively and reasonably determined that it has a finite project life, there is no project for the purposes of the legislation. Similarly, if the project is identified and it can be objectively and reasonably determined that it does not have a finite project life (for example, a business that can be carried on indefinitely), there is no project for the purposes of Subdivision 40-I. 73. To constitute a project for Subdivision 40-I purposes, then, the activity or activities the taxpayer carries on or proposes to carry on for a taxable purpose must, on a reasonable and objective determination, have a finite project life (whether or not that project life has yet been quantified by estimation). 74. It necessarily follows that for capital expenditure to be a project amount, a project with a finite project life must exist at or before the time at which the expenditure is incurred. If there is no finite project life, there is no project for the purposes of Subdivision 40-I. If there is no such project, it cannot be said that the expenditure incurred is directly connected with a project carried on or proposed to be carried on for a taxable purpose and the expenditure would not constitute a project amount. 75. The existence of this temporal requirement is reinforced by the inclusion of the reference to 'project' in subparagraphs 40-840(2)(d)(i), (iii), (iv) and (v). Subparagraph (iii), for example, refers to an amount incurred for feasibility studies for the project and the expenditure cannot be 'for the project' when it is incurred if there is no project being carried on or proposed to be carried on when it is incurred. Alternative view - a project need not have a finite project life 76. There is an alternative view that having a finite project life is not a requirement of a project for the purposes of Subdivision 40-I. That is, an activity or set of activities of indefinite or indeterminate duration is a project for the purposes of Subdivision 40-I if it has the other characteristics described in this ruling. Proponents of this view argue that the words of the legislation and available extrinsic materials are equivocal on this issue and that the policy and context does not require a more limited construction. 77. Under this view, the concept of finite project life is only relevant for calculating a progressive deduction under subsection 40-830(3). However, as the deduction under subsection 40-830(4) is independent of project life, it is inappropriate to import the concept of a finite project life into the meaning of 'project' itself. Thus, it is argued, capital expenditure directly connected with the project can constitute a project amount and be allocated to a project pool even if there is no finite project life. In such a case, no deduction would arise each year over the project life unless or until a project life is able to be estimated. However, if a project life is able to be estimated in any year during the life of the project, deductions can be calculated under subsection 40-830(3) from that year forward in relation to the project pool, with the amount not deducted progressively in relation to the earlier years of the project being able to be deducted under subsection 40-830(4) on abandonment, sale or other disposal of the project. Further, if no project life is able to be estimated before the project is abandoned, sold or otherwise disposed of, a deduction could then be claimed for the pool value under subsection 40-830(4). 78. One effect of this view would be that otherwise black hole expenditure on a feasibility study or an environmental assessment associated with an activity that does not have a finite life which is carried on or proposed to be carried on for a taxable purpose would be a project amount which may be deductible upon the abandonment, sale or other disposal of the project. This view would also have the effect that expenditure on, say, a feasibility study to determine whether a set of activities has a finite life could be a project amount even if the study revealed that the project does not have a finite life. 79. However, it is not considered that the alternative view looks to the concept of 'project' in the context of Subdivision 40-I. As specified in section 40-825, the provisions were introduced to allow a deduction for project amounts over a project life which is estimated. In that context, the 'abandonment, sale or other disposal' provision in subsection 40-830(4) has a reasonable and obvious function. Its function is merely to deal with situations where deductions for project amounts allocated to a project pool in a previous income year or in the current income year could have been claimed over the project life but for the abandonment, sale or other disposal of the project that truncates the project. Estimating project life 80. Section 40-845 requires that the project life of a project be worked out by the taxpayer 'by estimating how long (in years, including fractions of years) it will be from when the project starts to operate until it stops operating'. 81. A project for the purposes of Subdivision 40-I is considered in relation to the taxpayer carrying on or proposing to carry on the activity or activities. It is the taxpayer's project and not another party's project that is the relevant project. For example, an activity that is a project which is carried on by three taxpayers consecutively is not one project carried on by three different taxpayers at different times but three different projects. 