• Capital works deductions

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    You can deduct certain kinds of construction expenditure. In the case of residential rental properties, the deductions would generally be spread over a period of 25 or 40 years. These are referred to as capital works deductions. Your total capital works deductions cannot exceed the construction expenditure. No deduction is available until the construction is complete.

    Deductions based on construction expenditure apply to capital works such as:

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

    You can only claim deductions for the period during the year that the property is rented or is available for rent.

    If you can claim capital works deductions, the construction expenditure on which those deductions are based cannot be taken into account in working out any other types of deductions you claim, such as deductions for decline in value of depreciating assets.

    Amount of deduction

    The amount of the deduction you can claim depends on the type of construction and the date construction started.

    Table 1 below shows you the types of rental property construction that qualify. If the type of construction you own (or own jointly) does not appear next to the relevant 'date construction started' in the table, you cannot claim a deduction. If the type of construction qualifies, table 2 shows the rate of deduction available.

    Table 1

    Date construction started

    Type of construction for which deduction can be claimed

    Before 22 August 1979

    None

    22 August 1979 to
    19 July 1982

    Certain buildings* intended to be used on completion to provide short-term accommodation to travellers**

    20 July 1982 to
    17 July 1985

    Certain buildings* intended to be used on completion to provide short-term accommodation to travellers**

    Building intended to be used on completion for non-residential purposes (for example, a shop or office)

    18 July 1985 to
    26 February 1992

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

    27 February 1992 to
    18 August 1992

    Certain buildings* intended to be used on completion to provide short-term accommodation to travellers**

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

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

    19 August 1992 to
    30 June 1997

    Certain buildings* intended to be used on completion to provide short-term accommodation to travellers**

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

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

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

    After 30 June 1997

    Any capital works used to produce income (even if, on completion, it was not intended that they be used for that purpose)

    * 'Certain buildings' are apartment buildings in which you own or lease at least 10 apartments, units or flats; or a hotel, motel or guest house that has at least 10 bedrooms.

    ** For more information, phone the Business Infoline on 13 28 66.

     

    Table 2

    Date construction started

    Rate of deduction per income year

    Before 22 August 1979

    nil

    22 August 1979 to
    21 August 1984

    2.5%

    22 August 1984 to
    15 September 1987

    4%

    After 15 September 1987

    2.5%

    Note: Where construction of a building to provide short-term accommodation for travellers commenced after 26 February 1992, the rate of deduction was increased to 4%.

    For apartment buildings, the 4% rate applies to apartments, units or flats only if you own or lease 10 or more of them in the building.

    The deduction can be claimed for 25 years from the date construction was completed in the case of a 4% deduction, and for 40 years from the date construction was completed in the case of a 2.5% deduction. If the construction was completed part of the way through the income year, you can claim a pro-rata deduction for that part.

    Construction expenditure that can be claimed

    Construction expenditure is the actual cost of constructing the building or extension. A deduction is allowed for expenditure incurred in the construction of a building if you contract a builder to construct the building on your land. This includes the component of your payments that represents the profit made by individual tradespeople, builders and architects. If you are an owner/builder, the value of your contributions to the works - for example, your labour and expertise - and any notional profit element do not form part of the construction expenditure.

    If you purchase your property from a speculative builder, you cannot claim the component of your payment that represents the builder's profit margin as a capital works deduction.

    Some costs that you may include in construction expenditure are:

    • preliminary expenses such as architects' fees, engineering fees and the cost of foundation excavations
    • payments to carpenters, bricklayers and other tradespeople for construction of the building
    • payments for the construction of retaining walls, fences and in-ground swimming pools.

    Construction expenditure that cannot be claimed

    Some costs that are not included in construction expenditure are:

    • the cost of the land on which the rental property is built
    • expenditure on clearing the land prior to construction
    • earthworks that are permanent, can be economically maintained and are not integral to the installation or construction of a structure
    • expenditure on landscaping.

    Changes in building ownership

    Where ownership of the building changes, the right to claim any undeducted construction expenditure for capital works passes to the new owner. A new owner should confirm that the building was constructed during one of the appropriate periods outlined above. To be able to claim the deduction, the new owner must continue to use the building to produce income.

    Estimating construction costs

    Where a new owner is unable to determine precisely the construction expenditure associated with a building, an estimate provided by an appropriately qualified person may be used. Appropriately qualified people include:

    • a clerk of works, such as a project organiser for major building projects
    • a supervising architect who approves payments at stages of projects
    • a builder who is experienced in estimating construction costs of similar building projects
    • a quantity surveyor.

    Unless they are otherwise qualified, valuers, real estate agents, accountants and solicitors generally have neither the relevant qualifications nor the experience to make such an estimate.

    Example: Estimating capital works deductions

    The Perth property acquired by the Hitchmans on 20 July 2006 was constructed in August 1991. At the time they acquired the property it also contained the following structural improvements.

    Item

    Construction date

    Retaining wall

    September 1991

    Concrete driveway

    January 1992

    In-ground swimming pool

    July 1992

    Protective fencing around the pool

    August 1992

    Timber decking around the pool

    September 1992

    In a letter to the Hitchmans, a supervising architect estimated the construction cost of the rental property for capital works deduction purposes at $115,800. This includes the cost of the house, the in-ground swimming pool, the protective fencing and the timber decking. Although the retaining wall and the concrete driveway are structural improvements, they were constructed before 27 February 1992 (note that in table 1, structural improvements qualified for deduction from 27 February 1992). Therefore, they do not form part of the construction cost for the purposes of the capital works deduction and were not included in the $115,800 estimate.

    The Hitchmans can claim a capital works deduction of 2.5% of the construction costs per year. As they did not acquire the property until 20 July 2007, they can claim the deduction for the 347 days from 20 July 2007 to 30 June 2008. The maximum deduction for 2007-08 would be worked out as follows:

    Construction
    cost

    X

    rate

    X

    portion
    of year

    =

    deductible
    amount

    $115,800

    X

    2.5%

    X

    347
    366

    =

    $2,745

    The cost of obtaining an appropriately qualified person's estimate of construction costs of a rental property is deductible in the income year it is incurred. You make your claim for the expense, or your share of the expense if you jointly incurred it, at item D9 Cost of managing tax affairs on your tax return.

    Further Information

    For more information about construction expenditure and capital works deductions, see Taxation Ruling TR 97/25 - Income tax: property development: deduction for capital expenditure on construction of income producing capital works, including buildings and structural improvements.

    End of further information
    Last modified: 30 Jun 2009QC 27913