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Ruling
Subject: Capital works
Question
Are you entitled to a capital works deduction for the common property assets?
Answer
Yes.
This ruling applies for the following period:
Year ending 30 June 2012
The scheme commenced on
1 July 2011
Relevant facts
Under the relevant legislation, the body corporate holds the common property, including infrastructure assets, and manages the estate.
The infrastructure assets and communal areas are not owned privately.
Title to these infrastructure assets is held by the body corporation.
The body corporation acquired the infrastructure assets from the company responsible for the construction. The body corporation is the legal owner of the Corporation's communal assets.
The body corporation did not pay for the infrastructure assets.
The infrastructure assets are not rented out. The body corporation receives a fee for the use of the infrastructure assets.
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 43
Income Tax Assessment Act 1997 section 43-110
Reasons for decision
Capital works
Division 43 of the Income Tax Assessment Act 1997 (ITAA 1997) allows you to deduct an amount for construction expenditure on certain income producing capital works for an income year. The car park, lock and revetment walls are construction expenditure for Division 43 purposes.
The capital works deduction is only available for taxpayers with certain proprietary rights to the capital works. Section 43-110 of the ITAA 1997 explains that a capital works deduction is only available if you own, lease or hold the capital works. No more than one person may be entitled to the deduction in relation to that part of the capital works.
Capital expenditure on capital works by the owner of those capital works can only be deductible to that owner or a subsequent owner. A subsequent owner can claim a capital works deduction based on the original construction expenditure of the capital works. The actual purchase price of the capital works is not relevant in such a case.
Taxation Ruling TR 97/25 discusses construction expenditure and states at paragraph 17 that where a taxpayer purchases capital works at a price lower than the construction expenditure for those works, the deduction for the capital works is calculated by reference to the construction expenditure, not the purchase price.
In your case, the fact that the body corporation did not pay for the infrastructure assets does not impact on the allowance of a capital works deduction. As the body corporation is the subsequent owner of the infrastructure assets, they are entitled to a capital works deduction provided the other requirements of Division 43 of the ITAA 1997 are met.
The common property is being used to produce assessable income, as the body corporation receives income from the infrastructure assets. Therefore a capital works deduction of 2.5% of the construction expenditure is allowed.