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Edited version of your written advice
Authorisation Number: 1012987203461
Date of advice: 22 March 2016
Ruling
Subject: Deducted or deductible expenditure
Question and Answer
Must you reduce the cost base of your asset by an amount of capital allowance you chose not to deduct in a year of income?
Yes
This ruling applies for the following periods
Year ended 30 June 2015
Year ended 30 June 2016
Year ended 30 June 2017
The scheme commences on
1 July 2014
Relevant facts and circumstances
Your property was sold
You owned the property after7.30pm of the date 13 May 1997.
You claimed capital allowance assets and capital works deductions
Relevant legislative provisions
Section 40-25 of the Income Tax Assessment Act 1997
Section 40-30 of the Income Tax Assessment Act 1997
Section 43-10 of the Income Tax Assessment Act 1997
Section 110-40 of the Income Tax Assessment Act 1997
Section 110-45 of the Income Tax Assessment Act 1997
Reasons for decision
Depreciating assets and the capital allowance provisions
You can deduct an amount equal to the decline in value of a depreciating asset which you held for any time during the year. A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used (exceptions are land, trading stock or an intangible asset).
Division 43 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a taxpayer to deduct construction expenditure (incurred by the taxpayer, or a previous owner) in respect of certain income producing buildings and structural improvements (capital works).
For all CGT assets, the second and third elements of the cost base do not include expenditure for which deductions have been, or can be, claimed by the taxpayer: section 110-45(1B) of the ITAA 1997. Broadly speaking, second element expenditure refers to incidental costs incurred to acquire the CGT asset and that relate to the CGT event, while third element expenditure refers to the costs of owning the CGT asset.
Meaning of can deduct
Sections 110-40(2) and 110-45(1B) of the ITAA 1997 refer to expenditure that a taxpayer has deducted or "can deduct" for all CGT assets. This would apply to 2 types of deduction:
(1) a deduction which has been allowed; and
(2) a deduction to which the taxpayer is entitled but has not yet claimed.
The Commissioner takes the view in Determination TD 2005/47 that a taxpayer "can deduct" an amount at a particular time if:
(a) the terms of the relevant deduction provision have been satisfied in respect of the amount; and
(b) the deduction is not prevented by the expiry of the amendment period.
The result of this view is that, firstly, the cost base is reduced by amounts actually deducted by the taxpayer. In addition, cost base is reduced by amounts not deducted by the taxpayer but to which the taxpayer is entitled and in respect of which the taxpayer is still within time to amend the assessment for the year in which the deduction should have been claimed.
Conclusion
Section 40-25 of the ITAA 1997 states that you can deduct an amount equal to the decline in value of your depreciating asset for an income year. This statement does not oblige the taxpayer to claim the amount of depreciation; it allows the amount deduction to be applied.
Section 110-40(1B) of the ITAA 1997 specifically excludes an amount from the cost base for which a deduction was available. The deduction was made available under Section 40-25 of the ITAA 1997.
Taxation Determination TD 2005/47 permits an amount of deduction to be applied against the cost base of asset where it is discovered that amount of deduction was omitted from a year of income, and it was discovered within the period of review of the CGT event. Therefore when we consider the relationship between the relevant amendment periods to the CGT event and the period of your ruling request, the act of discovering an omission according to your facts is a wilful omission and therefore requires closer consideration.
In the Law Administration Practice Statement PS LA 2006/1 (GA) Calculating cost base of CGT asset where there is insufficient information to determine any Division 43 capital works deduction, the Commissioner specifies when he accepts a deduction cannot be made at question 2:
We will accept that a taxpayer cannot deduct an amount under Division 43, and so is not required to reduce their cost base and reduced cost base, where the taxpayer:
does not (as a question of fact) have sufficient information to determine the amount and nature of the construction expenditure for an asset, and
does not seek to deduct any amount in relation to the construction expenditure under Division 43 (or any other provision).
As you had sufficient information to determine the amount of capital allowance, the commissioner will not accept that you could not deduct the amount of capital allowance under Division 43.
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