Capital expenditure deductible under UCA

UCA maintains the pre 1 July 2001 treatment of some capital expenditure and allows deductions for some capital expenditure that did not previously attract a deduction. Most of these deductions are only available if the expenditure does not form part of the cost of a depreciating asset.

The following types of capital expenditure are deductible under UCA:

• landcare operations incurred by primary producers, other landholders and rural land irrigation water providers; see Landcare operations
• electricity connections or phone lines incurred by primary producers and other landholders; see Electricity connections and phone lines
• environmental protection activities (EPA); see Environmental protection activities
• exploration and prospecting; see Mining and quarrying, and minerals transport
• rehabilitation of mining and quarrying sites; see Mining and quarrying, and minerals transport
• petroleum resource rent tax; see Mining and quarrying, and minerals transport
• certain capital expenditure directly connected with a project; see Project pools
• expenditure incurred in establishing trees in a carbon sink forest; see Carbon sink forests
• certain business related costs; see Business related costs – section 40-880 deductions.

Generally, to work out your deductions you need to reduce the expenditure by the amount of any GST input tax credits you are entitled to claim for the expenditure. Increasing or decreasing adjustments that relate to the expenditure may be allowed as a deduction or included in assessable income, respectively. Special rules apply to input tax credits on expenditure allocated to a project pool; see Project pools.

Small business entities that have chosen to use the simplified depreciation rules (except primary producers) may deduct capital expenditure under these UCA only if the expenditure is not part of the cost of a depreciating asset. Primary producers that are using the simplified depreciation rules can choose to deduct certain depreciating assets under UCA; see Small business entities.

Landcare operations

You can claim a deduction in the year you incur capital expenditure on a landcare operation for land in Australia.

Unless you are a rural land irrigation water provider, the deduction is available to the extent you use the land for either:

• a primary production business, or
• in the case of rural land, carrying on a business for a taxable purpose from the use of that land, except a business of mining or quarrying.

You may claim the deduction even if you are only a lessee of the land.

The deduction for landcare operations was extended to rural land irrigation water providers for certain expenditure they incur on or after 1 July 2004. A rural land irrigation water provider is an entity whose business is primarily and principally supplying water to entities for use in primary production businesses on land in Australia or businesses (except mining or quarrying businesses) using rural land in Australia. The supply of water by the use of a motor vehicle is excluded.

If you are a rural land irrigation water provider, you can claim a deduction for capital expenditure you incur on a landcare operation for:

• land in Australia that other entities (being entities supplied with water by you) use at the time for carrying on primary production businesses, or
• rural land in Australia that other entities (being entities supplied with water by you) use at the time for carrying on businesses for a taxable purpose from the use of that land (except a business of mining or quarrying).

A rural land irrigation water provider’s deduction is reduced by a reasonable amount to reflect an entity’s use of the land for a non-taxable purpose after the water provider incurred the expenditure.

A landcare operation is one of the following:

1. erecting fences to separate different land classes in accordance with an approved land management plan
2. erecting fences primarily and principally to keep animals out of areas affected by land degradation to prevent or limit further degradation and to help reclaim the areas
3. constructing a levee or similar improvement
4. constructing drainage works (other than the draining of swamp or low-lying land) primarily and principally to control salinity or assist in drainage control
5. an operation primarily and principally for eradicating or exterminating animal pests from the land
6. an operation primarily and principally for eradicating, exterminating or destroying plant growth detrimental to the land
7. an operation primarily and principally for preventing or combating land degradation other than by erecting fences
8. an extension, alteration or addition to any of the assets described in the first four points above or an extension of an operation described in the fifth to seventh points.

The meaning of landcare operation was extended to apply to expenditure incurred on or after 1 July 2004 on:

• a repair of a capital nature to an asset that is deductible under a landcare operation
• constructing a structural improvement that is reasonably incidental to levees or drainage works deductible under a landcare operation
• a repair of a capital nature, or an alteration, addition or extension, to a structural improvement that is reasonably incidental to levees (or similar improvements) or drainage works deductible under a landcare operation.

