ATO Interpretative Decision
ATO ID 2003/377
Income Tax
Capital works: interim rental of trading stock by property developerFOI status: may be released
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Can the taxpayer, a property developer, claim a capital works deduction under Division 43 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of a building that they developed and otherwise held as trading stock for an interim period the building was rented out?
Decision
No. The taxpayer cannot claim a capital works deduction under Division 43 of the ITAA 1997 in respect of a building that is trading stock, even though the building was rented out for an interim period, because the construction expenditure on the building is revenue and not capital expenditure.
Facts
The taxpayer carries on a business of property development. The taxpayer bought a block of land on which they constructed a building. The building was an integral part of the property development business. The building was constructed for the sole purpose of resale and was always held as trading stock. During the period from when the building was completed until it was sold, the building was rented out.
Reasons for Decision
Broadly speaking, Division 43 of the ITAA 1997 provides a deduction for certain expenditure on income producing capital works, including a building. The deduction is based, amongst other things, on the construction expenditure in respect of the building. Subsection 43-70(1) of the ITAA 1997 broadly defines construction expenditure as capital expenditure incurred on the construction of capital works.
A building held by a property developer for sale in the ordinary course of their development business is trading stock of the developer. Expenditure incurred on trading stock in the ordinary sense of that term will be on revenue account 'in almost all cases that can be envisaged' (Federal Commissioner of Taxation v. Raymor (NSW) Pty Ltd (1990) 24 FCR 90; 90 ATC 4461; (1990) 21 ATR 458).
The building was developed and otherwise held by the taxpayer as an item of trading stock. The interim rental of the building does not alter that position. In these circumstances, the taxpayer cannot claim a capital works deduction under Division 43 of the ITAA 1997 in respect of the building because the construction expenditure on it is revenue and not capital.
Date of decision: 7 April 2003Year of income: Year ended 30 June 2002
Legislative References:
Income Tax Assessment Act 1997
subsection 43-70(1)
Division 43
Case References:
Federal Commissioner of Taxation v. Raymor (NSW) Pty Ltd
(1990) 24 FCR 90
90 ATC 4461
Keywords
Building depreciation
Buildings
Capital allowances CoE
Real estate as trading stock
Rental property
Trading stock
Date reviewed: 22 June 2016
ISSN: 1445-2782