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Edited version of private ruling
Authorisation Number: 1011582932964
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Ruling
Subject: Underground power costs
1. Are you entitled to a general deduction for your contribution towards the cost of installing underground electricity cables which were connected to your rental properties?
No.
2. Are you entitled to a deduction for capital works in respect of the underground power connection to your rental properties?
No.
3. Does the underground power fee paid by you form part of the cost base of the properties for capital gains tax (CGT) purposes?
Yes.
This ruling applies for the following period
Year ended 30 June 2010
The scheme commenced on
1 July 2009
Relevant facts
You own several rental properties from which you earn assessable income.
City councils were invited to nominate areas within their boundaries to have the overhead power lines replaced by an underground power supply.
The city council surveyed property owners to gauge whether they would be prepared to contribute towards the provision of underground power to the area. The majority were in favour of the underground power project and your rental properties were connected.
The underground power project is a partnership between the state government and the city council.
All properties in the area were connected to underground power and the old power poles and wires were removed.
Following the connection of your rental properties to the underground power the city council included additional charges with their rates notice for the year ending 30 June 2010. You elected to pay the total amount in two instalments in the 2009-10 income year.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1
Income Tax Assessment Act 1997 Division 43
Income Tax Assessment Act 1997 Division 387
Income Tax Assessment Act 1997 Section 110-25
Reasons for decision
General deduction
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.
Though your contribution to the cost of capital works for the conversion to underground power was necessarily incurred while you were gaining assessable income from your rental properties, the fact that it was an outgoing of a capital nature (paragraph 8-1(2)(a) of the ITAA 1997)) means that it cannot be claimed as a general deduction under section 8-1 of the (ITAA 1997).
Deduction for capital works
Under Division 43 of the ITAA 1997 taxpayers are entitled to a deduction of either 2.5% or 4% for expenditure incurred on certain capital works where you own, lease or hold part of a construction expenditure area.
In your situation, the construction expenditure area consists of the cables which have been laid. These cables are owned by the state government. Thus, you are not entitled to claim a deduction for capital works under this Division for contributing to the cost of capital works expenditure incurred and relating to works owned by someone else.
Cost base of the property for CGT purposes
As the underground power levy is treated as a capital expense and cannot be regarded as a deduction, we need to consider where this expenditure can form part of the cost base of the property.
Under section 110-25 of the ITAA 1997, the cost base of a CGT asset consists of five elements. The fourth element as outlined in subsection 110-25(5) of the ITAA 1997 includes capital expenditure you incurred for the purpose or the expected effect of which is to increase or preserve the asset's value.
It is considered that the conversion of the overhead power cable to underground power increases the value of your property. Therefore, it is a capital expense which forms part of the fourth element of the cost base of a CGT asset. The actual capital expenditure for the conversion of overhead cable is more than the fee charged. However, you can only include the amount outlaid by you. The amount is limited to the additional charges paid by you as your contribution for the underground power.
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