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  • Cost base adjustments for capital works

    Capital works expenses you can claim as deductions against income cannot be included in either:

    There are 2 exceptions to this rule:

    • you acquired the asset before 7.30pm (ACT time) on 13 May 1997 and incurred the capital works expense by 30 June 1999 – see the Guide to capital gains tax for more information about this situation
    • you were unable to claim a deduction because you did not know the full amount or exact nature of the construction expense – you can include the expense in your cost base or reduced cost base.

    Example: adjusting cost for capital works

    Brett purchased a residential rental property on 1 July 2002 for $150,000.

    • As part of the purchase he had non-deductible expenses of $20,000 for pest and building inspections, stamp duty and solicitor’s fees.
    • Over the next few years, Brett incurred deductible expenses of $33,000 for interest on money borrowed, council rates and deductible (non-capital) repairs.
    • In 2020 Brett decided to sell the property. Prior to the sale he spent $30,000 on major structural repairs to increase the value of the property. The repairs were completed on 1 October 2020.
    • On 1 February 2021 he sold the property. The real estate agent’s fees and solicitor’s fees for the sale of the property totalled $12,500.

    The purchasing expenses of $20,000 and sale expenses of $12,500 are capital costs and not deductible. These are added to the cost base of the property.

    The deductible expenses of $33,000 are not added to the cost base because Brett is able to claim deductions for them.

    Brett can claim a capital works deduction for the major structural repairs:

    • at the depreciation rate for capital works of 2.5% per year (365 days)
    • for the period between completing the capital works and selling the property (124 days).

    Therefore, Brett's deduction for the major structural repairs is:

    • $30,000 × 2.5% × 124 ÷ 365 = $255

    When working out his cost base, Brett reduces the capital costs element by the amount that he was able to claim as a deduction:

    Purchase price of property

    $150,000

    Purchase-related costs

    $20,000

    Capital costs (major structural repairs): $30,000 less capital works deduction ($255)

    $29,745

    Sale-related costs

    $12,500

    Cost base

    $212,245

     

    End of example
    Last modified: 04 Aug 2021QC 66023