On June 14, 2023 the Australian Taxation Office (ATO) released Ruling TR 2023/2 - Income tax: application of paragraph 8-1(2)(a) of the Income Tax Assessment Act 1997 to labour costs related to the construction or creation of capital assets. Via the ruling ATO confirms its long-standing view that labour costs incurred in the construction or creation of capital assets aren’t immediately deductible.

The Ruling explains when certain labour costs related to constructing or creating capital assets (tangible or intangible) cannot be deducted under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) because of the capital exclusion in paragraph 8-1(2)(a) of the ITAA 1997. The Ruling applies to taxpayers that incur labour costs that are:

• salary and wages for employees who perform functions in relation to the construction or creation of capital assets, and other costs associated with the employment of that labour, or, or both
• other amounts for labour or principally for labour incurred in relation to the construction or creation of capital assets (together referred to as capital asset labour costs).

(together referred to as capital asset labour costs).

Capital asset labour costs (such as salary, wages and other amounts for labour) are those incurred in the construction or creation of profit-generating:

• tangible assets - such as land, plant and property
• intangible assets - such as scientific or technical knowledge, design and implementation of new processes or systems, licenses, intellectual property, market knowledge and trademarks (including brand names and publishing titles).

Unlike other labour costs, which can generally be claimed as an immediate tax deduction because they’re considered revenue in nature, labour costs incurred specifically in the construction or creation of capital assets are considered capital in nature.

The aforementioned won’t apply to labour costs for employees whose roles or functions might only have a minor role in creating or constructing your capital assets.

If employees have mixed duties, the taxpayer will need to apportion its deduction between:

• immediately-deductible labour costs - not related to constructing or creating capital assets
• capital asset labour costs - which may instead form part of the cost of a depreciating asset or capital works and be claimed as depreciation or a capital works deduction.

The Ruling contains 7 examples that are intended to help taxpayers work out the tax treatment of labour costs where the employee performs a mix of functions, including practical guidance about what records and information a taxpayer will need to keep:

Example 1 – general manager of Head Co salary

Example 2 – centralised project management team salary

Example 3 – contract labour costs

Example 4 – apportionment of labour costs

Example 5 – apportionment of labour costs to the project

Example 6 – project delays

Example 7 – infrequent and incidental duties

The Pdf-version of Ruling TR 2023/2 can be downloaded here from the website of ATO.

The Compendium for Ruling TR 2023/2 can be found here on the website of ATO

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