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Edited version of private ruling
Authorisation Number: 1011568258038
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Ruling
Subject: Capital works deductions
1. Do you require written evidence of the construction start dates of your residential rental properties?
Yes.
2. Where actual construction costs of a rental property are not available, are you required to use an estimate provided by an appropriately qualified person in order to calculate any capital works deduction?
Yes.
3. Are costs incurred for an estimate provided by an appropriately qualified person an allowable deduction?
Yes.
4. Can you claim a capital works deduction for past years, from date of purchase, where the property was constructed after 17 July 1985 and is being used for an income producing purpose?
Yes.
5. Can you claim a capital works deduction for a residential rental property where the construction start date was prior to 18 July 1985?
No.
6. Where construction of a residential rental property is started after 17 July 1985 but before 16 September 1987, is any capital works deduction calculated as 4% of construction costs over 25 years?
Yes.
7. Where construction of a residential rental property is started after 15 September 1987, is any capital works deduction calculated as 2.5% of construction costs over 40 years?
Yes.
This ruling applies for the following period
Year ended 30 June 2008
Year ended 30 June 2009
Year ended 30 June 2010
The scheme commenced on
1 July 2007
Relevant facts
You currently hold three rental properties. One was constructed prior to 18 July 1985 and the others were constructed after this date.
All three properties were constructed for residential purposes and you have always used the properties to produce assessable income.
You have never claimed any capital works deduction for any of the properties.
You have confirmed the construction start dates for each of the properties based on documents held by the respective City Councils.
You have received written confirmation of the construction start date of one of the properties.
The council information received in relation to the other properties was verbal only.
Reasons for decision
Under Division 43 of the Income Tax Assessment Act 1997 (ITAA 1997) you can deduct certain capital expenditure on buildings used to produce assessable income. Section 43-10 of the ITAA 1997 operates to allow a deduction for an amount of capital works used in a deductible way during the income year.
The rate of deduction is either 2.5% or 4% of the construction expenditure depending on when construction started and how the capital works are used. In this case, construction expenditure is the cost of constructing the building.
Where ownership of the building changes either fully or partly, the residual entitlement passes to the new owner, provided of course that the building continues to be used for eligible income-producing purposes.
During periods when the building is not used for income-producing purposes, the associated write-off is forgone as a deduction.
The amount of the deduction you can claim depends on the type of construction and the date construction started.
Construction start date
Section 43-80 of the ITAA 1997 states that capital works are taken to begin when the first step in the construction phase starts; for example, the pouring of foundations or sinking of pilings for a building. For evidentiary purposes, written confirmation from the relevant city council of the construction start date would be sufficient.
Use of estimate when actual construction expenditure is not available
Taxation Ruling TR 97/25 considers when a deduction for capital expenditure on the construction of income producing capital works is available. TR 97/25 states that where it is not possible for the purchaser of a property to establish the actual construction costs of the building, particularly in circumstances where the builder or previous owner becomes bankrupt or is not able, for other reasons, to provide the information, an estimate provided by an appropriately qualified person will be accepted.
An appropriately qualified person might include:
· a quantity surveyor, who has expertise in the relevant type of construction
· a clerk of works, such as a project organiser for major building projects
· a supervising architect who approves payments at each stage in major projects and who may approve individual payments to subcontractors in smaller projects, or
· a builder who is experienced in estimating construction costs of similar building projects.
The attainment of relevant professional qualifications or recognition by an appropriate professional association or organisation is indicative of expertise in this field.
Unless they are otherwise qualified, valuers, real estate agents, accountants and solicitors generally have neither the relevant qualifications nor experience to make such an estimate.
Costs incurred in obtaining construction estimate
The cost of obtaining an appropriately qualified person's estimate of construction costs of a rental property is deductible in the income year it is incurred. You make your claim for the expense at item D9 Cost of managing tax affairs on your tax return.
Deductions for earlier years
As stated above, where ownership of the building changes, the right to claim any un-deducted construction expenditure for capital works passes to the new owner. You will need to confirm that your properties were constructed during one of the appropriate periods, discussed below, to calculate your deduction. To be able to claim the deduction in the future, you must continue to use the building to produce income.
Where you are entitled to a capital works deduction in past years, you will need to amend or object to your previous assessments. This ruling has been provided for the 2007-08, 2008-09 and 2009-10 income years as these years are still within the standard two year period of review and can be amended. For the income years prior to this, you will need to lodge an objection and request the Commissioner grant you an extension of time to object to these assessments.
Construction started prior to 18 July 1985
For construction that started prior to 18 July 1985, only the construction costs of rental properties intended to be used on completion to provide short-term accommodation to travellers or for non-residential purposes (for example, a shop or office) qualified for a deduction. Therefore, the construction costs of any building intended to be used on completion for residential purposes, where the construction started prior to 18 July 1985 do not qualify for a deduction.
In your case, you have stated that one of your properties was constructed prior to 18 July 1985, therefore, this property does not qualify for a capital works deduction for its construction costs.
Capital works deduction rates
As discussed above, the construction costs of any building intended to be used on completion for residential purposes, where the construction started prior to 18 July 1985 do not qualify for a deduction. The applicable rate for properties with a construction start date after 17 July 1985 but prior to 16 September 1987 is 4% of construction costs over 25 years, and for properties with a start date after 15 September 1987 the rate is 2.5% over 40 years.
In your case, the construction of two of your properties commenced after 17 July 2010. Therefore, you will need to establish the construction start date of these properties to determine the correct rate to be used.
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