Primary production deduction: Land used for growing grapevines

Whether the amount incurred in the purchase of land is deductible under Subdivision 40-F of the Income Tax Assessment Act 1997 (ITAA 1997) as establishment expenditure of grapevines?

No, a deduction is not allowed under Subdivision 40-F of the ITAA 1997 for the amount incurred in the purchase of land as part of the establishment expenditure of grapevines.

The taxpayer purchased land and used one third for growing grapevines.

Subdivision 40-F of the ITAA 1997 groups together depreciating assets used in primary production business and provides a deduction for decline in value for capital expenditure on depreciating assets that are water facilities, horticultural plants or grapevines.

Sections 40-545 and 40-550 of the ITAA 1997 provide that establishment expenditure is the amount of capital expenditure incurred that is attributable to either the establishment of the horticultural plant or grapevine. Examples of what is included in establishment expenditure are given in paragraph 5.24 in the Revised Explanatory Memorandum of the New Business Tax System (Capital Allowances) Bill 2001. This paragraph states that the costs of establishing horticultural plants may include the following: '• the cost of acquiring the plants or seeds; • the cost of planting the plants or seeds; • any costs incurred preparing to plant. These do not include the initial clearing of the land, but may in some cases include part of the cost of ploughing, contouring, top dressing, fertilising, stone removal, top soil enhancement and so on, that is attributable to the establishment of the plant; • the costs of pot and potting mixtures (for potted plants) • the cost incurred in grafting trees; and • the costs of replacing existing plants and trees, because of loss of fair economic return or because of declining popularity of a particular existing variety.'

The purchase cost of the land does not form part of the establishment expenditure, as this cost does not relate to the establishment of horticultural plants or grapevines. Furthermore, paragraph 40-30(1)(a) of the ITAA 1997 excludes land from being a depreciating asset. Note: The provisions relating to grapevines in Subdivision 40-F of the Income Tax Assessment Act 1997 (ITAA 1997) have been repealed with effect from 1 October 2004. Grapevines not planted and used in a business of primary production before that date are dealt with under the provisions relating to horticultural plants in Subdivision 40-F of the ITAA 1997.