82. This view is supported by the legislation. The Guide in section 40-825 specifies that 'you can deduct amounts for certain capital expenditure associated with projects you carry on' (emphasis added). Also, in paragraph 40-840(2)(c), one of the requirements of the definition of 'project amount' is that the amount must be 'directly connected with a project you carry on or propose to carry on for a taxable purpose' (emphasis added). 83. Accordingly, the project life for each taxpayer's project is estimated from when the taxpayer starts to operate that project. 84. Neither the legislation nor the extrinsic material which accompanied it provides any assistance in terms of the criteria necessary for estimating the project life for the taxpayer's project. The period of time that the taxpayer intends to carry on the activity or activities would not be a determining factor. The intention of the taxpayer is not a suitable basis for working out a statutory write-off period. 85. It is expected that to estimate the project life the taxpayer would need to have regard to factors outside their control. The factors to be considered by the taxpayer would vary from case to case. An example of a relevant factor would be something inherent in the project itself, such as a legislative or environmental restriction limiting the period of operation or normal commercial practices in relation to the activity or activities. Yearly estimate of project life 86. The project life estimated under section 40-845 is used in the formula in subsection 40-830(3) to calculate the deduction for the income year. The project life estimate must be undertaken each year in calculating the deduction for project amounts allocated to a project pool. 87. This annual estimate may result in a conclusion that the project life is the same as that estimated in the previous year. If the estimate results in a longer or shorter project life, however, the recalculated figure is the one which is used in the formula in subsection 40-830(3) to calculate the deduction for the income year. That is why there is a reference to 'recalculated project life' in paragraph (b) of the meaning of 'DV project pool life' in subsection 40-830(3). 88. The taxpayer continues to use the recalculated project life unless or until the annual estimate of project life results in a different project life. 89. As pointed out in paragraphs 84 and 85, it is expected that factors outside the control of the taxpayer rather than factors personal to the taxpayer would be considered to estimate the project life each year. 90. Factors taken into consideration in the yearly estimate may include a change in demand or changes in the regulatory environment in which the project operates. When do deductions commence? 91. Project amounts can be allocated to a project pool at any time, including before a project starts to operate. For example, a feasibility study on whether or not to conduct a project would necessarily be undertaken when it is proposed to carry on the project. Capital expenditure on that feasibility study could be a project amount which can be allocated to a project pool. 92. However, no deduction for any project amounts could be claimed under subsection 40-830(2) until the first year the project starts to operate: section 40-855. 93. Below is a detailed contents list for this Taxation Ruling: Commissioner of Taxation 9 March 2005 Previously released in draft form as TR 2004/D15

Appendix: What is a project for the purposes of Subdivision 40-I?: 44. The word 'project' is not defined for the purposes of Subdivision 40-I. It is appropriate, if they are not defined, that terms take their ordinary meaning shaped by the context in which they are found. 45. In The Australian Concise Oxford Dictionary (fourth edition, 2004), 'project' means: 46. In The Macquarie Dictionary (revised third edition, 2001 ) 'project' means: 47. In general terms then, a project is a plan, scheme or undertaking. 48. Subdivision 40-I, in referring to a project, refers to both a project you carry on and a project you propose to carry on. Whether it is being carried on or is proposed to be carried on, the project must be of sufficient substance and be sufficiently identified that it can be shown that the capital expenditure said to be a project amount is directly connected with the project. These considerations require that a project for the purposes of Subdivision 40-I must be something more substantial than an idea or speculation. A project you carry on or propose to carry on would involve a plan, scheme or undertaking of some substance. 49. A project is an activity or a set of related activities. The activities undertaken and the outcome or outcomes to which they are directed assist in the identification of the project. The following are some of the things that define a project: 50. The project that is carried on or proposed to be carried on is not the same activity as the activity on which the capital expenditure which constitutes a project amount (detailed in subparagraphs 40-840(2)(d)(i) through (vii)) is incurred. For example, environmental assessments under subparagraph 40-840(2)(d)(iv) must be 'directly connected with' the project but they are not the project itself. | A project must be carried on: 51. One of the tests that an amount of capital expenditure must satisfy to be a project amount is that it is 'directly connected with a project you carry on or propose to carry on for a taxable purpose': paragraph 40-840(2)(c). 