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Edited version of your private ruling
Authorisation Number: 1012525264813
Ruling
Subject: Rental - deductions (repairs, capital works, interest, borrowing expenses)
Question 1
Are you entitled to claim a capital works deduction for the costs of demolishing your rental property once the property is available for rent?
Answer
No.
Question 2
Are you entitled to a deduction for the undeducted construction expenditure for the building at the date of its destruction?
Answer
Yes.
This ruling applies for the following periods:
Year ended 30 June 2013
Year ended 30 June 2014
The scheme commenced on
1 July 2012
Relevant facts and circumstances
You own a rental property that was demolished as it was no longer fit for rental.
It cost you $X to demolish the property.
You intend to build a new dwelling for rental.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1.
Income Tax Assessment Act 1997 Section 8-5.
Income Tax Assessment Act 1997 Section 25-10.
Income Tax Assessment Act 1997 Division 43.
Reasons for decision
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.
Deductions allowed under section 8-1 of the ITAA 1997 are known as general deductions.
If a general deduction is not available, section 8-5 of the ITAA 1997 provides that an amount may be deductible as a specific deduction if it is allowed by another provision of the tax law. A summary list of allowable deductions is contained in section 12-5 of the ITAA 1997. The list includes the following specific deductions in relation to rental properties:
· repairs (section 25-10 of the ITAA 1997)
· deductions for depreciating assets (section 40 of the ITAA 1997), and
· deductions for capital works (section 43-10 of the ITAA 1997).
A rental expense that is allowed as either a general or specific deduction will either be:
· deductible as an immediate deduction in the income year you incur the expense, or
· deductible over a number of income years.
Repairs
Section 25-10 of the ITAA 1997 allows a deduction for expenditure on repairs to income producing premises, provided the expenditure is not capital in nature.
TR 97/23 discusses the situations in which repair expenditure is of a capital nature, and therefore not deductible under section 25-10 of the ITAA 1997. Those situations include where:
· there is a reconstruction of the entirety
· the repairs are initial repairs.
In your case, the costs of demolishing a property are seen to be reconstruction of the entirety and therefore are considered to be capital expenditure. As such, you are not entitled to an immediate deduction for these expenses.
Capital Works
Division 43 of the ITAA 1997 allows a deduction for capital expenditure on the construction of buildings and other capital works which are used for the purpose of producing assessable income. Eligible construction expenditure is written off over a number of years.
Section 43-40 of the ITAA 1997 allows a taxpayer to immediately deduct, in the income year in which the capital works was destroyed, the amount of construction expenditure that has not yet been deducted provided the conditions in section 43-40 of the ITAA 1997 are met.
Expenditure on demolishing existing structure is not an amount the can contribute to a deduction for capital works under section 43-10 of the ITAA 1997, because it is specifically excluded under section 43-70 of the ITAA 1997.However, such expenditure is taken into account in calculating a deduction under section 43-40 of the ITAA 1997.
Example 3 in ATO ID 2003/833 deals with demolition costs:
The taxpayer did not receive amount for the destruction of the building, and did not receive any amounts for disposing of the destroyed building. The reduction amount calculated as being received for the destruction under section 43-255 of the ITAA 1997 is zero. The $5000 excess of demolition expenditure over the amount received for disposing of the destroyed building is not deductible under Division 43 of the ITAA 1997.
The balancing deduction under section 43-250 of the ITAA 1997 is $50000 ($50000-$0).
There may be capital gains tax implications under Part 3-1 of the ITAA 1997 for the balance of the demolition expenditure incurred (in this example, $5000).
In your case, you have not received an amount for the destruction of the building and you did not receive any amounts for disposing of the destroyed building. Therefore, your balancing adjustment under section 43-250 of the ITAA 1997 is equal to your undeducted construction expenditure.
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