Capital Works: shipping channel - excluded earthworks

Does a project to increase the commercial capacity of a shipping channel comprise excluded earthworks as described in subsection 43-20(4) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The significant features of the shipping channel created by the project are not excluded by subsection 43-20(4) of the ITAA 1997 from being qualifying structural improvements, because they are not earthworks within the meaning of that term.

The taxpayer undertook a project that was generally designed to increase the commercial capacity of a shipping channel (the channel). The significant features of the channel are 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.

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 significant channel features created by the project are structural improvements (see ATO ID 2003/669 on Capital Works: shipping channel- structural improvement). Division 43 does not apply, however, to structural improvements that are merely earthworks (subsection 43-20(4) of the ITAA 1997).

The term 'earthworks' is not defined but generally connotes some form of excavation, movement and/or placement of earth. The illustrative examples described in paragraph 43-20(4)(a) of the ITAA 1997 indicate a nature and extent of work that is relatively simple and unsophisticated. The works undertaken in this case are not of that type. The project to deepen, widen, and extend the various features of the existing 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, means that these capital works do not constitute earthworks for the purposes of paragraph 43-20(4)(a) of the ITAA 1997.