Capital Allowances: project pools - abandonment

Is the taxpayer's project abandoned within subsection 40-830(4) of the Income Tax Assessment Act 1997 (ITAA 1997) if the taxpayer's tender for the development - a key activity in the project - is unsuccessful and the development is proceeded with by an unrelated party?

Yes. The taxpayer's project has been abandoned because an unrelated party is proceeding with the development.

The taxpayer was unsuccessful in a tender for the development of a multimillion dollar mixed-use property. The tender was a central activity in pursuing the taxpayer's project of acquiring, developing, leasing and managing the property for a determinate project life entirely for the purpose of producing rental and associated assessable income.

The taxpayer incurred a significant amount of expenditure in engaging external consultants to estimate the design and construction costs of the proposed development, to assess the impact of the development on the local environment, and to prepare documents for the tender.

All information provided by the consultants was specific to the property and cannot be used for any other property development. As the development has been commenced by the successful tenderer, a party unrelated to the taxpayer, the taxpayer will not be proceeding with its project.

Broadly speaking, section 40-830 of the ITAA 1997 allows a deduction over the project life for project amounts allocated to a project pool. If a project is abandoned, sold or otherwise disposed of in an income year, a deduction is available under subsection 40-830(4) for that year in relation to the sum of the pool's closing pool value for the previous income year and any project amounts allocated to the pool for the current income year.

As the taxpayer has not started to do the things which themselves will produce assessable income, the project has not started to operate for a taxable purpose.

However, the taxpayer's project started when the taxpayer first commenced to gather information for, and committed itself to, the tender.

For the purposes of subsection 40-830(4) of the ITAA 1997, a project can be abandoned any time after it starts, even before it starts to operate for a taxable purpose.

According to the decision in Kallooar v R [1964] 50 WWR 602, something is considered to be abandoned if it is given up completely and finally. On that basis, the temporary cessation of a project will not constitute abandonment: the cessation must be permanent. A project will be abandoned if it is objectively determined that it will no longer proceed.

As the taxpayer's tender was unsuccessful and there is no possibility that the project will proceed, the taxpayer's project has been abandoned within subsection 40-830(4) of the ITAA 1997.