An example of a structural improvement that may be reasonably incidental to drainage works is a fence constructed to prevent livestock entering a drain that was constructed to control salinity.

Expenditure incurred on or after 1 July 2004 on a repair of a capital nature, or a change to a depreciating asset may be eligible for the deduction for landcare operations under the extended rules even though the pre 1 July 2004 expenditure on the asset itself is not eligible for the deduction under the rules before they were extended. This is because the repair or change to the asset is not treated as part of the asset under the extended rules, so the extended rules are separately applied to that repair or change.

No deduction is available for landcare operations if the capital expenditure is on plant unless it is on certain fences, dams or other structural improvements. You work out the decline in value of plant not deductible under the landcare provisions using the general rules for working out decline in value; see Methods of working out decline in value.

There are no specific balancing adjustment rules for a depreciating asset on which capital expenditure has been incurred that is deductible under the landcare provisions. That asset may, however, be considered part of the land for CGT purposes.

If a levee is constructed primarily and principally for water conservation, it would be a water facility and no deduction would be allowable under these rules. You would need to work out its decline in value under the rules for water facilities; see Water facilities.

If you are a rural land irrigation water provider and you can deduct expenditure under both the water facilities and landcare operation rules, you can only deduct the expenditure as expenditure on a water facility.

You cannot deduct an amount for landcare operations if any entity can deduct an amount for that expenditure, in any income year, under the carbon sink forest rules; see Carbon sink forests.

If the expenditure incurred arises from a non-arm’s length dealing and is more than the market value of what the expenditure was for, the amount of the expenditure is taken to be that market value instead.

A recoupment of the expenditure may be included in your assessable income.

The deduction is not available to a partnership. Costs incurred by a partnership are allocated to each partner who can claim a deduction for their share of the relevant capital expenditure.

Capital expenditure on a landcare operation may be incurred on a depreciating asset. However, if the expenditure is deductible under these rules, you cannot use the general rules for working out decline in value or claim the immediate deduction for certain depreciating assets costing $300 or less.

If you incur the capital expenditure on a depreciating asset and you are a primary producer and a small business entity, you can choose to work out your deductions for these depreciating assets using either the simplified depreciation rules or these UCA. For more information about the simplified depreciation rules, see Small business entities.

Electricity connections and phone lines

You may be able to claim a deduction over 10 years for capital expenditure you incur on:

• connecting mains electricity to land on which a business is carried on for a taxable purpose or upgrading an existing connection to that land, or
• a telephone line on, or extending to, land on which a primary production business is carried on.

If the expenditure incurred arises from a non-arm’s length dealing and is more than the market value of what the expenditure was for, the amount of the expenditure is taken to be that market value instead.

A recoupment of the expenditure may be included in your assessable income.

These deductions are not available to a partnership. Costs incurred by a partnership are allocated to each partner who can claim a deduction for their share of the relevant capital expenditure.

Such capital expenditure may be incurred on a depreciating asset. However, if the expenditure is deductible under these rules, you cannot use the general rules for working out decline in value or claim the immediate deduction for depreciating assets costing $300 or less.

If you incur the capital expenditure on a depreciating asset and you are a primary producer and a small business entity, you can choose to work out your deductions for these depreciating assets using either the simplified depreciation rules or these UCA. For more information about the simplified depreciation rules, see Small business entities.

There are no specific balancing adjustment rules for a depreciating asset on which capital expenditure has been incurred that is deductible under these rules. That asset may, however, be considered part of the land for CGT purposes.

Environmental protection activities (EPA)

You can claim an immediate deduction for expenditure that you incur for the sole or dominant purpose of carrying on EPA. EPA are activities undertaken to prevent, fight and remedy pollution, and to treat, clean up, remove and store waste from your earning activity or a site on which another entity carried on a business that you acquired and carry on substantially unchanged as your earning activity. Your earning activity is one you carried on, carry on or propose to carry on for one or more of these purposes:

• producing assessable income (other than a net capital gain)
• exploration or prospecting
• mining site rehabilitation.

