Are you entitled to claim a deduction under Division 40 or Subdivision 328-D of the Income Tax Assessment Act 1997 (ITAA 1997) for the construction of employee accommodation on land that you lease to carry on a primary production business?
Yes. This ruling applies for the following period : Year ended 30 June 2024 The scheme commenced on: 1 July 2023
You carry on a primary production business. Person A is the farm manager and is actively involved on a full-time basis in both the management of the business and its operations including operating a full range of machinery owned by you. You pay Person A a competitive salary for the work that they undertake. Your turnover for the financial year was under $XXm. You lease a property from related parties to enable you to carry on your business. There is no lease agreement in place between you and the owner of the Property. All expenses associated with the property are paid by you including rates, insurance, repairs, various structural improvements including irrigation, sheds, new wash bay, silos, etc. You are currently in the process of constructing a dwelling on the land with the intention of using the dwelling to provide accommodation to your employees over time. It is not expected that there will be a formal lease in place but it is expected that Person A as manager with their family will be the initial residents of the dwelling.
Income Tax Assessment Act 1997 Division 40 Income Tax Assessment Act 1997 section 40-25 Income Tax Assessment Act 1997 subsection 40-30(1) Income Tax Assessment Act 1997 subsection 40-30(2) Income Tax Assessment Act 1997 subsection 40-30(3) Income Tax Assessment Act 1997 section 40-40 Income Tax Assessment Act 1997 section 40-45 Income Tax Assessment Act 1997 paragraph 43-70(2)(e) Income Tax Assessment Act 1997 section 45-40 Income Tax Assessment Act 1997 Subdivision 328-D
Section 40-25 of the ITAA 1997 allows a deduction equal to the decline in value of a depreciating asset that you held for any time during the year. A depreciating asset is defined in subsection 40-30(1) of the ITAA 1997 as an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used except land, trading stock and intellectual property that is not listed in subsection 40-30(2) of the ITAA 1997. Subsection 40-30(3) of the ITAA 1997 provides that Division 40 applies to improvements to land and fixtures on land as if they were separate assets from the land whether removable or not. Buildings and structural improvements to which Division 43 of the ITAA 1997 (capital works deductions) applies are specifically excluded from Division 40 (section 40-45 of the ITAA 1997). However, relevantly to this case, capital expenditure on plant is specially excluded from being construction expenditure by paragraph 43-70(2)(e) of the ITAA 1997.
Deductions for the decline in value of depreciating assets including plant are available under Division 40 of the ITAA 1997. Alternatively, small business entities have the choice to use the simplified depreciation rules in Subdivision 328-D of the ITAA 1997 to deduct the decline in value of eligible assets. Plant has the meaning given by section 45-40 of the ITAA 1997. The definition of plant includes structural improvements on land that is used for agricultural or pastoral operations where that improvement is used for domestic or residential purposes, if it is provided for the accommodation of employees, tenants or sharefarmers engaged in or in connection with agricultural or pastoral activities (paragraph 45-40(1)(f) of the ITAA 1997). Holder of depreciating assets The holder of a depreciating asset is determined by the table in section 40-40 of the ITAA 1997. Item 3 in that table provides that 'an improvement to land (whether a fixture or not) subject to a quasi-ownership right... where the owner of the right has no right to remove the asset' is held by the owner of the quasi-ownership right.
Quasi-ownership right over land is defined to include both a lease of the land or any other right in connection to the land. ATO ID 2009/156 Income Tax Capital allowances: quasi-ownership right over land - meaning of lease states: In determining whether a lease has been granted, the Courts will look to the substance of the transaction and the conduct of the parties to characterise the rights that have been created. If the substance of the agreement points to an intention to confer a right to exclusive possession, then there will be a lease, regardless of the type of tenancy that is created. The tenancy may be for a fixed term, or may be a periodic lease or a tenancy at will. A tenancy at will is a type of lease and therefore the occupier of land under such a tenancy will be the owner of a quasi-ownership right over land as defined in subsection 995-1(1). Citing Halsbury's Laws of Australia, ATO ID 2009/156 states: The usual way for a tenancy at will to come into existence is for the tenant to take possession of the property in question with the landlord's consent without paying rent. Capital allowances for small business
Subdivision 328-D of the ITAA 1997 states that if you are a small business entity, you can choose to deduct amounts for most of your depreciating assets on a diminishing value basis using a pool that is treated as a single depreciating asset. You can choose to calculate your deductions under this subdivision for an income year for all the depreciating assets you hold if: you are a small business entity for the income year, and you started to use the assets or have them installed ready for use, for a taxable purpose during or before that income year. Essentially, depreciating assets are allocated to a general small business pool. Once a depreciating asset has been allocated to your general small business pool, it cannot be reallocated, even if you are not a small business entity for a later income year or you do not choose to use Subdivision 328-D of ITAA 1997 to calculate your depreciation deduction for that later year. Application to your circumstances
The dwelling is a structural improvement on land that you use for primary production activities where the improvement is used for a residential purpose, providing accommodation for your farm employee. The dwelling is therefore plant under section 45-40 of the ITAA 1997. The dwelling meets the definition of a depreciating asset on that basis that it is an asset that will have a limited useful life and will decline in value and the exclusions don't apply as it is not: trading stock an intangible asset land given that it is treated separately to the land per subsection 40-30(3) of the ITAA 1997. The dwelling is also not excluded from Division 40 or Subdivision 328-D of the ITAA 1997, on the basis of it being capital works to which Division 43 applies, given it is plant. As you are a small business entity, you will be able to choose whether or not you use the simplified depreciation rules for all your eligible depreciating assets that you started to use or have installed ready for use, for a taxable purpose during or before that income year.
Consequently, when the dwelling is installed and ready for use, it will be a depreciable asset and you are entitled to add the dwelling to the small business pool under Subdivision 328-D.