Primary Production - Purchase of a water entitlement - Deductibility under Division 387

Is expenditure incurred in acquiring a water entitlement to irrigate primary production property, an allowable deduction under Division 387 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. A deduction is not available under Division 387 of the ITAA 1997 for the cost of acquiring a water entitlement to irrigate primary production property.

The taxpayer, an individual, carries on a business of primary production. The taxpayer acquired a water entitlement in the form of a licence to use a specified amount of water on a per annum basis to irrigate primary production land. It is a permanent transfer of the water entitlement.

Division 387 of the ITAA 1997 allows a deduction to primary producers for capital expenditure on some infrastructure, operations and plant.

Under subdivision 387-A of the ITAA 1997, a taxpayer can deduct capital expenditure on landcare operations, which include erecting a fence, constructing a levee, constructing surface drainage, or eradication of pests. The deduction is available in the income year in which it is incurred.

The expenditure incurred by the taxpayer does not relate to any of the activities specified in this subdivision. Therefore, no deduction is allowable under subdivision 387-A of the ITAA 1997.

Under subdivision 387-B of the ITAA 1997, it is stated that a taxpayer can deduct an amount for capital expenditure that is incurred in the construction, manufacture, installation or acquisition of a water facility, if it is incurred primarily for the purpose of conserving or conveying water for use in a primary production business.

A water facility being described in section 387-130 of the ITAA 1997 as an item of plant or a structural improvement or an alteration, addition or extension to an item of plant or a structural improvement. Examples include dams, water tanks, bores, wells and irrigation channels.

The expenditure incurred clearly does not meet the requirement of this subdivision. The entitlement or licence simply gives the taxpayer the right to pump a set amount of water from a specified river or stream. Accordingly, no deduction is allowed under subdivision 387-B of the ITAA 1997.