ATO Interpretative Decision
ATO ID 2003/786
Income TaxCapital works: destruction of capital works on leased premises
FOI status: may be released
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Status of this decision: Decision Current
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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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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.
Can a lessee claim a deduction under Division 43 of the Income Tax Assessment Act 1997 (ITAA 1997) for an amount of undeducted construction expenditure for capital works which were demolished at the end of the lease to restore the premises to the condition they were in at the beginning of the lease?
Yes. A lessee can claim a deduction (balancing deduction) calculated under section 43-250 of the ITAA 1997 at the time the capital works are destroyed if the conditions in section 43-40 of the ITAA 1997 are met.
A partnership operated a shop from leased premises to produce assessable income.
Capital expenditure was incurred after 26 February 1992 to fit out the shop. A deduction under section 43-10 of the ITAA 1997 was available for the construction expenditure on the capital works represented by the fit out.
The premises were leased continuously from the time the construction commenced until the fit out was demolished and the lease was terminated. The fit out was demolished in order to return the premises to its original state as required under the lease agreement.
Reasons for Decision
Section 43-40 of the ITAA 1997 provides for the deduction of an amount if all or part of 'your area' is destroyed in an income year and:
- you have been allowed, or can claim, a deduction under Division 43 of the ITAA 1997, or former Division 10C or 10D of Part III of the Income Tax Assessment Act 1936, for your area; and
- there is an amount of undeducted construction expenditure for your area; and
- you were using your area in a deductible way (per the table in section 43-140 of the ITAA 1997) immediately before the destruction.
For a lessee who has incurred construction expenditure, 'your area' is the part of the construction expenditure area to which that expenditure is attributed that has been leased continuously since the construction of the capital works was completed (section 43-120 of the ITAA 1997).
A deduction was available to the lessee under Division 43 of the ITAA 1997 for the construction expenditure incurred in respect of the fit out of the shop from the time the construction was completed as it was used in a deductible way (that is, to produce assessable income; section 43-140 of the ITAA 1997). The area was used continuously in a deductible way until the fit out was demolished and the lease was terminated. This satisfies the requirements of (a) and (c) above.
Paragraph 18 of Taxation Ruling TR97/25 states that section 43-40 of the ITAA 1997 applies both to the voluntary and involuntary destruction of capital works. The deliberate destruction of capital works does not affect the entitlement to the balancing deduction.
At the time the capital works were demolished and the lease was terminated, the construction expenditure had not been fully deducted. The amount of undeducted construction expenditure for capital works incurred after 26 February 1992 is calculated under sections 43-230 and 43-235 of the ITAA 1997. Generally this amount will be the original construction expenditure less any amounts previously claimed, or able to be claimed had the capital works been used wholly in a deductible way.
The balancing deduction is allowed in the income year in which the destruction occurs and is calculated under section 43-250 of the ITAA 1997. Generally, the balancing deduction is equal to the amount of undeducted construction expenditure less any insurance and salvage receipts and adjustments arising from using the area for a non-taxable purpose.
|Date of Amendment||Part||Comment|
|1 October 2014||Reason for Decision||Insert the word "former" when referring to Division 10C or 10D.|
Year of income: Year ended 30 June 2002
Related Public Rulings (including Determinations)
Taxation Ruling TR 97/25
Deductions & expenses
Construction expenditure area
Capital Allowances CoE
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