Capital Allowances: project pools - project life

Do the taxpayer's activities in operating a business amount to carrying on a project for a taxable purpose within the project pool provisions of Subdivision 40-I of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The taxpayer's activities in operating a business do not amount to carrying on a project for a taxable purpose within the project pool provisions of Subdivision 40-I of the ITAA 1997. This is because the activities do not, on a reasonable and objective determination, have a finite life (whether or not that project life has yet been quantified by estimation).

The taxpayer leased land and a factory (the leased property) from which it conducted its business operations.

In order to service the leased property with pipeline gas, the taxpayer entered into an arrangement with a gas company to connect them to the gas company's supply network. In order to connect the taxpayer the gas company had to install gas pipelines, meters and mains (gas works) within the boundaries of the leased property and also extending beyond those boundaries. The taxpayer paid the gas company an amount equal to the cost to the gas company of extending their gas pipeline network to the leased property.

Broadly speaking, section 40-830 of the ITAA 1997 allows a deduction over the project life for project amounts allocated to a project pool.

To be a 'project amount' within subsection 40-840(2) of the ITAA 1997, the amount must be capital expenditure which, among other things, is directly connected with a project that the taxpayer carries on or proposes to carry on for a taxable purpose (paragraph 40-840(2)(c) of the ITAA 1997).

To constitute a project under Subdivision 40-I of the ITAA 1997, the activities the taxpayer carries on or proposes to carry on must be activities which, on a reasonable and objective determination, have a finite life (whether or not that project life has yet been quantified by estimation).

There is no explicit statement in either the legislation or in the extrinsic material that accompanied it to the effect that, for an activity to be a project, it must have a finite project life. However, this requirement is implicit in the structure of the law.

There are several indicators of this. The guide to Subdivision 40-I of the ITAA 1997 (section 40-825 of the ITAA 1997) refers to the deduction for certain capital expenditure associated with projects being deducted 'over the life of the project using a pool'. The reason for the existence of these provisions then is to allow a deduction over a finite period.

Section 40-845 of the ITAA 1997 requires a taxpayer to work out the 'project life of a project'.

The calculation in subsection 40-830(3) of the ITAA 1997 for determining the yearly deduction for project amounts in a project pool uses, as its denominator, 'DV project pool life'. This is the project life and must be capable of estimation. If there is no figure to insert in the equation, there can be no deduction. Because the provisions exist to provide a deduction over the project life, there is little point in the provisions contemplating a project for which there is no project life when there can be no deduction for such a project over that life.

All of these references to 'project life' clearly indicate that one of the qualities that defines an activity as a project for the purposes of Subdivision 40-I of the ITAA 1997 is a finite project life.

'Project life', then, is an element of a 'project' rather than merely a condition which must be present to enable a deduction to be claimed for a project amount.

Accordingly, the operation of the taxpayer's business is an activity that will not have a finite period and will not constitute a project within the project pooling provisions of Subdivision 40-I of the ITAA 1997.