 Most primary producers are well aware of the tax write offs available to them in regards to expenditure on water facilities (and also land care operations). The scope of this article is to concentrate more on the area of water facilities, especially since the Australian Taxation Office (ATO) extended the type of expenditure available for write off from 1st July 2004.
The article will consider some general questions in relation to water facilities and highlight areas of caution or traps, as we go. This is because there are some areas of the legislation which many primary producers are unaware of and can spring a few surprises.
Who can claim the write off?
The write off is available to primary producers and irrigation water providers (since 1st July 2004) who ‘incur’ the necessary expenditure.
Tax Trap!!
It must be noted here that the write off is available to the business that ‘incurred’ the expenditure. For example the purchaser of a property with an existing dam and the necessary pumps cannot get a deduction for any part of the purchase price attributed to the dam etc as they did not incur the expenditure. The original owner has already had the benefit (or the deemed benefit) of the write off.
What can be claimed?
A water facility is plant or a structural improvement, addition, construction or installation that is primarily for the purpose of conserving or conveying water. Typical examples are dams, tanks, bores, irrigation pumps, equipment, wells & windmills.
From 1st July 2004 the write offs has been extended to include expenditure incurred which is ‘reasonably incidental’ to conserving on conveying water. Examples of this type of expenditure are bridges over an irrigation channel or work required around a culvert.
How much can be claimed?
A full 1/3 write off is allowed in the year the expenditure is incurred and the remainder over the next 2 years (i.e. a 3 year write off).
Tax Saving!!
The key issue is that you can incur expenditure on the last day of the financial year and get the full 1/3 write off as if you incurred the expenditure on the first day of the year. The write off is a powerful mechanism and works well in year end tax planning, especially when it forms part of an overall farm management or development plan.
Do you need to be the land owner?
No, you just need to be carrying on a business of primary production, therefore you can be leasing the land and incur expenditure. For example, on a pump for irrigation use on leased land.
Partnerships – Who deducts the claim?
Where a primary production business is operated through a partnership it is the partners not the partnership who deducts the write off, as it is taken that the individual partners incurred the expenditure.
Tax Saving!!
Even after a water facility is sold (plant or structural improvement) a taxpayer can continue to claim a deduction as long as it is still used in carrying on a primary production business or for a taxation purpose.
Purchase of second hand water facilities
The area relating to the purchase of second hand water facilities creates the most confusion and can be a real tax trap. So if we ask the question, “Is a deduction available for second hand water facilities?”
Tax Trap!!
The answer is clearly no, if any person ‘has deducted or can deduct’ an amount for any income year for earlier capital expenditure on the construction, manufacture or previous acquisition of water facilities.
It must also be highlighted here that the legislation says ‘can deduct’ which means that the previous taxpayer is deemed to have utilised the relevant subdivision (s40-F ITAA 1997).
This raises a very important issue which has an effect on the market for second hand equipment. Wouldn’t it be logical then that second hand water equipment would need to be sold at a large discount as compared to new equipment purely because no tax deduction is available?
It highlights the fact that the market may not be fully informed, plus also highlights the possibility that the legislation is commercially unrealistic. Even if this is the case, claims made for second hand water facilities are at the taxpayers’ peril.
Disposal of water facilities
The disposal of water facilities depending on the facts of each case could be handled by the ATO under the recoupment rules or the capital gains provisions. It is not the scope of the article to go into the intricacies of each except to say that care must be taken and advice should be obtained prior to a disposal.
Tax Tip!!
Care must be taken when defining the various aspects or break up of a property sale within a property sale agreement.
Summary
Overall the 3 year write off of expenditure incurred on water facilities is an attractive concession by the ATO and has recently become more attractive with the extension to include expenses labeled as ‘reasonably incidental’. The legislation however does hold issues which not all primary producers are aware of and can cause some unexpected consequences.
P.S. On a separate and more recent note the ATO have announced that they are reviewing the effective life of primary production depreciating assets. It will be with interest that we await the result of this, with the ATO most likely expected to lengthen effective lives and claw back some of the recent concessions given.
The information contained in this article is for information purposes only and does not represent advice. You should seek your own independent advice based on you own circumstances in relation with the issues covered in the article. Neither the firms of the WHK Pinnacle Group, Investor Group or the TFGA accept any responsibility for any reliance placed on this article. 
Source: Primary Focus, Issue No.4, 2005 |
