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When the taxpayer proposes to increase their rental income by extending a building which is being used solely to derive rental income, is that a project carried on for a taxable purpose within the project pooling provisions of Subdivision 40-I of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The project is not a project being carried on for a taxable purpose by the taxpayer within the project pooling provisions of Subdivision 40-I of the ITAA 1997.

The taxpayer is the owner of a commercial building from which the taxpayer derives rental income only. The tenant of the building requested the taxpayer to construct an extension to the building.

The taxpayer paid a drafting service to prepare building plans for the extension and paid fees to submit a building development application to the local council. That application was unsuccessful and the extension did not proceed.

Under subsection 40-840(2) of the ITAA 1997, capital expenditure incurred by a taxpayer which, among other things, is directly connected with a project that the taxpayer carries on or proposes to carry on for a taxable purpose is a project amount which can be allocated to a project pool and for which a deduction is available under section 40-830 of the ITAA 1997 over the project life.

Some projects carried on for a taxable purpose within the ambit of subsection 40-840(2) of the ITAA 1997 consist of two stages: a pre-operational stage (a construction or setting up stage) and an operational stage (when the taxpayer carries on activities for a taxable purpose). Such projects start at the beginning of the preparatory stage. They start to operate at the beginning of the operational stage.

The project life commences when a project starts to operate. The deduction for project amounts is spread over the project life.

The words 'carry on' in paragraph 40-840(2)(c) of the ITAA 1997 import a requirement of continuity of activity or of some active participation by the taxpayer.

In this particular case, the operational stage of the project does not involve continuity of activity or some active participation by the taxpayer. Something more than the receipt of rental income is required to satisfy that requirement: rental income merely flows from the holding of a passive investment rather than from any activities carried on by the property owner.

As a result, there is no project being carried on for a taxable purpose within the project pooling provisions of Subdivision 40-I of the ITAA 1997.