52. There is no definition of 'carry on' for the purposes of Subdivision 40-I. The term should therefore take its ordinary meaning shaped by the context in which it is found. 53. In The Australian Concise Oxford Dictionary (fourth edition, 2004 ) 'carry on' relevantly means: 54. In The Macquarie Dictionary (revised third edition, 2001 ) 'carry on' relevantly means: 55. These meanings have a clear connotation 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. If there is a temporary pause in activities, it will not lead to a conclusion that the project is not being carried on. 56. Whether there is a project carried on will, of necessity, be determined by the facts and circumstances of the particular case. It is expected, though, that for there to be a project carried on for the purposes of Subdivision 40-I there must be some activity or set of related activities. The holding of a passive investment would not have sufficient activity to constitute the carrying on of a project, for example. 57. To 'propose to carry on' a project, there must be a commitment of some substance to the activity or activities identified as constituting the project. An example would be a decision by a board of directors to commit resources to the project. | A project must be carried on for a taxable purpose: 58. 'Taxable purpose' is defined in subsection 40-25(7) to be the purpose of producing assessable income, the purpose of exploration or prospecting, the purpose of mining site rehabilitation, or environmental protection activities. 59. Subsection 995-1(1) clarifies the meaning of the phrase 'purpose of producing assessable income'. It provides that something is done for the purpose of producing assessable income if it is done: 60. A project, then, is carried on or proposed to be carried on for the purpose of producing assessable income if it is carried on or proposed to be carried on: 61. A project that is, of itself, carried on or proposed to be carried on for the purpose of gaining or producing assessable income is a project carried on or proposed to be carried on for a taxable purpose. 62. A project that is not, of itself, carried on or proposed to be carried on for the purpose of gaining or producing assessable income is nonetheless a project carried on or proposed to be carried on for a taxable purpose if it is carried on or proposed to be carried on in carrying on a business for the purpose of gaining or producing assessable income. 63. A project is carried on or proposed to be carried on in carrying on a business for the purpose of gaining or producing assessable income if it is carried on or proposed to be carried on in the course of and as an integral part of carrying on an existing business. It is not enough that the project be carried on or proposed to be carried on while that business is being carried on. Rather, the carrying on or proposed carrying on of the project must occur in the course of carrying on that business. | A project must have a finite project life: 64. A further essential element of a project for the purposes of Subdivision 40-I is a finite project life which can be objectively and reasonably determined. 65. There is no explicit statement in the legislation or in the extrinsic material that accompanied it to the effect that, for an activity or activities to be a project, they must be carried on over a finite period: that is, they must have a finite project life. However, it is the Commissioner's view that this requirement is implied in the legislation. 66. There are several indicators to that end. The Guide to Subdivision 40-I (section 40-825) refers to deducting amounts for certain capital expenditure associated with a project 'over the life of the project using a pool'. The reason for the existence of these provisions, then, is to spread the deductions for the project amounts over a finite project life. 67. The concept of the project life of a project is referred to in paragraphs (a) and (b) of the definition of 'DV project pool life' in subsection 40-830(3) and in section 40-845. 68. Section 40-845 requires the taxpayer to work out the project life of a project by estimating how long (in years, including fractions of years) it will be from when the project starts to operate until it stops operating. 69. The project life estimated must be used in the formula in subsection 40-830(3) to calculate the yearly deduction for project amounts in a project pool. The denominator of that formula is 'DV project pool life' which is the project life. If the project life cannot be estimated, there can be no deduction. Because the provisions of Subdivision 40-I were introduced to provide deductions over the project life, there is little point in the provisions contemplating a project for which no project life can be estimated and for which there can be no deductions. 70. In the context of Subdivision 40-I, the various references to 'project life of the project' and the use of that concept as the central element to calculate the deductions over the project life clearly indicate that one of the qualities that defines an activity or activities as a project for the purposes of Subdivision 40-I is a finite project life. 71. A finite project life, then, is an element of a Subdivision 40-I project rather than merely a condition which must be present to enable a deduction to be claimed for project amounts allocated to a project pool. 72. If the project is not identified to the point where it can be objectively and reasonably determined that it has a finite project life, there is no project for the purposes of the legislation. Similarly, if the project is identified and it can be objectively and reasonably determined that it does not have a finite project life (for example, a business that can be carried on indefinitely), there is no project for the purposes of Subdivision 40-I. 73. To constitute a project for Subdivision 40-I purposes, then, the activity or activities the taxpayer carries on or proposes to carry on for a taxable purpose must, on a reasonable and objective determination, have a finite project life (whether or not that project life has yet been quantified by estimation). 