Issue
Was the taxpayer's capital expenditure on cleaning up and removing waste material resulting from their former business incurred for the sole or dominant purpose of carrying on an environmental protection activity as defined in subparagraph 40-755(2)(b)(i) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes. The taxpayer's capital expenditure on cleaning up and removing waste material resulting from their former business was incurred for the sole or dominant purpose of carrying on an environmental protection activity as defined in subparagraph 40-755(2)(b)(i) of the ITAA 1997 because, objectively, the expenditure was calculated to effect that activity.
Facts
The taxpayer carried on a business, within the timber industry, for the purpose of producing assessable income. Under a voluntary governmental scheme, the taxpayer chose to cease carrying on their business.
Under the original development consent from a local council authority, the taxpayer was required to return their land to its natural state if they ceased to carry on business on the land. The scheme under which the taxpayer chose to cease carrying on their business provided reimbursement of some of the taxpayer's rectification costs.
The taxpayer incurred capital expenditure on cleaning up and removing various waste wood material from their land. The material substantially comprised the wood residue, in various forms, remaining after the raw wood material had been processed through the taxpayer's business operation.
Reasons for Decision
Section 40-755 of the ITAA 1997 provides a deduction for expenditure incurred for the sole or dominant purpose of carrying on environmental protection activities. While section 40-760 of the ITAA 1997 excludes certain types of expenditure from deduction, none of those types were incurred by the taxpayer.
Environmental protection activities are defined in subsection 40-755(2) of the ITAA 1997. One type of environmental protection activity is treating, cleaning up, removing or storing waste resulting, or likely to result, from your earning activity (subparagraph 40-755(2)(b)(i) of the ITAA 1997).
As stated in the facts, the material the taxpayer cleaned up and removed is the wood residue remaining after the raw wood material had been processed through the taxpayer's business operation - the residue is, clearly, waste that results from the taxpayer's business. The taxpayer's business also satisfies the definition of 'your earning activity' in subsection 40-755(3) of the ITAA 1997 because it was carried on for the purpose of producing assessable income. It follows that the taxpayer's activities of cleaning up and removing the wood waste constitute the carrying on of an environmental protection activity as defined in subparagraph 40-755(2)(b)(i) of the ITAA 1997.
The requirement in subsection 40-755(1) of the ITAA 1997 that the expenditure be incurred for the sole or dominant purpose of carrying on environmental protection activities is an objective test about what the expenditure is calculated to effect. In the present case, the expenditure was clearly calculated to effect the environmental protection activity. The development consent from the local council authority that required the taxpayer to rectify the land and the terms of the government scheme that provided reimbursement of some rectification costs might subjectively explain why the taxpayer undertook the clean up and removal activities but that is not the test of the section.
Accordingly, the taxpayer's capital expenditure on cleaning up and removing waste material resulting from their former business was incurred for the sole or dominant purpose of carrying on an environmental protection activity as defined in subparagraph 40-755(2)(b)(i) of the ITAA 1997.