ATO Interpretative Decision

ATO ID 2009/35

Income Tax

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Issue

Is the taxpayer's capital expenditure on acquiring and planting trees and shrubs an amount incurred for ornamental trees or shrubs for the purpose of subparagraph 40-840(2)(d)(vii) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. The taxpayer's capital expenditure on acquiring and planting trees and shrubs is an amount incurred for ornamental trees or shrubs for the purpose of subparagraph 40-840(2)(d)(vii) of the ITAA 1997 because the primary purpose of their acquisition and planting was for decorative purposes.

Facts

The taxpayer carries on their business on land they lease from the land owner.

The taxpayer constructed on the land that they lease a new building from which they carry on their business. The construction included landscaping works annexed to the land on the new building site. The capital expenditure incurred by the taxpayer on landscaping works included the cost of purchasing and planting trees and shrubs and the cost of purchasing and laying turf and mulch.

As the taxpayer's business is permitted to be carried on from the new building for a finite period only, the taxpayer's business is also a project for the purposes of the project pool provisions in Subdivision 40-I of the ITAA 1997.

The contract for the construction of the new building included capital expenditure on landscaping works on the building site. The acquisition and planting of trees and shrubs was part of the decorative and aesthetic theme on the new building site.

The expenditure was incurred on or after 1 July 2005.

Reasons for Decision

Broadly speaking, section 40-830 of the ITAA 1997 allows a deduction over the project life for project amounts allocated to a project pool.

To be a 'project amount' within subsection 40-840(2) of the ITAA 1997, the amount must be capital expenditure which, in addition to satisfying paragraphs 40-840(2)(a) to 40-840(2)(c) of the ITAA 1997 is one of the amounts specified in paragraph 40-840(2)(d) of the ITAA 1997.

In order for the capital expenditure to be a project amount within subparagraph 40-840(2)(d)(vii) of the ITAA 1997, the amount must be incurred for ornamental trees or shrubs.

The expression 'ornamental trees or shrubs' is not defined for the purposes of the project pool provisions of Subdivision 40-I of the ITAA 1997 and therefore, it will take its ordinary meaning shaped by the context in which it is found.

The Australian Oxford Dictionary, 1999, Oxford University Press, Melbourne, relevantly defines the word 'ornamental' as:

•

adj. serving as an ornament; decorative.

•

n. a thing considered to be ornamental, especially a cultivated plant.

Similarly, The Macquarie Dictionary, 2005, 4th edn, The Macquarie Library Pty Ltd, NSW, defines the word 'ornamental' as:

1. used for ornament: ornamental plants. 2. such as to ornament; decorative. 3. of or relating to ornament. 4. something ornamental. 5. a plant cultivated for decorative purposes.

In light of these dictionary definitions, we consider that an ornamental tree or shrub is, for the purposes of the project pool provisions, one where its primary purpose is decorative. That is, its primary purpose is to add to the visual and aesthetic effect of the project; for example, by beautifying the appearance of the project or by decorating the surroundings of the project.

As such, a tree or shrub which is generally used in horticulture, for example a fruit tree or plantation tree, may be an ornamental tree or shrub where its primary purpose was decorative. For example a nut tree that is planted primarily to beautify the surroundings will be ornamental.

A tree or shrub will also be an ornamental tree or shrub if its primary purpose is decorative but it also has another lesser purpose of providing a practical function. For example, trees planted for the primary purpose of beautifying a garden may also have the benefit of being a privacy screen, a windbreak or used to delineate a boundary

Only the direct costs of acquiring and planting ornamental trees or shrubs are amounts incurred for ornamental trees or shrubs. These direct costs include the purchasing of the tree or shrub, initial fertilising and top soil enhancement and other costs attributable to the establishment of the tree or shrub into its long term growing medium. Ongoing maintenance costs incurred, for example, to water the trees or shrubs on an on-going basis do not form part of amounts incurred for ornamental trees or shrubs.

In this case, the taxpayer has incurred capital expenditure on acquiring and planting trees and shrubs as part of the landscaping works on the new building site. The trees and shrubs are included as part of the new building site's decorative or aesthetic theme and are for those purposes only.

As such, the taxpayer has incurred capital expenditure for ornamental trees or shrubs for the purpose of subparagraph 40-840(2)(d)(vii) of the ITAA 1997 because the ornamental trees and shrubs were acquired and planted primarily for decorative purposes.

Amendment History

Year of income:  Year ended 30 June 2006 Year ended 30 June 2007 Year ended 30 June 2008 Year ended 30 June 2009 Year ended 30 June 2010

Legislative References:
Income Tax Assessment Act 1997
   Subdivision 40-I
   section 40-830
   section 40-840
   subsection 40-840(2)
   paragraph 40-840(2)(a)
   paragraph 40-840(2)(c)
   paragraph 40-840(2)(d)
   subparagraph 40-840(2)(d)(vii)

Related ATO Interpretative Decisions
ATO ID 2009/36

Other References:
The Australian Oxford Dictionary, 2004, Oxford University Press, Melbourne
The Macquarie Dictionary, 2005, 4th edn, The Macquarie Library Pty Ltd, NSW

Keywords
Australian Taxation Office
Capital Allowances CoE
Capital Works Deductions
Centres of Expertise
Deductions & expenses
Project amount
Project pool

Siebel/TDMS Reference Number:  6006398; 1-5VXKCCU, 1-C5S2USK

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  22 May 2009
Date reviewed:  2 August 2017

ISSN: 1445-2782