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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your written advice

Authorisation Number: 1012980907151

Date of advice: 8 March 2016

Ruling

Subject: Can you claim a capital works deduction for construction expenditure

Question

Are you entitled to claim a capital works deduction for the construction expenditure of your strata titled townhouse while it is income producing?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2016

The scheme commenced on

1 July 2015

Relevant facts

You purchased a new stratum titled townhouse in 20XX. You lived in it for a period of time, when you moved out and rented the townhouse.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Division 43

Income Tax Assessment Act 1997 - Section 43-10

Income Tax Assessment Act 1997 - Section 43-25

Income Tax Assessment Act 1997 - Section 43-80

Reasons for decision

Under Division 43 of the Income Tax Assessment Act 1997 (ITAA 1997) you can deduct certain capital expenditure on buildings used to produce assessable income. Section 43-10 of the ITAA 1997 operates to allow a deduction for an amount of capital works used in a deductible way during the income year.

The rate of deduction for capital works begun after 26 February 1992 which are used to produce rental income, even if that was not the original intention, is 2.5% over 40 years. (section 43-25 of the ITAA 1997).

In this case construction expenditure is the cost of constructing the building.

During periods when the building is not used for income-producing purposes, the associated write-off is forgone as a deduction. 

Use of estimate when actual construction expenditure is not available

Taxation Ruling TR 97/25 considers when a deduction for capital expenditure on the construction of income producing capital works is available. TR 97/25 states that where it is not possible for the purchaser of a property to establish the actual construction costs of the building, particularly in circumstances where the builder or previous owner becomes bankrupt or is not able, for other reasons, to provide the information, an estimate provided by an appropriately qualified person will be accepted.

An appropriately qualified person might include:

    • a quantity surveyor, who has expertise in the relevant type of construction;

    • a clerk of works, such as a project organiser for major building projects;

    • a supervising architect who approves payments at each stage in major projects and who may approve individual payments to subcontractors in smaller projects; or

    • a builder who is experienced in estimating construction costs of similar building projects.

The attainment of relevant professional qualifications or recognition by an appropriate professional association or organisation is indicative of expertise in this field.

Unless they are otherwise qualified, valuers, real estate agents, accountants and solicitors generally have neither the relevant qualifications nor experience to make such an estimate.

Costs incurred in obtaining construction estimate

The cost of obtaining an appropriately qualified person's estimate of construction costs of a rental property is deductible in the income year it is incurred.

Further issues for you to consider

    Common property

    • Common property is that part of a strata plan not comprised in any proprietor's lot, and includes stairways, lifts, passages, common garden areas, common laundries and other facilities intended for common use.

    • The ownership of the common property varies according to the relevant state strata title legislation. However, in all states, the income derived from the use of the common property constitutes assessable income of lot owners. Accordingly, expenses attributable to the derivation of the income from the common property, such as depreciation and capital works, may be able to be claimed as deductions by the lot owners in proportion to their lot entitlement.

    • You may be able to claim a deduction for body corporate fees and charges you incur for your rental property.

    • Body corporate fees and charges may be incurred to cover the cost of day-to-day administration and maintenance or they may be applied to a special purpose fund.

If you can claim capital works deductions, the construction expenditure on which those deductions are based cannot be taken into account in working out any other types of deductions you claim, such as deductions for decline in value of depreciating assets.

When working out a capital gain or capital loss from a rental property, the cost base and reduced cost base of the property may need to be reduced to the extent that it includes construction expenditure for which you have claimed or can claim a capital works deduction.


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