Capital Allowances: project pools - project - carry on for a taxable purpose

Do the taxpayer's activities in improving access to their transport facility by upgrading an adjacent public road amount to carrying on a project for a taxable purpose within the project pool provisions of Subdivision 40-I of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The taxpayer's activities in improving access to their transport facility by upgrading an adjacent public road amount to carrying on a project for a taxable purpose within the project pool provisions of Subdivision 40-I of the ITAA 1997.

The taxpayer's business is managing a transport facility that it owns. An adjacent heavily utilised public road provides access to the facility. It is estimated that most of the traffic on the road uses the road to access the facility. Due to the large number of heavy vehicles using the road and lack of regular maintenance of the road, the road surface was in poor condition.

The taxpayer considered that the road needed to be upgraded to safely service current traffic volumes accessing the facility and to adequately service increased future traffic volumes accessing the facility. For these reasons, the taxpayer engaged consultants to design the road improvements necessary and to prepare detailed cost estimates of those improvements, engaged in lengthy negotiations with relevant local and state government authorities regarding funding for the road upgrade and control of and responsibility for the road once upgraded, and engaged the construction group of the relevant state road authority to carry out the upgrade at a significant financial cost to the taxpayer.

Broadly speaking, section 40-830 of the ITAA 1997 allows a deduction over the project life for project amounts allocated to a project pool.

To be a 'project amount' within subsection 40-840(2) of the ITAA 1997, the amount must be capital expenditure which, among other things, is directly connected with a project you carry on or propose to carry on for a taxable purpose (paragraph 40-840(2)(c)).

Paragraph 40-840(2)(c) refers to projects that taxpayers 'carry on' or 'propose to carry on'. This means that a 'project' for the purposes of the project pool provisions of Subdivision 40-I requires something more than a passive involvement. It requires some active participation by the taxpayer.

Further, it is inherent in the meaning of 'project life' in section 40-845 of the ITAA 1997 and in the calculation of the amount of the deduction in subsection 40-830(3) of the ITAA 1997 that a 'project' for the purposes of the legislation is something that has a finite operational phase - a finite period from when it starts to operate until it stops operating. Ordinarily, the nature of the project will establish whether the project will operate for a finite period.

The project in the present case is improving access to the facility. This necessitated upgrading the adjacent public road. The project starts to operate when the upgrade is complete. The project will stop operating when the upgrade no longer provides the improved access to the facility. The taxpayer must estimate when this will occur.

A further aspect of paragraph 40-840(2)(c) of the ITAA 1997 is that the taxpayer must carry on or propose to carry on the project for a taxable purpose. So far as is relevant here, 'taxable purpose' is 'the purpose of producing assessable income' (subsection 40-25(7) of the ITAA 1997). Something is done for the 'purpose of producing assessable income' (as defined in subsection 995-1(1) of the ITAA 1997) if it is done: (a) for the purpose of gaining or producing assessable income; or (b) in carrying on a business for the purpose of gaining or producing assessable income.

For a project to be carried on for the purpose of producing assessable income: • the project itself must be capable of being carried on to produce assessable income (paragraph (a) of the definition); or • the project must be carried on in the course of carrying on an existing business for the purpose of gaining or producing assessable income (paragraph (b) of the definition).

A project is carried on in the course of carrying on an existing business for the purpose of gaining or producing assessable income if the carrying on of that project: • occurs in carrying on that business (in a temporal sense); and • is incidental and relevant to the carrying on of that business for the purpose of gaining or producing assessable income.

In the present case, the taxpayer's activities do not amount to a project that the taxpayer carries on for the purpose of gaining or producing assessable income because, of themselves, the activities are not capable of being carried on to produce assessable income. However, the taxpayer's activities do amount to a project that the taxpayer carries on in carrying on a business for the purpose of gaining or producing assessable income because the two requirements set out in the previous paragraph are satisfied. Accordingly, the taxpayer's activities do amount to a project that the taxpayer carries on for a taxable purpose.