74. It necessarily follows that for capital expenditure to be a project amount, a project with a finite project life must exist at or before the time at which the expenditure is incurred. If there is no finite project life, there is no project for the purposes of Subdivision 40-I. If there is no such project, it cannot be said that the expenditure incurred is directly connected with a project carried on or proposed to be carried on for a taxable purpose and the expenditure would not constitute a project amount. 75. The existence of this temporal requirement is reinforced by the inclusion of the reference to 'project' in subparagraphs 40-840(2)(d)(i), (iii), (iv) and (v). Subparagraph (iii), for example, refers to an amount incurred for feasibility studies for the project and the expenditure cannot be 'for the project' when it is incurred if there is no project being carried on or proposed to be carried on when it is incurred. Alternative view - a project need not have a finite project life 76. There is an alternative view that having a finite project life is not a requirement of a project for the purposes of Subdivision 40-I. That is, an activity or set of activities of indefinite or indeterminate duration is a project for the purposes of Subdivision 40-I if it has the other characteristics described in this ruling. Proponents of this view argue that the words of the legislation and available extrinsic materials are equivocal on this issue and that the policy and context does not require a more limited construction. 77. Under this view, the concept of finite project life is only relevant for calculating a progressive deduction under subsection 40-830(3). However, as the deduction under subsection 40-830(4) is independent of project life, it is inappropriate to import the concept of a finite project life into the meaning of 'project' itself. Thus, it is argued, capital expenditure directly connected with the project can constitute a project amount and be allocated to a project pool even if there is no finite project life. In such a case, no deduction would arise each year over the project life unless or until a project life is able to be estimated. However, if a project life is able to be estimated in any year during the life of the project, deductions can be calculated under subsection 40-830(3) from that year forward in relation to the project pool, with the amount not deducted progressively in relation to the earlier years of the project being able to be deducted under subsection 40-830(4) on abandonment, sale or other disposal of the project. Further, if no project life is able to be estimated before the project is abandoned, sold or otherwise disposed of, a deduction could then be claimed for the pool value under subsection 40-830(4). 78. One effect of this view would be that otherwise black hole expenditure on a feasibility study or an environmental assessment associated with an activity that does not have a finite life which is carried on or proposed to be carried on for a taxable purpose would be a project amount which may be deductible upon the abandonment, sale or other disposal of the project. This view would also have the effect that expenditure on, say, a feasibility study to determine whether a set of activities has a finite life could be a project amount even if the study revealed that the project does not have a finite life. 79. However, it is not considered that the alternative view looks to the concept of 'project' in the context of Subdivision 40-I. As specified in section 40-825, the provisions were introduced to allow a deduction for project amounts over a project life which is estimated. In that context, the 'abandonment, sale or other disposal' provision in subsection 40-830(4) has a reasonable and obvious function. Its function is merely to deal with situations where deductions for project amounts allocated to a project pool in a previous income year or in the current income year could have been claimed over the project life but for the abandonment, sale or other disposal of the project that truncates the project. | Estimating project life: 80. Section 40-845 requires that the project life of a project be worked out by the taxpayer 'by estimating how long (in years, including fractions of years) it will be from when the project starts to operate until it stops operating'. 81. A project for the purposes of Subdivision 40-I is considered in relation to the taxpayer carrying on or proposing to carry on the activity or activities. It is the taxpayer's project and not another party's project that is the relevant project. For example, an activity that is a project which is carried on by three taxpayers consecutively is not one project carried on by three different taxpayers at different times but three different projects. 