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Only capital expenditure that is attributable to the establishment of a horticultural plant is establishment expenditure.

Capital expenditure includes expenses incurred in establishing or extending a plantation up to the stage of planting horticultural plants in their long-term growing medium. The cost of maintaining an established plantation is revenue in nature. Therefore, the cost of maintenance does not form part of establishment expenditure.

Establishment expenditure includes: • the cost of purchasing plants or seeds; • any costs incurred in preparing to plant; • the cost of planting the plants or seeds; • the costs of pots and potting mixtures (for potted plants); • the costs incurred in grafting trees; and • the cost of establishing plants used for associated purposes, such as for companion planting (if those plants are not horticultural plants in their own right). Costs incurred in preparing to plant include the part of the cost of ploughing, top dressing, fertilising, top soil enhancement, soil analysis tests, forming up planting rows and planting site surveys that are attributable to the establishment of a horticultural plant.

Establishment expenditure also includes the cost of maintaining plants until they are ready to be planted, because the dominant purpose of the expenditure is to preserve and improve the plants until they are ready to be used, by planting or establishing them in their long-term growing medium.

The cost of replacing a plant in an established orchard or plantation because of premature death or disease is not capital in nature and does not form part of establishment expenditure. Such costs are revenue in nature and would be deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997).

The cost of purchasing land to be used for growing a horticultural plant is not establishment expenditure, as the cost is attributable to the land rather than to the establishment of the plant.

The costs of draining swamp or low-lying land and of clearing land are specifically excluded from establishment expenditure under subsection 40-555(3) of the ITAA 1997.

This Determination replaces Taxation Determination TD 98/3, which is withdrawn on and from the issue date of this Determination. To the extent that the Commissioner's view in TD 98/3 still applies, it has been incorporated into this Determination.

This Determination applies to years commencing both before and after its date of issue. However, it 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 the Determination.

The term 'establishment expenditure' is defined in section 40-545 of the ITAA 1997 as amounts of capital expenditure incurred that are attributable to the establishment of the horticultural plant. The amount of establishment expenditure is used in subsection 40-545(2) of the ITAA 1997 to work out the decline in value of a horticultural plant for an income year.

'Establishment' is not defined for the purposes of section 40-545 of the ITAA 1997. However, in The Macquarie Dictionary [1] 'establish' in this context means: • to set up on a firm or permanent basis; institute; found; and • to settle or install in a position, business, etc.

In general terms, to establish a horticultural plant would be to plant it in its long-term growing medium.

Paragraph 5.24 of the Revised Explanatory Memorandum to the New Business Tax System (Capital Allowances) Bill 2001 makes it clear that the cost of establishing a horticultural plant extends beyond the cost of planting. Paragraphs 5.24 and 5.25 provide a number of examples of the costs of establishing horticultural plants (refer to paragraph 3 of this Ruling).

Establishment expenditure includes only capital expenditure. Costs incurred in acquiring plants and planting them to establish or extend a plantation are capital in nature. As Pincus J, with whom the other members of the Full Federal Court agreed, said in FC of T v. Osborne 90 ATC 4889 at 4895; (1990) 21 ATR 888 at 895: It appears to be consistent with the trend of these authorities to hold that, in general, costs incurred in establishing a plantation of fruit or nut trees, at least up to the stage of getting seedlings in the ground, are capital expenses.

In some cases, a business will buy plants from a nursery under a contract where the purchased plants are held and maintained by the nursery until an agreed delivery date. The total cost charged by the nursery for the plants can include the cost of maintaining the plants until the delivery date. The maintenance costs could cover such services as potting, pruning, staking, weeding, spraying, watering and other horticultural services necessary to keep the plants alive and growing at an acceptable rate. As the maintenance cost relates to maintaining the plants prior to planting, the cost is capital in nature.