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Edited version of your written advice
Authorisation Number: 1012770363961
Ruling
Subject: Capital works
Question
Are you limited to a deduction under Division 43 of the Income Tax Assessment Act 1997 (ITAA 1997) of 2.5% of the capital works expenditure even though you hold a lease to use the property for X years?
Answer
Yes.
This ruling applies for the following period
Year ended 30 June 2015 til year ended 20 June 2026
The scheme commences on
1 July 2014
Relevant facts and circumstances
You own a business.
You have leased new premises in the 2013-14 financial year which required an extensive fit out before trading could commence.
You have incurred capital works expenditure.
You have signed a lease agreement for the term of X years.
Under the lease there is no compensation payable to you by the landlord if you exit the property or fail to renew the lease.
Furthermore, you will not be able to remove any of the fit out nor take it with you when you vacate the leave premises.
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 43
Income Tax Assessment Act 1997 subsection 43-120(1)
Income Tax Assessment Act 1997 subsection 43-125(1)
Income Tax Assessment Act 1997 subsection 43-125(2)
Reasons for decision
Division 43 of the ITAA 1997 provides a system of deducting capital expenditure incurred in the construction of building and other capital works used to produce assessable income.
You can deduct construction costs in respect of the following capital works:
• buildings or extensions, alterations or improvements to a building
• structural improvements or extensions, alterations or improvements to structural improvements
• environmental protection earthworks
Deductions for construction costs and structural improvements must be based on actual costs incurred. Generally, the rate of the deduction available is 2.5% over 40 years.
A lessee or holder can claim a deduction, under subsection 43-120(1) of the ITAA 1997, in respect of an area leased or held under a quasi-ownership right.
To claim a deduction, the lessee or holder must have:
• incurred the construction expenditure or been an assignee of the lessee who incurred the expenditure,
• continuously leased or held the capital works area itself, or lease or held the area that had been so held by previous lessees, holders or assignees since completion of constructions, and
• used the area to produce assessable income.
Subsection 43-125(1) of the ITAA 1997 states that:
an amount that relates to a pool of construction expenditure that arises as a result of expenditure incurred by a lessee or a holder of a quasi-ownership right over land:
a) can only be deducted by a lessee or a holder of a quasi-ownership right over land who satisfies subsection 43-120(1) or (2); and
b) cannot be deducted by the owner of the capital works while there is a lessee or a holder of quasi-ownership right over land who satisfies that subsection.
Under subsection 43-125(2) of the ITAA 1997, the owner of the capital works may deduct an amount that relates to that pool if there is no longer a lessee or a holder of a quasi-ownership right over land who is entitled to a capital works deduction.
Application to your circumstances
In this case, you have incurred capital works expenditure. You are entitled to a deduction at a rate of 2.5% of the actual costs incurred.
As discussed in subsection 43-125(2) of the ITAA 1997, if there is a lapse in the lease the entitlement to the deduction reverts to the building owner. Therefore, when your lease comes to an end, a deduction for capital works will no longer be available to you.
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