Capital allowances: second hand commercial water facilities

Is a taxpayer entitled to a deduction under section 40-515 of the Income Tax Assessment Act 1997 (ITAA 1997) for capital expenditure incurred on the acquisition of a second hand water facility?

No. Subsection 40-555(1) of the ITAA 1997 provides that no deduction is available for capital expenditure on the acquisition of a water facility if any person has deducted or can deduct an amount under Subdivision 40-F of the ITAA 1997 for any income year for earlier capital expenditure on the construction, manufacture or previous acquisition of that water facility.

A taxpayer has acquired second hand commercial irrigation equipment from an Australian based farming machinery dealer. The equipment is bought and sold by the dealer as a single self-contained unit.

The equipment's capacity is far in excess of domestic requirements (that is, size, water pressure, spray arc etcetera.)

The taxpayer intends to use the irrigation equipment in a primary production business undertaken in Australia.

The taxpayer does not know and can not find out who the previous owner was and if they claimed, or were entitled to claim, a deduction for the water facility under Subdivision 40-F of the ITAA 1997.

The water facility is not put to a tax preferred use so Division 250 of the ITAA 1997 does not apply to the capital expenditure.

Paragraph 40-515(1)(a) of the ITAA 1997 provides that you can deduct an amount equal to the decline in value for an income year (as worked out under Subdivision 40-F of the ITAA 1997) of a water facility.

Subsection 40-520(1) of the ITAA 1997 defines a water facility as plant or a structural improvement, or an alteration, addition or extension to plant or a structural improvement, that is primarily and principally for the purpose of conserving or conveying water. Examples of water facilities include dams, tanks, bores, wells, irrigation channels, pipes, pumps, water towers and windmills.

Subsection 40-525(1) of the ITAA 1997 requires that the capital expenditure you incurred on the construction, manufacture, installation or acquisition of the water facility must have been incurred primarily and principally for the purpose of conserving or conveying water for use in a primary production business that you conduct on land in Australia. Primary production business is defined in subsection 995-1(1) of the ITAA 1997.

However, subsection 40-555(1) of the ITAA 1997 provides that no deduction is available for capital expenditure on the acquisition of a water facility if any person has deducted or can deduct an amount under Subdivision 40-F of the ITAA 1997 for any income year for earlier capital expenditure on the construction, manufacture or previous acquisition of that water facility. (A water facility and an alteration, addition or extension to that facility are not the same water facility for the purposes of that subsection.)

Section 40-525 of the Income Tax (Transitional Provisions) Act 1997 provides that a taxpayer is taken as having deducted or being able to deduct an amount under Subdivision 40-F of the ITAA 1997 for expenditure on a water facility if the taxpayer has deducted or could have deducted an amount for it under former Subdivision 387-B of the ITAA 1997 or section 75B of the Income Tax Assessment Act 1936.

In some instances a taxpayer who acquires a second hand water facility, particularly one not permanently affixed to land, will not know and will not be able to find out whether the previous owner claimed or was entitled to a deduction under Subdivision 40-F of the ITAA 1997. In such a case the onus of proof would be on the taxpayer to prove that a previous entitlement had not existed if they wish to claim a deduction for the decline in value of a water facility.

In certain circumstances it may not be unreasonable to conclude that an entitlement has previously existed for a water facility based on the facts and balance of probabilities.

The main factor influencing such a conclusion would be the inherently commercial nature of the item which is of the type, function and configuration ordinarily used in primary production businesses. Where the water facility provides for capacity that is in excess of that generally used for a private purpose it is not unreasonable to conclude that it was previously employed to conserve or convey water in a primary production business in Australia.

A further indicator that such an conclusion is not unreasonable is that the water facility is obtained from an Australian based farming machinery dealer who regularly acquires such equipment from local primary producers.

Based on the conclusion that a previous entitlement has existed, no deduction is allowable under Subdivision 40-F of the ITAA 1997 for capital expenditure incurred on the acquisition of second hand commercial water facilities. This conclusion will be made unless the taxpayer has proof to the contrary.

Furthermore, subsection 40-50(1) of the ITAA 1997 provides that no deduction for the decline in value of a depreciating asset is allowed under Subdivision 40-B of the ITAA 1997 where you or another taxpayer has deducted or can deduct an amount under Subdivision 40-F of the ITAA 1997.

Date of Amendment Part Comment 12 January 2018 Related ATO Interpretative Decisions Remove ATO ID 2003/234 as it has been withdrawn. 15 September 2015 Facts Remove reference to subsection 40-555(2) of the ITAA 1997. Include reference to Division 250 of the ITAA 1997. Legislative reference Remove reference to subsection 40-555(2) of the ITAA 1997. Include reference to Division 250 of the ITAA 1997.

Date of Amendment | Part | Comment

12 January 2018 | Related ATO Interpretative Decisions | Remove ATO ID 2003/234 as it has been withdrawn.

15 September 2015 | Facts | Remove reference to subsection 40-555(2) of the ITAA 1997. Include reference to Division 250 of the ITAA 1997.

Legislative reference | Remove reference to subsection 40-555(2) of the ITAA 1997. Include reference to Division 250 of the ITAA 1997.