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Edited version of private advice
Authorisation Number: 1051610292555
Date of advice: 4 December 2019
Ruling
Subject: Depreciation and capital works
Question
Can the costs incurred to re-concrete the driveway in the commercial premises be depreciated over the remaining period of the lease?
Answer
No
This ruling applies for the following periods:
Year ending 30 June 20XX
Year ending 30 June 20XX
Year ending 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
You own a commercial property which is currently leased by a long term tenant who runs a company.
The tenant has stated the surface of the premises is no longer fit for their purpose and has demanded it be re-concreted or they will vacate the property.
The cost to re-surface the property is significant.
There are several years remaining on the lease.
You state that if the current tenant vacates the property and a new tenant moves in, you may need to remove the concreted area from the re-surfaced area to suit the prospective new tenant.
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 40
Income Tax Assessment Act 1997 Division 43
Income Tax Assessment Act 1997 Section 43-10
Income Tax Assessment Act 1997 Section 43-25
Reasons for decision
Summary
In your case, the re-concreting of the surface of the commercial premises is classified as a capital works deduction and subject to the deduction rate of 2.5% per year.
Detailed Reasoning
Section 40-25 of the Income Tax Assessment Act 1997 (ITAA 1997) allows you to claim a deduction equal to the decline in value of a depreciating asset to the extent to which it is used to produce assessable income or is installed ready for use for that purpose.
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. Land, trading stock and some intangible assets are not depreciating assets.
Division 43 of the ITAA 1997 operates generally to provide a deduction for capital expenditure on capital works used to produce assessable income.
Re-concreting of a surface is considered a capital improvement as it does not have an effective life and therefore is not depreciable.
Capital works used to produce income, including buildings and structural improvements, are written off over a longer period than other depreciating assets.
The capital works deduction is available for:
· buildings or extensions, alterations or improvements to a building
· structural improvements such as sealed driveways, fences and retaining walls
· earthworks for environmental protection, such as embankments.
Deduction rates of 2.5% or 4.0% apply, depending on the date on which construction began, the type of capital works, and how they're used. In your case, you are entitled to a deduction of 2.5% in relation to the works at the property, and are not able to assess your own effective life of three years for the purposes of calculating a capital works deduction.