Capital Allowances: water facilities - irrigation water provider

Is an entity's business the supply of water as required by the definition of 'irrigation water provider' in subsection 40-515(6) of the Income Tax Assessment Act 1997 (ITAA 1997) at the time when it constructs water facilities, where the entity is required to conduct its business in two separate but consecutive phases - the first being the construction of the water facilities; and the second being the supply of water through the subsequent operation of the water facilities?

Yes. The entity's business is the supply of water as required by the definition of irrigation water provider in subsection 40-515(6) of the ITAA 1997 at the time when it constructs the water facilities because the scope of the entity's business is twofold, being both the construction of the water facilities and the supply of water through the subsequent operation of the water facilities.

An entity is established as a wholly Government owned entity for the purpose of constructing, owning and operating a water infrastructure project. The entity carries out its business activities in two separate but consecutive phases. The first phase requires the entity to incur capital expenditure on the construction of water facilities as defined in subsection 40-520(1) of the ITAA 1997. Once the construction of the water facilities is completed, the entity can start the second phase of its business which is the supply of water primarily and principally to entities for use in primary production businesses on land in Australia, through the subsequent operation of the water facilities.

Subsection 40-515(6) of the ITAA 1997 defines an 'irrigation water provider' as follows: An irrigation water provider is an entity whose business is primarily and principally the supply (otherwise than by using a motor vehicle) of water to entities for use in primary production businesses on land in Australia.

As part of the process of considering whether an entity is an irrigation water provider, it is necessary to determine whether the entity is an entity whose business is the supply of water. This is of particular relevance in circumstances where the entity carries out its business activities in two separate but consecutive phases - the first phase being the construction of the water facilities; and the second phase being the supply of water through the subsequent operation of the water facilities.

For the purpose of making this determination, it is necessary to establish the overall scope of the entity's business and whether that business is the supply of water.

Identifying the scope of a business depends on whether the courts adopt a broad or narrow formulation of those activities that constitute part of the subject business. If a court adopts a broad formulation of the business, its related or incidental activities are more likely to be treated as part of a single business. For example, in G.P. International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation (1990) 170 CLR 124; 90 ATC 4413; (1990) 21 ATR 1 ( GP International Pipecoaters Case ), in the process of considering the scope of the taxpayer's business, the Full Bench of the High Court rejected the suggestion that the taxpayer's business was confined to the coating of natural gas pipelines to the exclusion of the production of the pipe-coating: It is impossible to treat the business of the taxpayer as limited to the coating of the pipe when the construction of the pipe-coating plant was an integral part of the work which the taxpayer was bound to perform.

Australian courts have tended in recent times to take a fairly broad view of the scope of a business and therefore it is considered appropriate for the Commissioner to adopt a broad view when determining the scope of the entity's business.

As a result of the entity being a company newly established for the purpose of developing the water infrastructure project, it is a matter of pure necessity that it carries out its business activities in two separate but consecutive phases. As concluded in the GP International Pipecoaters Case , the business of a taxpayer cannot be limited to one activity when another activity was an integral part of the work which the taxpayer was bound to perform.

In adopting a broad view, it is therefore considered that it is appropriate for the Commissioner to have regard to both phases of the entity's business activities that is, the initial construction phase and the subsequent supply phase, in the process of considering the overall scope of the entity's business activities. The business of the entity cannot be limited to the initial construction phase when the subsequent supply phase was an integral part of the work which the entity was bound to perform. Both phases are interlinked, have a clear and direct connection with each other, and support each other in a genuine commercial way.

The entity's business is twofold, being both the construction of the water facilities and the supply of water primarily and principally to entities for use in primary production businesses on land in Australia through the subsequent operation of the water facilities. Therefore, at the time when it constructs the water facilities, the entity's business is the supply of water as required by the definition of 'irrigation water provider' in subsection 40-515(6) of the ITAA 1997.