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Edited version of your private ruling
Authorisation Number: 1012117104555
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Subject: Capital Gains Tax - Deduction for capital expense
Question 1
Is the cost incurred by you to install kerb and guttering an allowable deduction?
Answer:
No.
Question 2
Does the cost of installing kerb and guttering form part of the cost base of your rental property for capital gains tax (CGT) purposes?
Answer:
Yes.
This ruling applies for the following period
Year ended 30 June 2012
The scheme commenced on
1 July 2011
Relevant facts
You own an investment property.
The property is managed by an agent and is available for short term rental.
You have received correspondence from a Local Council, which requires you to contribute an amount of towards the cost of installing kerb and guttering to the front of your property.
You do not own the land that the kerb and guttering has been installed on.
The kerb and guttering has been installed by the council to improve the stormwater capability of the area.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 43-10
Income Tax Assessment Act 1997 Section 43-20
Income Tax Assessment Act 1997 Section 43-115
Income Tax Assessment Act 1997 Subsection 110-25(5)
Alexander Mathews Deduction for capital works
Section 43-10 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for expenditure incurred on certain capital works where you own, lease or hold part of a construction expenditure area.
The definition of capital works includes structural improvements such as kerb and guttering.
In your situation, the construction expenditure area is the road which has had kerb and guttering installed. The land on which the road is situated is owned by the State. Accordingly, you are not entitled to claim a deduction for capital works for contributing to the cost of capital works expenditure relating to works owned by someone else.
Cost base of the property for CGT purposes
Your contribution to the cost of installing the kerb and guttering is a capital expense which is not deductible. Therefore it is necessary to consider whether this expenditure can form part of the cost base of the property.
Section 110-25 of the ITAA 1997 provides that the cost base of a CGT asset consists of five elements. Subsection 110-25(5) states:
The fourth element is capital expenditure you incurred the purpose of which is to increase or preserve the assets value.
We consider the installation of kerb and guttering increases the value of your property. Therefore, it is a capital expense which you can include as part of the fourth element of the cost base of your investment property.