Income tax : installation costs of plant and equipment
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FOI status: May be released
This Office has had occasion recently to consider the
extent to which income tax deductions may be allowed for expenses
incurred either by an owner or by a lessee in the installation of plant
and equipment to be used for the purpose of producing assessable
2. The purpose of this ruling is to restate the
official approach to be followed in this area.
3. At the outset it is important to make a
distinction between two categories of expenditure which may be
associated with the installation of plant and equipment. The first,
which is referred to in this ruling as installation expenses, embraces
such items as freight and delivery costs, customs duty and other import
levies, minor re-arrangements and removal of plant and equipment within
the relevant premises - i.e., expenses which may be incurred in getting
the plant and equipment to the site and putting it in place.
4. The second category, which is referred to as
structural alterations and ancillary items of plant and equipment,
covers expenses which may be necessary to make way for the new plant and
equipment, e.g., the demolition of existing plant and equipment and
consequent clearing of a site, structural alterations to a building etc.
It also covers ancillary items of equipment which may be necessary to
the operation of the major items of new plant and equipment, e.g., a
free access floor for a computer.
5. Where the owner of plant and equipment incurs
installation expenses the cost forms part of the total cost of the plant
and equipment upon which depreciation and investment allowance
deductions may be allowed. In appropriate cases the cost may be subject
to deduction in the manner permitted under other provisions of the
Income Tax Assessment Act, e.g., Division 10, 10AA, 10AAA, etc.
6. Expenditure incurred by a lessee on installation
expenses may be allowed as a deduction under sub-section 51(1). The
expenditure is considered to partake of the same nature as the payments
under the lease for the plant and equipment, i.e., it is part of the
costs incurred for the use of the plant and equipment and, therefore, of
a revenue nature. This will be the case whether the lessee incurs the
installation expenses personally or pays an amount by way of
reimbursement to the lessor for installation expenses. To this extent
paragraph 1 of Taxation Ruling No. IT 21 is withdrawn.
Structural Alterations and Ancillary Items of Plant and
7. Costs incurred in the demolition of existing
plant and generally clearing a site for the installation or erection of
new plant and equipment is of a capital nature and no income tax
deduction will be allowable either to an owner or to a lessee.
8. Costs incurred in making structural alterations
to a building in which plant and equipment is located are also of a
capital nature but income tax deductions may be allowable in respect of
the cost, e.g., under Division 10, 10A, 10AA, 10AAA, 10C or 10D.
9. Expenditure incurred by the owner of new plant
and equipment on ancillary items of plant and equipment will qualify for
deduction in the same way as is available generally. The same result
will follow if the lessee of new plant and equipment incurs expenditure
on ancillary items of plant and equipment of which the lessee is the
owner. If, on the other hand, the lessee leases ancillary items of
plant and equipment, the lease charges will be allowable as income tax
deductions under sub-section 51(1).
10. To the extent that there are installation
expenses associated with the ancillary items of plant and equipment they
should be treated in the same manner as is set out in paragraphs 5 and
6. In a case recently considered in this Office a taxpayer was required
to lease from Telecom certain data transmission lines necessary for the
operation of new computer facilities installed by the taxpayer. In
addition to the lease rentals for the data transmission lines the
taxpayer was required to pay an initial connection fee. Both the lease
rentals and the initial connection fee were accepted as deductible under
COMMISSIONER OF TAXATION
25 October 1985
Paragraph 6, last line - reference to paragraph "1" should be paragraph "2".
Date of effect:
Date orig. memo issued:
23 July 1985
INSTALLATION COSTS - LEASED PLANT
DEPRECIATION - COMPUTER EQUIPMENT