You may also claim a deduction for expenditure on EPA relating to a site if the pollution or waste is caused by another entity to which you have leased or granted a right to use the site.

The deduction is not available for:

• EPA bonds and security deposits
• expenditure on acquiring land
• expenditure on constructing or altering buildings, structures or structural improvements
• expenditure to the extent that you can deduct an amount for it under another provision.

Expenditure on EPA that is also for an environmental impact assessment of your project is not deductible as expenditure on EPA. However, if it is capital expenditure directly connected with a project, it could be a project amount for which a deduction would be available over the project life; see Project pools.

Expenditure that forms part of the cost of a depreciating asset is not deductible as expenditure on EPA if a deduction is available for the decline in value of the asset.

A recoupment of the expenditure may be included in your assessable income.

Note that expenditure incurred on or after 19 August 1992 on certain earthworks constructed as a result of carrying out EPA can be written off at a rate of 2.5% under the provisions for capital works expenditure.

Mining and quarrying, and minerals transport

From 1 July 2001, you work out deductions for the decline in value of depreciating assets used in mining and quarrying, and in minerals transport using the general rules; see Working out decline in value. The general rules either do not apply or are modified for the depreciating assets or capital expenditure discussed below.

Immediate deduction for depreciating assets used in exploration or prospecting

The decline in value of certain depreciating assets that you first use for exploration or prospecting for minerals (including petroleum), or quarry materials, obtainable by activities carried on for the purpose of producing assessable income, can be its cost. This means you can deduct the cost of the asset in the year in which you start to use it for such activities to the extent that the asset is used for a taxable purpose.

However, where the depreciating asset is a mining, quarrying or prospecting right or mining, quarrying or prospecting information first used for exploration or prospecting for minerals (including petroleum) or quarry materials, an immediate deduction is only available for the asset if one of the following tests are also met:

• The mining, quarrying or prospecting right or mining, quarrying or prospecting information has been acquired from an Australian Government agency or a government entity.
• The mining, quarrying or prospecting information is a geophysical or geological data package you acquired from an entity which predominantly carries on a business of providing mining, quarrying or prospecting information to other entities.
• You created the mining, quarrying or prospecting information or contributed to the cost of its creation.
• You caused the mining, quarrying or prospecting information to be created or contributed to the cost of it being created by an entity which predominantly carries on a business of providing mining, quarrying or prospecting information to other entities.

If one of these tests is not met in respect of the mining, quarrying or prospecting right or mining, quarrying or prospecting information, then there is no immediate deduction of the cost of that asset and the effective life of the asset is the shorter of:

• the effective life provided in the table, if one has been determined (see Effective life of intangible depreciating assets that are mining, quarrying or prospecting rights, or mining, quarrying or prospecting information), and
• 15 years.

Immediate deduction for expenditure which does not form part of the cost of a depreciating asset

An immediate deduction is available for payments of petroleum resource rent tax and for expenditure that does not form part of the cost of a depreciating asset and is incurred on:

• exploration or prospecting for minerals, including petroleum, or quarry materials, obtainable by activities carried on for the purpose of producing assessable income (see Taxation Ruling TR 2017/1 Income tax: deductions for mining and petroleum exploration expenditure), or
• rehabilitation of your mining or quarrying sites.

If the expenditure arises from a non-arm’s length dealing and is more than the market value of what the expenditure was for, the amount of the expenditure is taken to be that market value instead.

A recoupment of the expenditure may be included in assessable income.

