Capital Works: shipping channel - separate construction expenditure areas

Are multiple construction expenditure areas created, pursuant to subsection 43-75(6) of the Income Tax Assessment Act 1997 (ITAA 1997), within a single project that is designed to increase the commercial capacity of a shipping channel?

Yes. Multiple expenditure areas are created, pursuant to subsection 43-75(6) of the ITAA 1997 because the project undertakes the construction of separate capital works.

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.

You can deduct an amount for capital works for an income year if, among other things, the capital works have a construction expenditure area (subsection 43-10(1) and paragraph 43-10(2)(a) of the ITAA 1997).

It is accepted that the project work on the channel's significant features constitute structural improvements that are capital works (subsection 43-20(2) of the ITAA 1997) (see ATO ID 2003/669 on Capital Work:- shipping channel- structural improvement) and that construction expenditure (as defined in section 43-70 of the ITAA 1997) has been incurred in respect of the capital works.

Identifying the construction expenditure area depends on the particular facts of each case. This is of practical importance for a number of reasons, including that the construction of capital works must be complete before the construction expenditure area is determined (subsection 43-75(4) of the ITAA 1997), and a deduction is not available before the completion of construction of the capital works even though the works may be used before completion (section 43-30 of the ITAA 1997). 'Construction expenditure area', is defined in subsection 43-75(1) of the ITAA 1997. In particular, a separate construction expenditure area is created each time an entity undertakes the construction of capital works (subsection 43-75(6)).

While all of the capital works are part of a broader project, each section of the project is a separate construction expenditure area. The nature and extent of each section is different, each section is physically located at different sites; each feature of the channel, although complementary with each other, has a distinct function or operation; and each section was undertaken at a different time and for a different period.