Cost base adjustments for capital works

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

the cost base of an asset (including a structure or other capital improvement treated as a separate asset for capital gains tax purposes)
the reduced cost base of an asset.

There are 2 exceptions to this rule:

You acquired the asset at or before 7:30 pm (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 didn't 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 2004 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 2022 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 2022.
On 1 February 2023 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: 30 Jun 2023QC 66023