Farm-in farm-out arrangements

A farm-in farm-out (FIFO) arrangement broadly involves an exchange of an interest in a mining, quarrying or prospecting right in return for an 'exploration benefit', usually an entitlement to receive exploration services or to have exploration expenditure funded by the other party. The tax treatment of FIFO arrangements, prior to amendments in 2014, is outlined in Miscellaneous Tax Rulings MT 2012/1 and MT 2012/2. Further amendments in 2015 were necessary to ensure that FIFO arrangements did not have certain tax consequences where those consequences could impede genuine exploration activity.

Deduction over time for capital expenditure associated with projects you carry on

Expenditure incurred after 30 June 2001 which does not form part of the cost of a depreciating asset and is not otherwise deductible may be a project amount that you can allocate to a project pool for which deductions are available. To be a project amount, mining capital expenditure or transport capital expenditure must be directly connected with carrying on the mining operations or business, respectively.

Mining capital expenditure is capital expenditure you incur on:

• carrying out eligible mining or quarrying operations
• site preparation for those operations
• necessary buildings and improvements for those operations
• providing or contributing to the cost of providing water, light, power, access or communications to the site of those operations
• buildings used directly for operating or maintaining plant for treating minerals or quarry materials
• buildings and improvements for storing minerals or quarry materials before or after their treatment
• certain housing and welfare (except for quarrying operations).

Transport capital expenditure includes capital expenditure on:

• a railway, road, pipeline, port or other facility used principally for transporting minerals, quarry materials or processed minerals (other than wholly within the site of mining operations) or the transport of petroleum in certain circumstances
• obtaining a right to construct or install such a facility
• compensation for damage or loss caused by constructing or installing such a facility
• earthworks, bridges, tunnels or cuttings necessary for such a facility
• as part of carrying on your business, contributions you make to someone else’s expenditure on the above items.

For information on how to work out deductions using a project pool, see Project pools.

Special transitional rules ensure that amounts of undeducted expenditure as at 30 June 2001 incurred under the former special provisions for the mining and quarrying and mineral transport industries remain deductible over the former statutory write-off periods, for example, over the lesser of 10 years or the life of the mine.

Similarly, the former statutory write-off continues to apply to expenditure you incurred after 30 June 2001 if:

• it would have qualified for deduction under the former special provisions

and either:

• it is a cost of a depreciating asset that you started to hold under a contract entered into before 1 July 2001 or otherwise started to hold or began to construct before that day, or
• your expenditure was incurred under a contract entered into before 1 July 2001 and the expenditure does not relate to a depreciating asset.

Eligible exploration or prospecting expenditure incurred after 30 June 2001 that is a cost of a depreciating asset that you started to hold under a contract entered into before 1 July 2001, or otherwise started to hold or began to construct before that day, is deductible at the time it is incurred.

Project pools

Under UCA, you can allocate to a project pool certain capital expenditure incurred after 30 June 2001 that is directly connected with a project you carry on (or propose to carry on) for a taxable purpose, and write it off over the project life. Each project has a separate project pool.

The project must be of sufficient substance and be sufficiently identified that it can be shown that the capital expenditure said to be a ‘project amount’ is directly connected with the project.

A project is carried on if it involves some form of continuing activity. The holding of a passive investment such as a rental property would not represent sufficient continuing activity to constitute the carrying on of a project.

The capital expenditure is known as a ‘project amount’ and is expenditure incurred:

• to create or upgrade community infrastructure for a community associated with the project; this expenditure must be paid (not just incurred) to be a project amount
• for site preparation costs for depreciating assets (other than draining swamp or low-lying land, or clearing land for horticultural plants)
• for feasibility studies or environmental assessments for the project
• to obtain information associated with the project
• in seeking to obtain a right to intellectual property
• for ornamental trees or shrubs.

Mining capital expenditure and transport capital expenditure (see Mining and quarrying, and minerals transport) can also be a project amount that you can allocate to a project pool and for which you can claim a deduction.

The expenditure must not be otherwise deductible or form part of the cost of a depreciating asset held by you.

