Capital Allowances: plant - breakwater

Is the taxpayer's breakwater plant within the meaning of that term in section 45-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The breakwater is not plant within the meaning of that term in section 45-40 of the ITAA 1997. This is because it is the setting within which income producing activities are undertaken.

The taxpayer provides facilities and services within the water transport industry. On 30 June 1992, the taxpayer started constructing a breakwater to improve the effectiveness and efficiency of the facilities and services that it provides. This construction was completed on 30 June 1993.

The breakwater was constructed of multiple layers of rock and was specially designed to take into account the particular facilities and services that it provides and the natural elements in which they are provided. The infrastructure attached to the breakwater included several wharves, sand pumping equipment, power lines, a road and a conveyor system.

The breakwater was specially designed to take into account particular activities within the harbour.

Breakwaters qualify as structural improvements for the purposes of Division 43 of the ITAA 1997. This Division generally allows a deduction for capital expenditure incurred in respect of the construction of capital works. However, construction expenditure does not include, among other things, expenditure on plant (paragraph 43-70(2)(e) of the ITAA 1997).

'Plant' is defined in section 45-40 of the ITAA 1997 to take its ordinary meaning and to include certain other things. None of the inclusions are applicable to the capital works being considered here. This means that for the works to be excluded from being construction expenditure, they would need to be expenditure on plant within the ordinary meaning of that term. Taxation Ruling TR 1999/2 provides the following overview of the ordinary meaning of plant: 20. '[Plant] in its ordinary sense...includes whatever apparatus is used by a business man for carrying on his business, - not his stock-in-trade which he buys or makes for sale; but all goods and chattels, fixed or moveable, live or dead, which he keeps for permanent employment in his business': Lindley LJ in Yarmouth v France (1887) 19 QBD 647 at 658.

Using capital works for the purpose of the taxpayer's income producing activities does not, of itself, make capital works plant. For something that is a structural improvement to constitute plant, it must not merely be a setting in which the income producing activities are carried on ( J. Lyons & Co Ltd v. The Attorney-General [1944] 1 All ER 477).

In Wangaratta Woollen Mills Ltd v. Federal Commissioner of Taxation (1969) 119 CLR 1, 69 ATC 4095; (1969) 1 ATR 329 plant has been distinguished from items that do: ....nothing more than exclude the elements...

Where the function of the structural improvement is no more than to provide a location on which income producing activities can be carried on, then this will be another form of setting which indicates that the item is not plant. As noted in the UK case of Benson (Inspector of Taxes) v Yard Arm Club Ltd [1979] 1 WLR 347, CA, Digest (Cont Vol E) 309,1676e, per Buckley LJ, at 341: If one asks the same question here-namely whether the chemistry laboratory and the gymnasium are the premises in which the business is carried on or are part of the plant with which the business is carried on- the answer must be the former. Education is not carried out with these particular buildings but in these particular buildings

In those cases where structural improvements have been held to be plant, the improvements were significantly integrated with the income producing operations. They played an active part in an industrial process and often were physically integrated with items of machinery. For example: • The dyehouse in Wangaratta Woollen Mills Limited v. Federal Commissioner of Taxation (1969) 119 CLR 1; 69 ATC 4095; (1969) 1 ATR 329 • The drydock in Inland Revenue Commissioners v. Barclay, Curle and Co Limited (1968) 45 TC 221 • The grain silo in Schofield (Inspector of Taxes) v. R & H Hall Limited 49 TC 538, and • The tailings dams and mudlakes in TR 1999/2.

In this case, it is considered that the function of the breakwater is to provide a 'setting' that is, concerned with protection from the elements, being wind and tides and their effects, such as siltation and to provide a location upon which infrastructure like wharves can be attached.

It should be noted that Division 40 of the ITAA 1997 does not apply to the structural improvement because subsection 40-45(2) of the ITAA 1997 excludes capital works for which you can deduct amounts under Division 43 of the ITAA 1997.