Issue
Does a project undertaken to increase the commercial capacity of a shipping channel comprise qualifying structural improvements under subsection 43-20(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes. The significant features of the shipping channel created by the project are qualifying structural improvements for the purposes of subsection 43-20(2) of the ITAA 1997.
Facts
The taxpayer undertook a project that was principally designed to increase the commercial capacity of a shipping channel (the channel). The significant features of the channel include a 'main channel' (a body of water that connects points of the channel to each other), a 'berthing pocket' (a section of the channel immediately adjacent to a wharf that can accommodate fully laden marine craft berthed at low tide) and a 'swing basin' (a circular facility to allow marine craft to turn 180 degrees). The project was undertaken in sections with each section involving a particular aspect (for example: deepening, widening or extending) of each channel feature and was carried out over a considerable period of time.
Reasons for Decision
In Division 43 of the ITAA 1997, the term 'capital works' includes certain structural improvements (or extensions, alterations or improvements to those structural improvements)(subsection 43-20(2) of the ITAA 1997).
The term 'structural improvement' is not defined but some examples of structural improvements to which Division 43 of the ITAA 1997 applies are described in subsection 43-20(3) of the ITAA 1997. Subsection 43-20(4) also provides some examples of structural improvements to which Division 43 does not apply.
The term 'structural' connotes some form of building or construction. The term 'improvement' is not necessarily a qualitative character in the sense that it makes something better in some sense or more valuable. It equally applies to describe an alteration in characteristics ( Case V108 88 ATC 694; AAT Case 4484 (1988) 19 ATR 3691). While there were some differences in the reasons of the Full High Court in Dampier Mining Company Limited v. Federal Commissioner of Taxation (1981) 147 CLR 408; 81 ATC 4329; (1981) 11 ATR 928, it was generally agreed that dredging was an improvement to either the seabed or the waterway. The structural improvements under consideration here are distinguishable from the simple land filling addressed in ATO ID 2009/96 (see ATO ID 2003/670 on Capital Works: shipping channel - excluded earthworks)
The project to deepen, widen and extend the various features of the channel is a complex and sophisticated engineering undertaking for both the design and implementation phases. It encompasses multiple disciplines including ship handling and maritime and environmental engineering.
In these circumstances, the creation of the significant features of the channel constitute structural improvements for the purposes of 43-20(2) of the ITAA 1997 and are of the type described in subsection 43-20(3) of the ITAA 1997.