Capital works: plant - improvements partly used for accommodation of employees

Does some part of the capital expenditure incurred on structural improvements to a building, on a farming property provided for the accommodation of both employees and the owner of the property, qualify for a capital works deduction under Division 43 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. No part of the capital expenditure incurred on structural improvements to a building, on a farming property provided for the accommodation of both employees and the owner of the property, qualifies for a capital works deduction under Division 43 of the ITAA 1997, because the expenditure was incurred to provide an asset qualifying as plant as defined in section 45-40 of the ITAA 1997. The whole of the capital expenditure was therefore 'expenditure on plant' which is specifically excluded from a deduction under Division 43 of the ITAA 1997.

The taxpayer maintains a residence in a city.

The taxpayer carries on a farming business as a sole trader on farming property he owns. The property contains a cottage that is used for the accommodation of employees who work on the property. The taxpayer also occupies the cottage, at times when employees are present and also on his own, when working on the property.

The taxpayer incurred expenditure to renovate and extend the cottage.

(All legislative references are to the ITAA 1997)

Section 43-10 provides a deduction for certain 'construction expenditure' incurred in respect of the construction of capital works such as buildings or structural improvements, including any extensions, alterations, or improvements to buildings or structural improvements.

Subsection 43-70(1) defines 'construction expenditure' as capital expenditure incurred in respect of the construction of capital works. However, paragraph 43-70(2)(e) specifically excludes expenditure on 'plant' from being construction expenditure. As a result no deduction is allowed for such expenditure under Division 43.

Paragraph 45-40(1)(c) extends the meaning of plant to include structural improvements on land used for agricultural or pastoral operations other than those used for domestic or residential purposes. However Paragraph 45-40(1)(f) specifically includes those structural improvements as plant even though they are used for domestic or residential purposes if they are provided for employees, tenants or sharefarmers engaged in or in connection with the agricultural or pastoral activities.

There is no requirement in paragraph 45-40(1)(f) that the structural improvements be used solely for the accommodation of employees, tenants or sharefarmers. Therefore, the concurrent use of the structural improvements for another purpose does not exclude them from the definition of plant in paragraph 45-40(1)(f).

As the structural improvements, including the building, are provided for use as accommodation for employees engaged in the agricultural or pastoral operations they are plant within the definition. The whole of the expenditure on the renovations is, therefore, expenditure on plant and is specifically excluded from deduction under Division 43.