82. This view is supported by the legislation. The Guide in section 40-825 specifies that 'you can deduct amounts for certain capital expenditure associated with projects you carry on' (emphasis added). Also, in paragraph 40-840(2)(c), one of the requirements of the definition of 'project amount' is that the amount must be 'directly connected with a project you carry on or propose to carry on for a taxable purpose' (emphasis added). 83. Accordingly, the project life for each taxpayer's project is estimated from when the taxpayer starts to operate that project. 84. Neither the legislation nor the extrinsic material which accompanied it provides any assistance in terms of the criteria necessary for estimating the project life for the taxpayer's project. The period of time that the taxpayer intends to carry on the activity or activities would not be a determining factor. The intention of the taxpayer is not a suitable basis for working out a statutory write-off period. 85. It is expected that to estimate the project life the taxpayer would need to have regard to factors outside their control. The factors to be considered by the taxpayer would vary from case to case. An example of a relevant factor would be something inherent in the project itself, such as a legislative or environmental restriction limiting the period of operation or normal commercial practices in relation to the activity or activities. | Yearly estimate of project life: 86. The project life estimated under section 40-845 is used in the formula in subsection 40-830(3) to calculate the deduction for the income year. The project life estimate must be undertaken each year in calculating the deduction for project amounts allocated to a project pool. 87. This annual estimate may result in a conclusion that the project life is the same as that estimated in the previous year. If the estimate results in a longer or shorter project life, however, the recalculated figure is the one which is used in the formula in subsection 40-830(3) to calculate the deduction for the income year. That is why there is a reference to 'recalculated project life' in paragraph (b) of the meaning of 'DV project pool life' in subsection 40-830(3). 88. The taxpayer continues to use the recalculated project life unless or until the annual estimate of project life results in a different project life. 89. As pointed out in paragraphs 84 and 85, it is expected that factors outside the control of the taxpayer rather than factors personal to the taxpayer would be considered to estimate the project life each year. 90. Factors taken into consideration in the yearly estimate may include a change in demand or changes in the regulatory environment in which the project operates. | When do deductions commence?: 91. Project amounts can be allocated to a project pool at any time, including before a project starts to operate. For example, a feasibility study on whether or not to conduct a project would necessarily be undertaken when it is proposed to carry on the project. Capital expenditure on that feasibility study could be a project amount which can be allocated to a project pool. 92. However, no deduction for any project amounts could be claimed under subsection 40-830(2) until the first year the project starts to operate: section 40-855.


What this Ruling is about | Preamble: The number, subject heading, What this Ruling is about (including Class of person/arrangement section), Date of effect, and Ruling parts of this document are a 'public ruling' for the purposes of Part IVAAA of the Taxation Administration Act 1953 and are legally binding on the Commissioner. Taxation Rulings TR 92/1 and TR 97/16 together explain when a Ruling is a 'public ruling' and how it is binding on the Commissioner. | What this Ruling is about: 1. This Ruling considers the operation of certain provisions in Subdivision 40-I of the Income Tax Assessment Act 1997 (ITAA 1997) which allow deductions for project amounts that are allocated to a project pool. The Ruling is concerned with project amounts under subsection 40-840(2) which are specific items of capital expenditure directly connected with a project carried on or proposed to be carried on by a taxpayer for a taxable purpose. The Ruling is not to be read as applying to any amount of 'mining capital expenditure' or 'transport capital expenditure' that is a project amount under subsection 40-840(1). | 2. All references in this Ruling are to the ITAA 1997. | 3. This Ruling specifically considers: | 4. The Ruling provides guidance to taxpayers who wish to determine whether the activity or activities that they are undertaking or propose to undertake qualify as a project for the purposes of Subdivision 40-I. | Class of person/arrangement


Related rulings: TR 92/1 TR 92/20 TR 97/16
Legislative references: ITAA 1997 Subdiv 40-I ITAA 1997 40-25(7) ITAA 1997 40-825 ITAA 1997 40-830 ITAA 1997 40-830(1) ITAA 1997 40-830(2) ITAA 1997 40-830(3) ITAA 1997 40-830(4) ITAA 1997 40-830(5) ITAA 1997 40-830(6) ITAA 1997 40-830(8) ITAA 1997 40-835 ITAA 1997 40-840 ITAA 1997 40-840(1) ITAA 1997 40-840(2) ITAA 1997 40-840(2)(a) ITAA 1997 40-840(2)(b) ITAA 1997 40-840(2)(c) ITAA 1997 40-840(2)(d) ITAA 1997 40-840(2)(d)(i) ITAA 1997 40-840(2)(d)(ii) ITAA 1997 40-840(2)(d)(iii) ITAA 1997 40-840(2)(d)(iv) ITAA 1997 40-840(2)(d)(v) ITAA 1997 40-840(2)(d)(vi) ITAA 1997 40-840(2)(d)(vii) ITAA 1997 40-845 ITAA 1997 40-855 ITAA 1997 40-860 ITAA 1997 40-865 ITAA 1997 40-870 ITAA 1997 40-875 ITAA 1997 40-880 ITAA 1997 40-885 ITAA 1997 995-1(1) TAA 1953 Pt IVAAA
Subject references: project amount project pools