How to use capital works deductions
Capital works used to produce income, including buildings and structural improvements, are written off over a longer period than other depreciating assets.
The capital works deduction is available for:
- buildings or extensions, alterations, or improvements to a building
- alterations and improvements to a leased building, including shop fitouts and leasehold improvements
- structural improvements such as sealed driveways, fences and retaining walls
- earthworks for environmental protection, such as embankments.
The land itself can't be written off and its cost isn't deductible.
For more detail, see the Division 43 of the ITAA 1997 Deductions for capital works.
Deductions for construction costs
Deduction rates of 2.5% or 4.0% apply to the construction costs of the capital works, depending on:
- the date construction began
- the type of capital works
- how they're used.
If it isn't possible to determine the actual construction costs, you can get an estimate from a quantity surveyor or other independent qualified person. You can claim a deduction for the full costs charged for the estimate in the year it is incurred.
See more about claiming capital works deductions for rental properties.
Deductions for leasehold improvements
Deductions for leasehold improvements (including shop fitouts), which are capital works, cannot be claimed over their effective life or the term of the lease. They must be claimed at the statutory rate of either 2.5% or 4.0%, whichever is applicable.
If the capital works are destroyed at the end of the lease, you may claim a balancing deduction in the income year in which the destruction occurs. This treatment is very different to the general treatment for accounting purposes.
See more in Taxation Ruling: TR 2007/9 Income tax: circumstances when an item used to create a particular atmosphere or ambience for premises used in a cafe, restaurant, licensed club, hotel, motel or retail shopping business constitutes an item of plant.
Special rules for other activities
Special rules apply to:
How to work out the correct deduction
Work out the correct capital works deduction that applies to you with the Depreciation and capital allowances tool.
For example, to work out the depreciation amounts for your rental property, you can either:
- click on the Rental Property tab, add property and then add relevant assets, or
- click on the Asset tab, add relevant assets and, under the Type question, choose Net income or loss from business.