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
- 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 genuinely available for rent.
Where the rental property is destroyed, for example by fire, and results in a total loss of the asset, you can deduct an amount in the income year in which the capital works are destroyed for all of your construction expenditure that has not yet been deducted. However, you must reduce this deduction by any insurance and salvage receipts.
If however, using the same example above, during an income year the building is affected by fire and the building cannot be rented or made available for rent but it is expected to be made available for rent again, then the owners cannot claim a deduction for capital works for the number of days that the building is not available for rent.
If you claimed capital works deductions based on construction expenditure, you cannot take that expenditure into account in working out any other types of deductions you claim, such as deductions for decline in value of depreciating assets.
You can work out your deductions using the Depreciation and capital allowances tool or see Rental properties for more information.
If expenditure on a depreciating asset (which includes construction expenditure) is financed or refinanced wholly or partly by limited recourse debt (including a notional loan under certain hire purchase or instalment sale agreements of goods), you must include excessive deductions for the capital allowances as assessable income. This will occur where the limited recourse debt arrangement terminates but has not been paid in full by the debtor. Because the debt has not been paid in full, the capital allowance deductions, including capital works deductions, allowed for the expenditure exceed the deductions that would be allowable if the unpaid amount of the debt was not counted as capital expenditure of the debtor. Special rules apply for working out whether the debt has been fully paid.
If you are not sure what constitutes a limited recourse debt or how to work out your adjustment to assessable income, contact your recognised tax adviser.