Issue
If the owner of land derives income from renting the land to another entity that uses it to carry on a primary production business, can the landowner claim a deduction for capital expenditure they incur on a landcare operation for the land under section 40-630 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No, because the landowner does not use the land for carrying on a business as required by section 40-630 of the ITAA 1997.
Facts
A taxpayer owns a farming property and rents it on a long term lease to another entity that carries on a business of primary production on the land.
The landowner's rental activity does not amount to carrying on a business.
The landowner incurs capital expenditure on erecting a fence to separate different land classes on the land in accordance with an approved management plan.
Reasons for Decision
A landcare operation includes erecting a fence to separate different land classes on the land in accordance with an approved management plan (section 40-635 of the ITAA 1997). Capital expenditure on a landcare operation is deductible for the income year in which it is incurred under section 40-630 of the ITAA 1997 provided the operation is for: • Australian land you use for carrying on a primary production business; or • rural Australian land you use for carrying on a business for a taxable purpose from the use of that land.
The landowner does not satisfy either of these conditions because their only use of the land, being the rental activity, does not amount to the carrying on of a business. Therefore, a deduction is not available to the landowner under section 40-630 of the ITAA 1997. Note: a fence is a depreciating asset as defined in section 40-30 of the ITAA 1997. A deduction for an amount equal to the decline in value of a depreciating asset that is held and used for a taxable purpose may be available under section 40-25 of the ITAA 1997.