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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your private ruling

Authorisation Number: 1012470507198

Ruling

Subject: Rental property expenses

Question 1

Are you entitled to include all costs for your capital works deduction for your rental property?

Answer

No.

Question 2

Are the demolition costs and owner-builder labour costs included in your construction expenditure in calculating your capital works deduction for your rental property?

Answer

No.

Question 3

Are the piling, material and sub-contractor costs included in your construction expenditure in calculating your capital works deduction for your rental property?

Answer

Yes.

Question 4

Are you entitled to a deduction for the demolition costs and owner-builder labour costs incurred for your rental property?

Answer

No.

Question 5

Are the following items regarded as depreciating assets

Answer

No.

Question 6

Are you entitled to claim a capital works deduction for the following items in your rental property:

Answer

Yes.

Question 7

Are the diminishing value rates of 7.5%, 11.25% and 15% the relevant rates for the listed depreciating assets when using the diminishing value method?

Answer

No.

Question 8

Are you entitled to a deduction for the decline in value of your depreciating assets based on their effective life?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2013

The scheme commenced on

On or after 1 July 2012

Relevant facts

The arrangement that is the subject of the Ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

You started building a house to be used as your main residence. The property is in your name only.

The property began under an owner builder arrangement.

You then contracted an unrelated building company to complete the building works.

The property was completed.

You moved into the house.

You were unable to meet your financial commitments and you had to move out.

The house was tenanted from the relevant year.

The total cost to build the house, excluded the purchase price of the land and old dwelling, legal costs and stamp duty. The cost included demolition costs and piling costs.

The piling costs relate to the supports that go several metres underground for the building.

You have purchased furniture and other depreciating assets for the property.

The kitchen island, cupboards, cabinet unit, robes and fireplace are fixed items.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 Division 43

Reasons for decision

Capital works

Division 43 of the Income Tax Assessment Act 1997 (ITAA 1997) provides a deduction for capital works. Capital works includes buildings and structural improvements where a residential property is used for income producing purposes.

Division 43 of the ITAA 1997 outlines the requirements in calculating your allowable deduction.

Section 43-70 ITAA 1997 defines construction expenditure as capital expenditure incurred in respect of the construction of capital works.

However, paragraphs 43-70(2)(a) to (d) ITAA 1997 states that construction expenditure does not include:

Taxation Ruling TR 97/25 discusses the expenses that are included in the construction for Division 43 of the ITAA 1997 purposes. Paragraph 10 of TR 97/25 states that the value of the owner/builder's contributions to the works, such as labour and expertise and any notional profit element, do not for part of the construction expenditure.

Consequently, expenditure incurred in purchasing the land, demolishing the previous dwelling or other existing structures, and your labour costs does not form part of construction expenditure for the purposes of the capital works deduction.

However, the piling costs to put in supports for the house are included in your construction expenditure. Similarly, the costs paid to the builder to complete your house and the materials used are construction expenditure for Division 43 of the ITAA 1997 purposes.

The legislation does not allow a deduction for the demolition or owner builder labour costs in any other provision.

Subsection 43-25(1) of the ITAA 1997 provides that the rate of deduction for capital works which began after 26 February 1992 for a residential rental property is 2.5%. However, a deduction cannot be made prior to the completion of the capital works (section 43-30 of the ITAA 1997) and only when the property is being used for income producing purposes.

Therefore you are entitled to a deduction of 2.5% of your construction expenditure for the period the property is being used for income producing purposes.

Some items found in a rental property are regarded as being part of the building and are not treated as separate depreciating assets.

Items fixed to the building are considered structural improvements within the definition of Division 43 of the ITAA 1997. Such items form a permanent part of the fabric of the building and are considered to be capital works for Division 43 purposes.

In your case, the following items are regarded as permanent fixtures and form part of the building for Division 43 of the ITAA 1997 purposes:

That is, the above items are not regarded as depreciating assets.

Depreciating assets

Section 40-25 of the ITAA 1997 allows a deduction for the decline in value (depreciation) of a depreciating asset you hold, to the extent the asset is used for a taxable purpose.

A depreciating asset is an asset that has a limited effective life and can be expected to decline in value over the time it is used (subsection 40-30(1) of the ITAA 1997).

Ovens, refrigerators, fans, curtains and carpets are regarded as depreciating assets for Division 40 of the ITAA 1997 purposes. A deduction for their decline in value is an allowable deduction where they are used for income producing purposes. Please note Division 40 replaced Division 42.

Deductions for the decline in value of depreciating assets are generally worked out using the effective life of the assets.

Where a depreciating asset has been purchased in a previous year and previously used for private purposes, the opening written down value needs to be calculated before calculating the allowable deduction.

If the property is not available for rent for the full year, the deduction will need to be apportioned accordingly.

There are two methods available to calculate the decline in value of depreciating assets:

In your case, you advised that you wish to use the diminishing value method. Section 40-72 of the ITAA 1997 provides the formula for working out the decline in value of a depreciating asset you started to hold on or after 10 May 2006.

The formula is: base value x days held x 200%

You can choose to work out the effective life of the asset yourself based on the manufacturer's specifications and other relevant material. Alternatively, you can use the effective life determined by the Commissioner of Taxation. The Commissioner has determined the effective life of most depreciating assets in Taxation Ruling TR 2012/2.

The effective life as determined by the Commissioner for your assets is listed below as well as the relevant percentage:

Asset Effective life 200% / asset's effective life

Cook top 12 16.6

Oven 12 16.6

Range hood 12 16.6

Fridge 12 16.6

Freezer 12 16.6

Dishwasher 10 20

Insinkerator 10 20

Curtains 6 33.3

Queen bed 13 1/3 15

Bathroom exhaust fan 10 20

Air conditioner 10 20

Carpet 10 20

Security system 5 40

Hot water system (gas) 12 16.6

Audio system 7 28.5

Irrigation control panel 5 40

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