If the expenditure incurred arises from a non-arm’s length dealing and is more than the market value of what the expenditure was for, the amount of the expenditure is taken to be that market value instead.

The deduction for project amounts allocated to a project pool begins when the project starts to operate. For projects that start on or after 10 May 2006 and that only contain project amounts incurred on or after 10 May 2006 the calculation is:

(pool value × 200%) ÷ DV project pool life

For projects that started before 10 May 2006 the calculation is:

(pool value × 150%) ÷ DV project pool life

The ‘DV project pool life’ is the project life of a project or the most recently recalculated project life of a project.

Certain projects may be taken to have started to operate before 10 May 2006 (for example, when a project is abandoned and restarted on or after 10 May 2006 so that deductions can be calculated using the post 9 May 2006 formula).

The pool value for an income year is, broadly, the sum of the project amounts allocated to the pool up to the end of that year less the sum of the deductions you have claimed for the pool in previous years (or could have claimed had the project operated wholly for a taxable purpose).

The pool value can be subject to adjustments.

If you are entitled to claim a GST input tax credit for expenditure allocated to a project pool, you reduce the pool value in the income year in which you are, or become, entitled to the credit by the amount of the credit. Certain increasing or decreasing adjustments for expenditure allocated to a project pool may also affect the pool value.

If during any income year commencing after 30 June 2003 you met or otherwise ceased to have an obligation to pay foreign currency incurred as a project amount allocated to a project pool, a foreign currency gain or loss (referred to as a forex realisation gain or loss) may have arisen under the forex provisions. If the project amount was incurred after 30 June 2003 (or earlier, if you so elected) and became due for payment within 12 months after you incurred it, then the pool value for the income year you incurred the project amount is adjusted by the amount of any forex realisation gain or loss. This is known as ‘the 12-month rule’. You are able to elect out of the 12-month rule in limited circumstances; for more information, see Election out of the 12 month rule.

If you have elected out of the 12-month rule, the pool value is not adjusted; instead, any forex realisation loss is generally deductible and any gain is included in assessable income.

DV project pool life: You must estimate the project life of your project each year. The project life may not change, but reconsider the question each year. If your new estimate is different from the previous estimate, the DV project pool life you use in the formula is that new estimated project life, not the project life estimated the previous year.

The project life is worked out by estimating how long (in years and fractions of years) it will be from when the project starts to operate until it stops operating. Factors that are personal only to you, such as how long you intend to carry on the project, are not relevant when objectively estimating project life. Factors outside your control, such as something inherent in the project itself, for example, a legislative or environmental restriction limiting the period of operation, would be relevant.

If there is no finite project life, there is no project and therefore no deduction is available under these rules.

There is no need to apportion the deduction if the project starts to operate during the income year, or for project amounts incurred during the income year.

You reduce the deduction to the extent to which you operate the project for a non-taxable purpose during the income year.

If the project is abandoned, sold or otherwise disposed of in the income year, you can deduct the sum of the closing pool value of the prior income year plus any project amounts allocated to the pool during the income year, after allowing for any necessary pool value adjustments. A project is abandoned if it stops operating and will not operate again.

Your assessable income will include any amount received for the abandonment, sale or other disposal of a project.

If you recoup an amount of expenditure allocated to a project pool or if you derive a capital amount for a project amount or something on which a project amount was expended, you must include the amount in assessable income.

If any receipt arises from a non-arm’s length dealing and the amount is less than the market value of what the receipt was for, you are taken to have received that market value instead.

Business related costs – section 40-880 deductions

UCA allows a five-year write-off for certain business related capital expenditure, provided that no other provision either takes the expenditure into account or denies a deduction (known as blackhole expenditure).

Expenditure incurred after 30 June 2005 is deductible if you incur it:

• for your business
• for a business that used to be carried on, such as capital expenses incurred in order to cease the business
• for a business proposed to be carried on, such as the costs of feasibility studies, market research or setting up the business entity
• as a shareholder, beneficiary or partner to liquidate or deregister a company or to wind up a trust or partnership (and the company, trust or partnership has carried on a business).

