Issue
Can an STS taxpayer who builds a farm shed on pastoral land pool the construction expenditure in an STS pool?
Decision
Yes. An STS taxpayer who builds a farm shed on pastoral land can pool the construction expenditure in an STS pool.
Facts
A taxpayer operates a farming business activity. The taxpayer incurs expenditure in constructing a shed used solely in the farming activity. The taxpayer has elected to be an STS taxpayer for the financial year. The taxpayer has constructed the shed on the land that is being used for the farming operation.
Reasons for Decision
An STS taxpayer who holds a depreciating asset and uses it, or has it ready for use, for a taxable purpose in an income year will calculate deductions for the decline in value under Subdivision 328-D of the Income Tax Assessment Act 1997 (ITAA 1997) rather than under Division 40 of the ITAA 1997.
Subsection 328-175(2) of the ITAA 1997 states that Subdivision 328-D of the ITAA 1997 will not apply where section 40-45 of the ITAA 1997 operates to make a capital work deductible under Division 43 of the ITAA 1997 rather than under Division 40.
Subsection 40-45(2) of the ITAA 1997 ensures that depreciating assets that are capital works are not deductible under both Division 40 and 43 of the ITAA 1997. It does this by excluding from Division 40 those capital works for which an amount can, or could be deducted under Division 43.
Section 43-10 of the ITAA 1997 provides a deduction for certain 'construction expenditure' incurred in respect of the construction of capital works such as buildings or structural improvements, including any extensions, alterations, or improvements to buildings or structural improvements.
Subsection 43-70(1) of the ITAA 1997 defines 'construction expenditure' as capital expenditure incurred in respect of the construction of capital works. However, paragraph 43-70(2)(e) of the ITAA 1997 specifically excludes expenditure on 'plant' from being construction expenditure. As a result no deduction is allowed for such expenditure under Division 43 of the ITAA 1997.
Paragraph 45-40(1)(c) of the ITAA 1997 extends the meaning of 'plant' to include structural improvements on land used for agricultural or pastoral operations other than those used for domestic or residential purposes.
In this case the farm shed is a structural improvement according to ordinary concepts and is constructed on land used for agricultural or pastoral operations, but not for domestic and residential purposes. The farm shed meets the extended definition of 'plant' in paragraph 45-40(1)(c) of the ITAA 1997 (see Willeroo & Manbulloo Ltd v. Federal Commissioner of Taxation (1964) 111 CLR 336; 13 ATD 356; (1964) 9 AITR 424). As this is the case, the expenditure on constructing the farm shed will be excluded from the definition of construction expenditure for the purposes of Division 43 of the ITAA 1997.
It follows that the farm shed is not a capital work to which Division 43 of the ITAA 1997 applies. This means section 40-45 of the ITAA 1997 does not apply to the expense on a farm shed, and the decline in value of the depreciating asset (the farm shed) is deductible under Division 40 of the ITAA 1997.
As the taxpayer is an STS taxpayer however, they will not claim a deduction under Division 40 of the ITAA 1997, but will calculate their deduction as per Subdivision 328-D of the ITAA 1997. The STS taxpayer will allocate the depreciating asset to an STS pool (as per section 328-185 of the ITAA 1997).