Capital Allowances: Primary Production - Depreciating Assets - Water Facilities

Can a taxpayer who purchases a property that is used in a business of primary production claim a deduction for the decline in value of water facilities constructed prior to the purchase of the property by another taxpayer under Subdivision 40-B of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. Subsection 40-50(1) of the ITAA 1997 provides that where a taxpayer or another taxpayer has deducted or can deduct amounts for water facilities under Subdivision 40-F of the ITAA 1997 or the former Subdivision 387-B of the ITAA 1997 then a deduction for the decline in value of the existing water facilities is not available under Subdivision 40-B of the ITAA 1997.

Taxpayer A purchased a primary production property as a going concern from Taxpayer B on 1 August 2001. At the time of purchase the property had on it a bore and rock dam.

Prior to the purchase of the property, Taxpayer B had leased part of the land to Taxpayer C in 1998. Taxpayer C was not in the business of primary production.

Taxpayer C did a number of activities on the leased part of the property including the construction of a bore and rock dam. Upon expiration of the lease Taxpayer B acquired the bore and rock dam constructed by Taxpayer C for nil cost and used the bore and rock dam primarily and principally for conveying and conserving of water in their primary production business.

Section 40-25 of the ITAA 1997 allows a deduction for the decline in value of a depreciating asset to the extent that it is used for a taxable purpose.

Taxpayer B has acquired the bore and rock dam on the expiration of the lease for nil cost. As the bore and rock dam has been used primarily and principally for the purpose of conveying and conserving water in Taxpayer B's primary production business they qualify as water facilities under section 387-130 of the ITAA 1997.

Taxpayer B would have been entitled to claim a deduction for these water facilities under section 387-125 of the ITAA 1997, notwithstanding that the amount of this deduction is zero.

Subsection 40-555(1) of the ITAA 1997 provides that no deduction is available for capital expenditure on the acquisition of a water facility if any person has deducted or can deduct an amount under Subdivision 40-F of the ITAA 1997 for any income year for earlier capital expenditure on the construction, manufacture or acquisition of that water facility.

Paragraph 40-525(a) of the Income Tax (Transitional Provisions) Act 1997 provides that a taxpayer is taken as having deducted or being able to deduct an amount under Subdivision 40-F of the ITAA 1997 for expenditure on a water facility if the person has deducted or can deduct an amount for it under Subdivision 387-B of the ITAA 1997.

Subsection 40-50(1) of the ITAA 1997 provides that Subdivision 40-B of the ITAA 1997 does not apply where a taxpayer or another taxpayer has deducted or can deduct an amount under Subdivision 40-F of the ITAA 1997. Therefore no deduction for the decline in value on the water facilities is available to Taxpayer A under Subdivision 40-B of the ITAA 1997 as Taxpayer B was entitled to claim a deduction under Subdivision 387-B of the ITAA 1997.