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If there is a disposal of mining property to the taxpayer, a common law partnership, in which the former owner of the property has an interest, and there is a joint election for roll-over relief under subsection 330-520(4) of the Income Tax Assessment Act 1997 (ITAA 1997), is the partnership entitled to claim deductions for the undeducted allowable capital expenditure (ACE)?

Yes. The partnership is entitled to claim deductions for the undeducted ACE, as it is taken to have incurred the expenditure under subsection 41-40(3) of the ITAA 1997. Division 330 of the ITAA 1997 allows the deduction to the entity carrying on eligible mining operations.

The owner of the mine operated a mine. In 1999 the owner of the mine entered into a partnership agreement with another party (partnership A). As a result, partnership A gained an interest in the assets of the mine and the mining tenements due to the formation of the taxpayer, a new partnership (partnership B). The owner of the mine continues to have an interest in the partnership B.

An amount of ACE had been previously deducted under Subdivision 330-C of the ITAA 1997 by the former owner of the mine, however, there is still an undeducted amount of ACE at the time of the formation of partnership B.

The transferor and the transferee (taxpayer) made a joint election for roll-over relief under subsection 330-520(4) of the ITAA 1997. It is contended by the taxpayer that the joint election for roll-over relief was made by the owner of the mine (as the transferor) and each of the individual partners of partnership B (as the transferee).

The partnership agreement clearly states that the operations in respect of the mine are being carried on by the partners in their capacity as partners of the partnership.

Section 330-520 of the ITAA 1997 applies where there is a partial change in ownership of, or interests of persons, in property in respect of which an amount has been deducted under Subdivisions 330-A, 330-C or 330-H of the ITAA 1997, due to the formation, dissolution or variation in interest in a partnership and an owner before the change has an interest in the property after the change.

Subsection 330-520(2) of the ITAA 1997 deems that the person or persons who owned the property before the change (transferor), had, when the change happened, disposed of the whole property to the person, or all of the persons, who own the property after the change (transferee).

Subsection 330-520(3) of the ITAA 1997 requires the transferor to do a balancing adjustment, unless the transferor and transferee jointly elect for roll-over relief, in which case Common Rule 1 in Subdivision 41-A of the ITAA 1997 applies to the disposal (subsection 330-520(4) of the ITAA 1997).

Subsection 41-23(2) of the ITAA 1997 states that the entity referred to as 'transferee' in subsection 330-520(2) of the ITAA 1997 is also the transferee for the purposes of Common rule 1.

Subsection 41-30(2) of the ITAA 1997 states to gain entitlement to a deduction, the transferee must satisfy the rules for the capital allowance in relation to the income year for which the transferee claims the deduction under those rules. The effect of the roll-over is that the expenditure that was incurred by the transferor is now taken to have been incurred by the transferee (subsection 41-40(3) of the ITAA 1997).

Division 330 of the ITAA 1997 allows 'you' to deduct expenditure that you have incurred on exploration or prospecting and on ACE incurred in working of a mine site, petroleum fields and quarries. Section 4-5 of the ITAA 1997 provides the meaning of 'you'. It states 'you' applies to entities generally. An entity is defined in section 960-100 of the ITAA 1997 and includes a partnership.

In this case, the operative provision, as contained in Subdivision 330-C of the ITAA 1997, requires that the deduction is available to the entity which is carrying on the eligible mining operations.

The partnership agreement states that the operations in respect of the mine are being carried on by the partners in their capacity as partners of the partnership.

Therefore, when the transferor and transferee jointly elect for roll-over relief under section 330-520 of the ITAA 1997, the undeducted balances of ACE will be carried forward by partnership B and not the individual partners.

It is partnership B that will be entitled to a deduction for the undeducted ACE under Subdivision 330-C of the ITAA 1997 as they are taken to have incurred the expenditure under subsection 41-40(3) of the ITAA 1997. It is the entity that is carrying on eligible mining operations.

Accordingly, partnership B is the transferee for the purposes of subsection 330-520(2) of the ITAA 1997 and not the partners individually.