Capital Allowances: plant - rail transport trackwork

Is the expenditure on the rail transport trackwork excluded from being construction expenditure by paragraph 43-70(2)(e) of the Income Tax Assessment Act 1997 (ITAA 1997) because it is expenditure on plant within the meaning of that term in section 45-40 of the ITAA 1997?

Yes. The expenditure on the rail transport trackwork is excluded from being construction expenditure by paragraph 43-70(2)(e) of the ITAA 1997 because it is expenditure on plant within the meaning of that term in section 45-40 of the ITAA 1997.

The taxpayer incurred capital expenditure to construct rail transport trackwork on which it operates a passenger rail service business. The rail transport trackwork is a composite item that consists of several components, including rails, sleepers, ballast, and the earthworks or embankments on which the ballast, sleepers and rails are laid, and integral bridges, girders, culverts and tunnels.

The rail transport trackwork is a structural improvement that is a capital works for the purposes of Division 43 of the ITAA 1997. This Division generally allows a deduction for capital expenditure incurred in respect of the construction of capital works. However, construction expenditure does not include, among other things, expenditure on plant (paragraph 43-70(2)(e) of the ITAA 1997).

'Plant' is defined in section 45-40 of the ITAA 1997 to take its ordinary meaning and to include certain other things. None of the inclusions are applicable to the rail transport trackwork. This means that for the trackwork to be excluded from being construction expenditure, it would need to be expenditure on plant within the ordinary meaning of that term.

Taxation Ruling TR 1999/2 (TR 1999/2) provides the following overview of the ordinary meaning of plant: '20. '[Plant] in its ordinary sense...includes whatever apparatus is used by a business man for carrying on his business, - not his stock-in-trade which he buys or makes for sale; but all goods and chattels, fixed or moveable, live or dead, which he keeps for permanent employment in his business': Lindley LJ in Yarmouth v France (1887) 19 QBD 647 at 658.'

Using capital works for the purpose of the taxpayer's income producing activities does not, of itself, make capital works plant. For something that is a structural improvement to constitute plant, it must not merely be a setting in which the income producing activities are carried on and become an integral part of that activity ( J. Lyons & Co Ltd v. The Attorney-General [1944] 1 All ER 477). The distinction was drawn in that case between the setting in which a business is carried on and the apparatus used in carrying on a business. However, it was also said in Jarrold (Inspector of Taxes) v. John Good & Sons, Ltd 40 TC 681; (1963) 1 All ER 141 that the two concepts are not always necessarily mutually exclusive, and that plant may perform its function passively.

The rail transport trackwork is readily identifiable as part of the permanent means or apparatus used in carrying on business and by which assessable income is produced. It is designed to function in harmony with rolling stock plant and peculiar to the taxpayer's specific business operations. It has the character of plant because it is sufficiently functionally integrated with the income producing operations and process. Only by integration of the trackwork components into a functioning unit is the functioning of the rolling stock and the carriage of passengers possible.

The rail transport trackwork provides more than the general setting or environment in which income-producing activities are conducted. In the same way as railway rolling stock, it serves a functional purpose in the business operations within that setting, sufficient to make it 'an essential part in the efficient and economic operation' of the taxpayer's business ( Wangaratta Woollen Mills Ltd v. Federal Commissioner of Taxation (1969) 119 CLR 1;69 ATC 4095; (1969) 1 ATR 329).

The rail transport trackwork is consequently plant within the ordinary meaning of that term and is therefore, excluded from construction expenditure by paragraph 43-70(2)(e) of the ITAA 1997.