If you incur expenditure for your existing business, a business that you used to carry on or a business that you propose to carry on, the expenditure is deductible to the extent the business is, was or is proposed to be carried on for a taxable purpose.

You cannot deduct expenditure for an existing business that is carried on by another entity. However, you can deduct expenditure you incur for a business that used to be, or is proposed to be, carried on by another entity. The expenditure is only deductible to the extent that:

• the business was, or is proposed to be, carried on for a taxable purpose, and
• the expenditure is in connection with your deriving assessable income from the business and the business that was carried on or is proposed to be carried on.

A five-year straight-line write-off is allowed for certain capital expenditure incurred to terminate a lease or licence if the expenditure is incurred in the course of carrying on a business, or in connection with ceasing to carry on a business. See Other capital expenses (including capital works deductions).

If you are an individual operating either alone or in partnership, this deduction may be affected by the non-commercial loss rules; see Non-commercial losses.

The extent to which a business is, was or is proposed to be carried on for a taxable purpose is worked out at the time the expenditure is incurred. For an existing business or a business proposed to be carried on, you need to take into account all known and predictable facts in all years.

For a business to be ‘proposed to be’ carried on, you need to be able to sufficiently identify the business and there needs to be a commitment of some substance to commence the business. Examples of such a commitment are establishing business premises, investment in capital assets and development of a business plan. The commitment must be evident at the time the expenditure is incurred. It must also be reasonable to conclude that the business is proposed to be carried on within a reasonable time. This time may vary according to the industry or the nature of the business.

The deduction cannot be claimed for capital expenditure to the extent to which it:

• can be deducted under another provision
• forms part of the cost of a depreciating asset you hold, used to hold or will hold
• forms part of the cost of land
• relates to a lease or other legal or equitable right
• would be taken into account in working out an assessable profit or deductible loss
• could be taken into account in working out a capital gain or a capital loss
• would be specifically not deductible under the income tax laws if the expenditure was not capital expenditure
• is specifically not deductible under the income tax laws for a reason other than the expenditure is capital expenditure
• is of a private or domestic nature
• is incurred for gaining or producing exempt income or non-assessable non-exempt income
• is excluded from the cost or cost base of an asset because, under special rules in UCA or the CGT regimes respectively, the cost or cost base of the asset was taken to be the market value
• is a return of, or on, capital (for example, dividends paid by companies or distributions by trustees) or a return of a non-assessable amount (for example, repayments of loan principal).

If the expenditure:

• arises from a non-arm’s length dealing, and
• is more than the market value of what the expenditure was for

then the amount of the expenditure is taken to be that market value instead.

You deduct 20% of the expenditure in the year you incur it and in each of the following four years.

From 2015–16, certain start-up expenditure for a small business that would be deductible over five years is fully deductible in the income year in which the expenditure is incurred; see Certain start-up expenses immediately deductible.

Even if the business ceases or the proposed business does not commence (for example, if there is an unforeseen change in circumstances) the deduction may be able to be claimed over the five years. Deductions for expenditure for a proposed business can be claimed before the business is carried on. However, if you are an individual taxpayer, the non-commercial loss rules may defer your deductions for pre- and post-business expenditure; see Non-commercial losses.

A recoupment of the expenditure may be included in your assessable income.

Carbon sink forests

You can claim a deduction, subject to certain conditions, for the expenditure you incur in establishing trees in a carbon sink forest.

• For such trees established in 2007–08, 2008–09, 2009–10, 2010–11 or 2011–12, you can claim an immediate deduction for the expenditure you incurred in establishing the trees.
• For such trees established in 2012–13 or later, you can claim a maximum capital write-off rate of 7% of the expenditure incurred in establishing the trees (conditions apply).

You will find the rules in Subdivision 40-J of the Income Tax Assessment Act 1997 and in Carbon sink forests.