Edited version of private ruling

Authorisation Number: 1011742319738

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: rental capital works deduction

Question 1

Are the following costs eligible to be included in your capital works deduction?

· surveyors costs

· council building application fees

· property owners liability costs

· design and consultation fees

· draftsman fees

· site disposal costs

Answer

Yes.

Question 2

Are water and gas connection fees eligible to be included in your capital works deduction?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2009

Year ended 30 June 2010

The scheme commences on:

1 July 2008

Relevant facts and circumstances

You constructed a rental property as an owner/builder.

The rental property first earned income during the 2008-09 year.

You incurred the following expenses:

· material costs

· labour costs - you paid wages to a builders labourer to assist in the construction process

· surveyors costs

· council building application fees

· property owner liability cost

· design and consultation fees

· draftsman fees

· water and gas connection fees

· site disposal costs

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 43.

Reasons for decision

Question 1

Summary

In your case, as you are an owner/builder, you are entitled to include in your deduction for capital works all construction costs that you actually incurred.

Detailed reasoning

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

Construction costs, as defined in subsection 43-70(1) of the ITAA 1997 is capital expenditure incurred in respect of the construction of capital works.

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).

Taxation Ruling TR 97/25 explains that in the case of capital works constructed by an owner/builder for retention as an income producing asset, the deduction is calculated with regard to capital expenditure actually incurred in respect of the construction of capital works. The value of the owner's contributions (such as labour and expertise and any notional profit element) do not form part of construction expenditure.

Construction expenditure includes:

· preliminary expenses such as architect fees, engineering fees, foundation excavation expenses and costs of building permits

· cost of structural features that are an integral part of the income producing buildings or income producing structural improvements, such as atriums and lift wells, and

· some portion of indirect costs.

Therefore, as you are an owner/builder, you are entitled to include in your deduction for capital works all construction costs that you actually incurred. This would include:

· material costs

· labour costs - you paid wages to a builders labourer to assist in the construction process

· surveyors costs

· council building application fees

· property owner liability cost

· design and consultation fees

· draftsman fees

· site disposal costs

Question 2

Detailed reasoning

Water and gas are not regarded as construction costs under Division 43 of the ITAA 1997. The connection fee to gain access to the gas or water is similarly not regarded as a construction cost of the building.

These connection costs are not costs incurred in the construction of capital works and are therefore not eligible to be included in your capital works deduction.