RSM Australia

Deductibility of labour costs related to the construction or creation of assets

Draft Tax Ruling TR 2019/D6 explains the Commissioner’s views as to when labour costs relating to the construction or creation of an asset is deductible for tax purposes under section 8-1 of the Income Tax Assessment Act 1997 (Tax Act). 

Labour costs falling for deductibility under another provision of the Tax Act, including the research & development provisions, won’t fall within the ruling. It is proposed that when the ruling is finalised it will have retrospective application.

If the ruling is finalised in its current draft form, it will have broad application and affect those taxpayers that employ both employees and contractors, to construct plant, build mines, create software, undertake acquisition due diligence or generally add to the profit yielding structure of a business. The ATO has the owners of Australia’s LNG plants in their sights!  asset_32.png

Employees with roles that directly support other employees that are constructing or creating a capital asset are also considered by the ATO to be on capital account. These roles would include, for example, a project finance manager or project materials procurement manager of a capital project.

The prevailing view has been that labour costs, by their very nature, are a recurring ‘working expense’ and in only very limited circumstances could they be regarded as being on capital account. The exceptions were where an employee or contractor was employed specifically to carry out a capital purpose or was wholly engaged for such a purpose. This position has its genesis from the following obiter of Hill J in Goodman Fielder1:

“Where a person is employed for the specific purpose of carrying out an affair of capital, the mere fact that that person is renumerated  by a form of periodic outgoing would not make the salary or revenue account.”

Similarly, in the Star City2 case Jesep J said:

“Likewise, while wages are ordinarily a revenue expense, wages paid to employees engaged wholly under the installation of new capital equipment should not be so regarded.” 
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Examples of job roles that will not be regarded as being on capital accounts, even where an organisation is undertaking a capital project, are:

  • a human resource manager, general manager or general counsel whose roles extend across an organisation; or
  • a security guard whose role would be too “remote” from the construction activity.

It is the ATO’s position in the draft ruling on the point of apportionment that is arguably the most contentious point and arguably at odds with the following comments of Hill J in Goodman Fielder:

On the other hand, where an employee is employed and engaged in activities which are part of the recurring business of a company, the fact that he may, on a particular day, be engaged in an activity which viewed alone would be of a capital kind, does not operate to convert the periodical outgoing for salary and wages into an outgoing of a capital nature.”

TR 2019/D6 says that apportionment of labour costs between amounts on revenue account and capital account “is to be conducted on a fair and reasonable basis”.  It is only where a minor, infrequent or incidental part of an employee or contractor’s time is spent on a capital project that the ATO would not consider a need for apportionment.

The draft ruling provides examples on the issue of labour cost apportionment:

  • A general manager who works one day a week on activities relating to a construction project would not need to apportion their salary costs;
  • A contract electrician who spends 50% of their time on general repair work and 50% on a capital project would need to have their time costs apportioned.

The accounting treatment of apportioning labour costs between amounts that are capitalised or expensed is indicative but not determinative of a reasonable basis of apportionment for tax purposes. Timesheets may reflect the most appropriate determination of the capital versus revenue split of labour costs. This brings into question the type of systems a taxpayer needs to maintain to support a reasonable position in this regard. It should be remembered that the burden of proof in a tax case rests with the taxpayer

Due to the proposed retrospective application of the ruling, taxpayers should review the tax treatment of labour costs associated with capital projects for income years still open for amendment, and in conjunction with your RSM tax adviser determine whether:

  • a reasonably arguable position can be maintained; 
  • a reportable or uncertain tax position exists and will need to be declared; or
  • a voluntary disclosure to the ATO is warranted. 

The ATO is accepting comments in relation to the draft ruling until 14 February 2020.

If you require further information, please contact your local tax adviser.


1  Goodman Fielder Wattle LTD v FC of T [1991] FCA 264

2 FC of T v Star City Pty Ltd [2009] FCAFC 191


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