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  • Work out your capital works deductions

    You can claim capital works deductions for certain kinds of construction costs for a rental property. Your capital works deductions can't exceed the construction expenses.

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    Capital works you can claim

    Capital works deductions are income tax deductions that can be claimed for the expenses such as:

    • a building or extension – for example, adding a room, garage, patio or pergola
    • altering a building – for example, adding or removing an internal wall
    • structural improvements to the surrounding property – for example, adding a gazebo, carport, sealed driveway, retaining wall or fence.

    You can only claim a deduction for the capital works on residential rental properties if the property:

    • was built after 17 July 1985
    • is rented or genuinely available for rent.

    If your rental property is destroyed – for example, by fire or a natural disaster event – and the result is a total loss of the asset, you can claim a deduction in the income year in which the capital works are destroyed for all construction expenses that have not yet been deducted. However, you must reduce this deduction by any insurance payouts and salvage receipts.

    Preliminary expenses such as architect fees, engineering fees, surveying fees, foundation excavation expenses and costs of building permits also form part of construction expenditure.

    The rate of deduction, and the number of years you claim it for, are determined by the type of construction and the date construction commenced.

    See also:

    Limits to a claim

    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 2020, 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 is 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 claims a capital works deduction in her 2020 tax return for her rental property based on the estimate of the construction costs she obtained from the quantity surveyor. However, she only claims a deduction for that part of the year her property was available for rent (1 March to 30 June 2020). The rate of deduction she claims was 2.5% as construction of her residential property started after 15 September 1987.

    Her annual capital works deduction was calculated as follows:

    $200,000 × 2.5% (see note)=$5,000

    Note: See the date construction commenced for different rates of reduction.

    As the property was only used for income producing purposes for 122 days in 2020, her 2019–20 claim was calculated as follows:

    $5,000 × (122 ÷ 366) = $1,667

    End of example

    What you need to know to work out your claim

    As a general rule, you can claim a capital works deduction for the cost of construction for 40 years from the date the construction was completed. However, to make sure that you are eligible, you must have all of the following:

    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.

    If it isn't possible to determine the actual construction costs, you can obtain an estimate from a quantity surveyor or other independent qualified person. You can claim a deduction for the cost of the estimate.

    See also:

    The type of construction and the date construction commenced

    To be eligible to claim a capital works deduction, work must have commenced after the date relevant to that type of construction in the table below.

    Deductions for capital works were introduced over time, so the date from which you can claim a deduction will depend on the type of construction.

    This table shows the rate of deduction and the period over which you can claim the deduction depending on the type of construction.

    Capital works deductions for buildings and structural improvements

    Type of construction

    Construction commenced after

    Deduction rate applicable years

    Building intended to be used on completion to provide short-term accommodation to travellers in:

    • apartment buildings in which you own or lease at least 10 apartments
    • units or flats
    • hotels
    • motels
    • guest houses with at least 10 bedrooms.

     

    21/8/1979

    22/8/1979–21/8/1984 – 2.5%

    22/8/1984–15/9/1987 – 4%

    16/9/1987–26/2/92 – 2.5% (where the construction related to certain pre-16/9/1987 contracts, the rate is 4%)

    27/2/1992 onwards – 4%

    Building intended to be used on completion for non-residential purposes such as a shop or office.

    19/7/1982

    20/7/1982–21/8/1984 – 2.5%

    22/8/1984–15/9/1987 – 4%

    16/9/87 onwards – 2.5%

    Any building intended to be used on completion for residential purposes or to produce income.

    17/7/1985

    18/7/1985–15/9/1987 – 4%

    16/9/1987 onwards – 2.5% (where the construction related to certain pre-16/9/1987 contracts, the rate is 4%)

    Structural improvements intended to be used on completion for residential purposes or to produce income.

    26/2/1992

    27/2/1992 onwards – 2.5%

    Environment protection earthworks intended to be used on completion for residential purposes or to produce income.

    18/8/1992

    18/8/1992 onwards – 2.5%

    Any capital works used to produce income, even if they were not intended to be used for that purpose.

    For pre-1 July 1997 works only, the capital works must have been intended for use for specified purposes at the time of completion.

    30/6/1997

    The capital works must actually be used in a deductible way in the income year in which the deduction is claimed (see above onwards rates details for each type of construction).

    2.5% means that you can claim deductions for 40 years and 4% means for 25 years.

    You can't claim a capital works deduction until the construction is completed.

    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.

    Construction cost

    Evidence of the construction cost must be provided by either of the following:

    • precise documentation of the construction costs such as receipts
    • a report written by an appropriately qualified person.

    The following items can't be used as the construction cost:

    • the purchase price of the building and land
    • the insured cost
    • the replacement cost.

    If you were the owner builder

    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. This includes:

    • your labour and expertise
    • any notional profit element – that is, an amount you might consider as a profit margin on the construction cost.

    Obtaining the construction information

    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 either the previous owner or 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 your costs in obtaining 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). A separate deduction for the decline in value of depreciating assets in a rental property can be claimed:

    • if you purchased the rental property before 7.30pm (AEST) on 9 May 2017 – it doesn't matter whether the property was brand new or not, or
    • if the depreciating asset is brand new - purchased at or after 7.30pm (AEST) on 9 May 2017 as part of your brand new property or which you purchased subsequently for your existing (non-new) property, or
    • if you purchase the property on or after 7.30pm (AEST) on 9 May 2017 to provide residential accommodation, it (i.e. the property) has to be brand new or substantially renovated if no one previously claimed any depreciation deductions on the asset, and:
      • either no one lived in the property when you acquired it, or
      • if anyone lived in the property after it was built or renovated, you acquired it within six months of the property being built or renovated, or
       
    • the property does not provide residential accommodation, or
    • the asset is used in carrying on a business, or
    • the entity claiming depreciation is a:
      • corporate tax entity
      • superannuation plan other than a self-managed superannuation fund
      • public unit trust
      • managed investment trust
      • unit trust or partnership whose members are any of the entities in this dot-point.
       

    If you are a vendor disposing of capital works begun after 26 February 1992 and were allowed deductions for those capital works, you should provide the buyer with a capital works notice containing information to allow them to work out their capital works deduction. The notice should be provided within six months following the income year that the disposal occurred or a further period allowed by the ATO.

    Where the property was not used to gain rental income, the vendor disposing of the property does not need to provide the purchaser with a notice. In this situation, the purchaser can obtain an estimate, usually from an appropriately qualified person.

    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.

    See also:

      Last modified: 01 Jul 2020QC 21620