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Edited version of your written advice
Authorisation Number: 1051422844910
Date of advice: 31 August 2018
Ruling
Subject: Depreciation
Question 1
Can you claim your depreciation in full for your rental property that has been demolished?
Answer
No.
Question 2
Can you claim your capital works deductions in full for your rental property that has been demolished?
Answer
Yes.
This ruling applies for the following period:
Year ended 30 June 2018
The scheme commences on:
1 July 2017
Relevant facts and circumstances
You purchased an investment property.
You have been claiming deductions for plant and equipment deprecation and capital works.
You demolished this property.
You have unclaimed balances on your deprecation and capital works schedules.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subsection 6-5(1)
Income Tax Assessment Act 1997 Section 8-1
Income Tax Assessment Act 1997 Section 25-10
Income Tax Assessment Act 1997 Division 40
Income Tax Assessment Act 1997 Division 43
Income Tax Assessment Act 1997 Division 43-250
Reasons for decision
Deprecation
Section 40-25 of the Income Tax Assessment Act 1997 (ITAA 1997) allows you to deduct an amount equal to the decline in value for an income year of a depreciating asset that you held to the extent that it is used for a taxable purpose.
A taxable purpose includes the purpose of producing assessable income (subsection 40-25(7) of the ITAA 1997).
You generally can't deduct spending on capital assets immediately; instead you claim the cost over time, reflecting the asset's depreciation (or decline in value).
This applies if you use depreciating assets to earn assessable income, including subletting part of a rental property. A depreciating asset is one that has a limited effective life and can reasonably be expected to decline in value over the time it's used; such as furniture.
Section 40-30 of the ITAA 1997 states that a depreciating asset is an asset with a limited effective life and can reasonably be expected to decline in value over the time it is used. The decline in value of a depreciating asset starts when you first use it for any purpose.
As you are no longer holding depreciating assets, you cannot claim a deduction for these assets. You can apportion the deduction for the time that you held the depreciating asset.
Capital works
Section 43-40 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a capital works deduction if the capital work that has been undertaken is destroyed. This applies to both voluntary destruction (such as site clearance for redevelopment) and involuntary destruction (such as damage caused by fire or flood) of capital works undertaken.
You are allowed a deduction for unrecouped capital expenditure on a capital item included in a building that has been destroyed in an income year under section 43-40(1) of the ITAA 1997 provided that:
● you have been allowed or are entitled to a deduction for capital works expenditure for your property;
● there is an amount of undeducted construction expenditure for your property; and
● you were using the property to produce assessable income immediately before the destruction or, if not neither you nor any other entity used your property for any other purpose since it was last used by you to produce assessable income.
If a deduction for capital works is to be allowable, the property must be used in a deductible way as described in section 43-10 of the ITAA 1997. Capital works that were started after 30 June 1997 are deductible if the property was used for the purposes of producing assessable income during an income year.
Section 43-40(2) of the ITAA 1997 advises that deductions are allowable in the income year in which the building was destroyed and is calculated under section 43-250 of the ITAA 1997.
In your case, you had been claiming capital works deduction on your rental property. You demolished the property, and at that time there were unclaimed capital works deductions.
You were using the property to produce assessable income immediately before the demolition of the building.
As you satisfy all of the conditions set out in section 43-40 of the ITAA 1997 you are entitled to a deduction for the balance of your unrecouped capital works.
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