Capital Allowances: hold - fixtures on land subject to sale contract

Did the taxpayer, who contracted to purchase depreciating assets that were fixtures attached to the vendor's land, start to hold them under section 40-40 of the Income Tax Assessment Act 1997 (ITAA 1997) before they were detached and removed from the vendor's land?

Yes, the taxpayer who contracted to purchase depreciating assets that were fixtures attached to the vendor's land, started to hold them under Item 6 of the table in section 40-40 of the ITAA 1997 from the contract settlement date until they were detached and removed from the vendor's land.

The taxpayer entered a contract to purchase depreciating assets from another entity.

The depreciating assets were fixtures attached to the vendor's land. They were generally contained in and affixed to the floor, walls and roof of buildings on the vendor's land and connected to services such as gas, water and electricity.

The taxpayer was required to detach and remove the depreciating assets within a specified period and, for that purpose, was granted a right to access the vendor's land. The taxpayer's right to detach and remove the depreciating assets did not include the obligation (although it may have chosen to) to detach and remove all the elements of the depreciating assets' affixation and connection other than ensuring those elements left behind were left safe, to a specified statutory standard, and the buildings and site secure.

The vendor retained legal title to the land to which the depreciating assets were attached at all times.

The taxpayer held the depreciating assets once they were detached and removed from the land as legal owner (Item 10 of the table in section 40-40 of the ITAA 1997).

At law, a fixture forms part of the land to which it is attached and, as a consequence, the legal owner of the land is the legal owner of the fixture. 'There is no doubt that the general maxim of the law is, that what is annexed to the land becomes part of the land...' ( Eon Metals NL v Commissioner of State Taxation (WA) 91 ATC 4841; (1991) 22 ATR 601) ( Eon Metals ).

This position does not change even when a contract (or a series of contracts) is entered for the sale of the fixtures to another party. 'The mere intention to sever items from land does not transform the items into chattels; physical severance must occur...' ( Eon Metals ).

Under a contract to purchase fixtures on another's land, the purchaser acquires a right (possibly subject to conditions) to remove the fixtures; they do not obtain legal title until the fixtures are detached and removed from the vendor's land. 'A right to remove a fixture would not, in any event, alter the status of a fixture as part of the land and thus in the legal ownership of the owner of the freehold until the right is exercised.' ( Eastern Nitrogen Ltd v. Commissioner of Taxation [1999] FCA 1536; 99 ATC 5163; (1999) 43 ATR 112)

In the present case, the condition to detach and remove the assets was payment of the purchase price on the settlement date.

Therefore the taxpayer did not hold the depreciating assets as legal owner under Item 10 of the table in section 40-40 of the ITAA 1997 prior to their detachment and removal from the land.

However, Item 6 of the table in section 40-40 of the ITAA 1997 can apply to make a taxpayer the holder of a depreciating asset, to the exclusion of the legal owner, where the taxpayer is not the legal owner of the depreciating asset, but: • has possession of or an immediate right to possess the asset • has a right against the legal owner that, when exercised, makes the taxpayer a holder of the asset under an item in the table in section 40-40 of the ITAA 1997; and • it is reasonable to expect that the taxpayer will exercise the right to become the asset's holder, or that the asset will be disposed of for the taxpayer's benefit.

Under the terms of the contract, the taxpayer was required to detach and remove the depreciating assets from the vendor's land within a specified period commencing from the settlement date. Thus the taxpayer had the right to remove the depreciating assets from the vendor's land during this period. In exercising this right, the taxpayer detached and removed the assets from the vendor's land and in so doing obtained legal title to the assets at that time. At that time, the taxpayer started to hold them under Item 10 of the table in section 40-40 of the ITAA 1997. In this case, it was clearly reasonable, prior to the detachment and removal, to have expected that the taxpayer would exercise the right and become the holder of the assets under Item 10 because it had entered a contract for that very purpose.

As the taxpayer satisfied all of the conditions of Item 6 of the table in section 40-40 of the ITAA 1997 for the depreciating assets from the contract settlement date, it held them under that provision from that date until they were detached and removed from the land to the exclusion of the vendor who was the legal owner of the assets. (Note: the conditions for Item 2 of the table in section 40-40 of the ITAA 1997 were also nominally satisfied in this case however Item 6 is preferred as more precisely matching the specific facts of the case.)