Capital Allowances: environmental protection activity - subscribing for shares in a company

Where a taxpayer incurs expenditure in subscribing for shares in a company for the purpose of establishing a financial assurance fund, does that activity meet the definition of an environmental protection activity in subsection 40-755(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The taxpayer's activity in subscribing for shares in a company for the purpose of establishing a financial assurance fund was not an environmental protection activity as defined in subsection 40-755(2) of the ITAA 1997 because it was not an activity which qualifies as preventing, fighting or remedying pollution or treating, cleaning up, removing or storing waste.

The taxpayer conducts a business on a purpose designed site. They carry on the business wholly for a taxable purpose.

A necessary part of the taxpayer's business is the maintenance of a licence from a government authority to carry on that business. In order for the taxpayer to maintain the necessary licence from the government authority, they must comply with a condition that they provide the government authority with a financial assurance in respect of the licence. The financial assurance is intended to provide a guarantee that, amongst other things, certain remedial costs in respect of the taxpayer's business are not borne by the community.

The taxpayer sought to satisfy their obligation to provide a financial assurance by incorporating a company (the company) into which the taxpayer subscribed capital to establish a pool of funds. The subscription of capital occurred by the taxpayer subscribing for shares in the company upon its establishment and then on a quarterly basis until the fund reached (and maintained) the maximum amount required by the government authority. The shareholders' agreement provided that the company was established for the single purpose of providing a vehicle into which the taxpayer will subscribe capital to establish the financial assurance fund.

The taxpayer is expected to fund any remedial action in respect of their business operation from their own resources and not from the financial assurance fund. That is, the company will not use the money in the fund to carry out remedial action on behalf of the taxpayer as a matter of course. This is only done in circumstances where the taxpayer fails to carry out that action themselves. In this respect, the company has the ability to undertake the remedial work itself (or assume responsibility for the work being done). The government authority is also able to claim against the fund for reimbursement if the government authority is required to undertake remedial action.

The share subscription is capital expenditure incurred on or after 1 July 2005.

Subsection 40-755(1) of the ITAA 1997 provides an immediate deduction for expenditure, whether capital or not, incurred for the sole or dominant purpose of carrying on environmental protection activities.

'Environmental protection activities' are defined in subsection 40-755(2) of the ITAA 1997. In order to qualify as an environmental protection activity, the taxpayer's activity must be for preventing, fighting or remedying pollution or treating, cleaning up, removing or storing waste. Since the terms 'pollution' and 'waste' are not defined for the purposes of section 40-755 of the ITAA 1997 they take their ordinary meaning shaped by the context in which they are found.

In the present case, the relevant activity carried on by the taxpayer is subscribing for shares in the company for the purpose of establishing the financial assurance fund.

As stated in the facts, the company was established for the single purpose of providing a vehicle into which the taxpayer will subscribe capital to establish the financial assurance fund. It follows that the taxpayer will incur the expenditure in subscribing for shares in the company for the purpose of the establishment of the financial assurance fund, with the company acting primarily as a repository for the fund.

The expenditure incurred by the taxpayer in subscribing for shares in the company is not incurred for the purpose of meeting remedial action costs that might be incurred by the taxpayer in respect of their business operation.

In the present case, the taxpayer is expected to undertake any remedial action in respect of their business operation from their own financial resources and not from the financial assurance fund. Neither the company nor the government authority will use the money in the financial assurance fund to carry out remedial action on behalf of the taxpayer as a matter of course. This is only done in circumstances where the taxpayer defaults in meeting their obligations under the licence from the government authority and fails to carry out the remedial action themselves.

In these circumstances, the taxpayer's activity in subscribing for shares in the company for the purpose of establishing the financial assurance fund will not meet the definition of an environmental protection activity in subsection 40-755(2) of the ITAA 1997 because it is not an activity which qualifies as preventing, fighting or remedying pollution or treating, cleaning up, removing or storing waste.