Issue
Can a taxpayer claim a deduction under section 387-355 of the Income Tax Assessment Act 1997 (ITAA 1997) for a levy paid as a contribution to the cost of reinstalling overhead electricity cables underground for a rental property?
Decision
No. The taxpayer is not entitled to a deduction under section 387-355 of the ITAA 1997 for the levy paid as they do not carry on a business on the land.
Facts
The taxpayer owned a rental property from which assessable income was earned.
The electricity supply to the property was converted from overhead mains to underground power during the 2001 income year through a joint state government and local council project by the installation of underground cables. There was an increase in the amount of electricity transmitted by the relocated cables.
The underground cables were installed largely on council land and owned by the council.
The taxpayer contributed to the cost of reinstalling overhead electricity cables underground by way of a levy.
The tenants were not carrying on a business at the rental property at the time when the taxpayer paid the levy or thereafter.
Reasons for Decision
Section 387-355 of the ITAA 1997 allows a deduction to a taxpayer if:
the taxpayer incurs capital expenditure on connecting power to land or upgrading the connection; and
when the taxpayer incurs the expenditure: the taxpayer has an interest in the land or is a share-farmer carrying on a business on the land; and the taxpayer or another person intends to use some or all of the electricity to be supplied as a result of the expenditure in carrying on a business on the land for the purpose of producing assessable income at a time when the taxpayer has an interest in the land or is a share-farmer carrying on a business on the land.
A deduction for expenditure for connecting power or upgrading the connection is allowable in equal instalments over 10 years. That is, 10 per cent of the expenditure for the income year in which the expenditure is incurred and for each of the next nine income years (subsection 387-355(2) of the ITAA 1997).
For the purposes of Subdivision 387-E of the ITAA 1997, the taxpayer's contribution to the cost of installing and connecting an underground power supply to a rental property owned by the taxpayer is treated in the same way as capital expenditure on connecting power to land (section 387-390 of the ITAA 1997).
Although the taxpayer owned the building and the land to which the power was connected and was deriving assessable income from the rental property on the land, the taxpayer was not carrying on a business but was merely undertaking a passive investment (Taxation Ruling IT 2423). Therefore the taxpayer was not carrying on a business on the land.
As the taxpayer has not satisfied the conditions contained in subsection 387-355(1) of the ITAA 1997 they cannot claim a deduction for the levy paid under subsection 387-355(2) of the ITAA 1997.