The types of capital work deductions you can claim and what you need in order to claim them.
Capital works deductions are the following expenses you pay for which you can claim an income tax deduction:
- building construction costs
- the cost of altering a building
- the cost of capital improvements to the surrounding property.
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You can only claim a deduction for the capital works on residential rental properties you built after 17 July 1985.
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If you own a rental property, you may be able to claim a deduction (usually at the rate of 2.5% per year in the 40 years following construction) for the construction cost of:
- buildings
- extensions, such as a garage or patio
- alterations, such as adding an internal wall, kitchen renovations or bathroom makeovers
- structural improvements – such as a gazebo, carport, sealed driveway, retaining wall or fence.
As a general rule, you can claim a deduction for the cost of constructing a residential rental property over 40 years from the date the construction was completed. However, to be sure you get your claim right, you must have all of the following:
- the date construction commenced
- details of the type of construction
- the date construction was completed
- details of who carried out the construction work
- the construction cost (not the purchase price)
- details of the period during the year that the property was used for income producing purposes.
Capital works expenses you incur form part of the cost base of your property for capital gains tax purposes. If you claim a capital works deduction, you will need to take this into account when you work out your capital gain or loss.
To work out the rate at which you can claim a deduction and the period over which you can claim it, you must have all of the following details:
- when the construction commenced
- the type of construction
- when the construction was completed.
Date construction commenced
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Period (years) over which you can claim a deduction
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Rate of deduction per income year
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Before 22 August 1979
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nil
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22 August 1979 to 21 August 1984
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40
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2.5%
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22 August 1984 to 15 September 1987
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25
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4%
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After 15 September 1987
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40
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2.5%
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Where you built short-term accommodation for travellers (for example, a hotel or serviced apartments) and that construction commenced after 26 February 1992:
- the period over which you can claim a deduction is 25 years
- the rate at which you can claim the deduction is 4%.
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Deductions for capital works have been introduced over time. Due to this, the date from which you can claim a deduction will depend on the type of construction.
To be eligible to claim a capital works deduction, the type of construction must commence after the relevant date in the table below.
Type of construction
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Construction commenced after
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The following building intended to be used on completion to provide short-term accommodation to travellers:
- apartment buildings in which you own or lease at least 10 apartments
- units or flats
- hotels
- motels
- guest houses with at least 10 bedrooms.
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21 August 1979
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Building intended to be used on completion for non-residential purposes such as a shop or office.
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19 July 1982
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Any building intended to be used on completion for residential purposes or to produce income.
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17 July 1985
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Structural improvements intended to be used on completion for residential purposes or to produce income.
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26 February 1992
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Environment protection earthworks intended to be used on completion for residential purposes or to produce income.
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18 August 1992
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Any capital works used to produce income, even if they were not intended to be used for that purpose.
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30 June 1997
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Although you may be able to claim a deduction for your building costs, you may not be able to claim costs such as for landscaping. For more information, see Rental Properties (NAT 1729).
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You cannot claim a deduction until the construction is completed. The rate of your deduction and the number of years over which you can claim it depends on the date the construction commenced.
If you carried out the construction as an owner/builder, the value of your contribution to the works does not form part of the construction cost; for example:
- your labour and expertise
- any notional profit element; that is, an amount you might consider as a profit margin on the construction cost.
The construction cost must take the form of either of the following:
- precise evidence of the construction costs such as receipts
- a report written by an appropriately qualified person.
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Remember, none of the following can be used as the construction cost:
- the purchase price of the building and land
- the insured cost
- the replacement cost.
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You can only claim a deduction for those periods during the year you used your rental property for income producing purposes, not when you used the property for private purposes.
Example
On 1 March 2007 Meg purchased a rental property for $300,000 and immediately rented it out. Meg obtained a report from a quantity surveyor stating:
- construction of the property commenced in February 2003
- the property was a residential townhouse
- construction was completed in November 2003
- the townhouse was built by a developer
- the estimated cost of constructing the townhouse was $200,000.
Meg would be able to claim a capital works deduction in her 2007 tax return for her rental property based on the estimate of the construction costs she obtained from the quantity surveyor. However, Meg could only claim a deduction for that part of the year her property was available for rent (1 March to 30 June 2007). The rate of deduction she could claim was 2.5% as construction of her residential property started after 15 September 1987.
Her annual capital works deduction was calculated as follows:
As the property was only used for income producing purposes for 122 days in 2007, her 2007 claim was calculated as follows:$5,000 x 122/365 = $1,671.
If you carried out the construction or contracted a builder to do so, you should make sure you keep detailed records of the construction costs.
If you purchased the property and do not have a record of the construction costs – for example, where the vendor did not provide them – you will need to obtain this information from an appropriately qualified person. This could be a:
- quantity surveyor
- clerk of works, such as a project organiser for major building projects
- supervising architect who approves payments at project stages
- builder experienced in estimating construction costs of similar building projects.
You can claim a deduction for the cost you pay to obtain this information from an appropriately qualified person in the year you pay it.
Quantity surveyor reports can also include a schedule of depreciable assets (capital allowances). You can claim a separate deduction for the decline in value of depreciable assets.
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Remember to obtain your construction costs report as soon as possible as these reports can take a long time to prepare. If you obtain a report after you lodge your tax return, you can amend your tax return at a later date. However, there is a time limit on amending tax returns for which we have already issued a notice of assessment.
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You must keep proper records in order to make a claim, even if you use a tax agent to prepare your tax return. This includes records of:
- the rental income you receive and the expenses you pay for which you can claim a deduction – keep these records for five years from 31 October or, if you lodge later, for five years from the date your tax return is lodged
- all costs you incurred when you purchased the property, while you owned the property and when you sold the property – you may need to keep some of these records for longer than five years, depending on how long you own the property.
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As capital tax gains may apply if you sell your rental property, we recommend you keep records of every transaction over the period of ownership of the property. This would include contracts of purchase and sale, and conveyance and loan documentation. Keeping these records will help you work out your capital gain or loss correctly and ensure you don’t pay more tax than you need to.
For information about easy ways to keep your records, refer to 'asset registers' in chapter 3 of part A of Guide to capital gains tax (NAT 4151).
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For more information about other rental property expenses you can claim, you can refer to the following:
For help in applying this information to your own situation, phone us on 13 28 61 between 8.00am and 6.00pm, Monday to Friday.
Last Modified: Friday, 3 April 2009
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