ATO Interpretative Decision
ATO ID 2006/213
Income Tax
Capital Allowances: Capital works - construction expenditure - preliminary expenseFOI status: may be released
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This document incorporates revisions made since original publication. View its history and amending notices, if applicable.
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is the expenditure incurred by a builder of a residential unit complex in South Australia on an insurance policy that insures the owner of the residential unit complex against the risk of loss from the building not being completed included in construction expenditure as defined in subsection 43-70(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes. The expenditure incurred on this particular type of insurance policy is construction expenditure as defined in subsection 43-70(1) of the ITAA 1997 as the expenditure is incurred in respect of the construction of capital works.
Facts
A residential unit complex was constructed by a builder in South Australia in 2003.
The builder was required, under section 34 of the Building Work Contractors Act 1995 (SA) (BWCA 1995), to obtain an insurance policy that insured the building owner against the risk of loss from the building not being completed due to the insolvency, death or disappearance of the builder. Section 34 of the BWCA 1995 prevented the builder from undertaking any building work until such an insurance policy was in place.
Under the BWCA 1995, builders were required to take out this type of insurance policy on behalf of the homeowner for each and every contract that they entered into.
Section 34 of the BWCA 1995 prevented the builder from undertaking any building work until such an insurance policy was in place.
The residential unit complex is capital works to which Division 43 of the ITAA 1997 applies.
Reasons for Decision
A deduction for capital works under Division 43 of the ITAA 1997 is based on the amount of construction expenditure. Construction expenditure is defined in subsection 43-70(1) of the ITAA 1997 as 'capital expenditure incurred in respect of the construction of capital works'.
The Explanatory Memoranda to the Income Tax Assessment Bill (No. 2) 1980 (Cth) and Income Tax Assessment Bill 1983 (Cth) (the Explanatory Memoranda), which inserted former Division 10C and 10D into the Income Tax Assessment Act 1936, state that construction costs include such preliminary expenses as architects' fees, engineering fees and the cost of foundation excavations.
This is reflected in paragraph 9 of 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 (TR 97/25), which also considers that the costs of building permits form part of preliminary expenses.
The insurance policy is required by section 34 of the BWCA 1995. The policy must be obtained to permit the building work on the capital works to commence and has a direct connection with the construction of the capital works (being the residential unit complex). It is therefore incurred in respect of the construction of the capital works and is included within construction expenditure as defined by subsection 43-70(1) of the ITAA 1997.
Amendment History
| Date of Amendment | Part | Comment |
|---|---|---|
| 23 February 2018 | Facts | Included reference to the BWCA requiring a new policy for each building contract. |
| Reason for Decision | Updated references to Bills and ATO view documents. Amended references to the Taxation Ruling to reflect the ATO view. | |
| 21 November 2014 | Reason for Decision | Insert the word "former" when referring to Division 10C or 10D. |
Year of income: Year ended 30 June 2005
Legislative References:
Income Tax Assessment Act 1936
Division 10C
Division 10D
subsection 43-70(1) Building Work Contractors Act 1995 (SA)
section 34
Related Public Rulings (including Determinations)
Taxation Ruling TR 97/25
ATO ID 2002/1098
ATO ID 2004/137
ATO ID 2004/138
ATO ID 2004/822
Other References:
Explanatory Memorandum to Income Tax Assessment Bill (No. 2) 1980
Explanatory Memorandum to Income Tax Assessment Bill 1983
Keywords
Buildings
Capital expenditure
Construction costs
Date reviewed: 14 February 2018
ISSN: 1445-2782
| Date: | Version: | |
| 2 June 2006 | Original statement | |
| 21 November 2014 | Updated statement | |
| You are here | 23 February 2018 | Updated statement |