Edited version of private advice

Authorisation Number: 1052215299697

Date of advice: 29 January 2024

Ruling

Subject: Capital works deductions

Question 1

Can you amend prior year income tax returns to claim Division 43 of the Income Tax Assessment Act 1997 (ITAA 1997) deductions per the provided quantity surveyor's report for the time period prior to ownership of the property?

Answer

No.

This ruling applies for the following periods:

Income tax year ending 30 June 20XX

Income tax year ending 30 June 20XX

Income tax year ending 30 June 20XX

Income tax year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The Company is an Australian Private Company.

The Company acquired the property on XX December 20XX.

The property is a commercial property and the whole property is currently used for income producing purposes.

The property is not used as a hotel or apartment building.

The property's construction completion date was XX August 19XX.

The quantity surveyors report has been sighted.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 43-10(2)

Income Tax Assessment Act 1997 subsection 43-15(1)

Income Tax Assessment Act 1997 subparagraph 43-20(1)(a)

Income Tax Assessment Act 1997 subsection 43-25(2)

Income Tax Assessment Act 1997 section 43-70

Income Tax Assessment Act 1997 subsection 43-75(2)

Income Tax Assessment Act 1997 section 43-75

Income Tax Assessment Act 1997 subsection 43-85(1)

Income Tax Assessment Act 1997 section 43-90

Income Tax Assessment Act 1997 section 43-115

Income Tax Assessment Act 1997 section 43-215

Income Tax Assessment Act 1997 section 43-240

Summary

As you acquired the property in the 20XX income tax year, the output of the formula in section 43-215 of the ITAA 1997 will be zero for all earlier years meaning there is no entitlement to a deduction for those years.

Detailed reasoning

Division 43 of the ITAA 1997 allows a deduction for construction expenditure that is not deductible under Division 40 of the ITAA 1997.

Subsection 43-15(1) of the ITAA 1997 states you can deduct a portion of the construction expenditure each year, however, it cannot exceed the amount of what is termed the 'undeducted construction expenditure'. This ensures that not more than 100% of the construction expenditure can be deducted and a time limit is imposed on the period over which the construction expenditure can be deducted.

However, a deduction is only available for an income year if you own, lease or hold part of the property during that year.

Paragraph 24 of TR 97/25 states that it is not always possible for the purchaser of a building to establish the actual cost of the building, particularly in circumstances where the building or previous owner becomes bankrupt or is not able, for other reasons, to provide the information. In such cases, we will accept estimates from an appropriately qualified person listed under Paragraph 28 of TR 95/27. Relevantly, this includes a quantity surveyor who has expertise in the relevant type of construction.

You have provided a quantity surveyor's report with an estimate of $XXXX which we accept as the construction expenditure for Division 43 purposes.

Section 43-215 of the ITAA 1997 provides the calculation for the deduction where the capital works were begun before 27 February 1992.

The formula is used each year to calculate the entitlement to a deduction and relevantly provides as follow:

Step 1

Step 1 Calculate the amount worked out using the following formula:

Your CE x Days used x Applicable rate

365

where:

your CE is your construction expenditure.

days used is the number of days in the income year that you owned or were the lessee of your area and used it in the way that applies to the capital works under Table 43-140 (Current year use).

applicable rate is:

a)    0.04 if the capital works began after 21 August 1984 and before 16 September 1987; or

b)    0.025 in any other case

Step 2

Step 2 is not applicable on your facts

Step 3

The Step 3 amount is the same as the Step 1 amount on your facts.

Step 4

Step 4 is the lesser of the Step 3 amount and the 'undeducted construction expenditure'.

In income years prior to the 20XX income year, 'days used' in step 1 of this formula will be zero meaning that for each of these years the amount of the deduction you would be entitled to would also be zero. This is because you did not own the property during those years.

For this reason, you cannot amend your 20XX to 20XX assessments as there is no entitlement to a deduction for those years.

The Step 1 calculation under section 43-215 of the ITAA 1997 for the 20XX income year will be as follows:

Construction expenditure = $XXXX

Days used = period after XX December 20XX which is XXXX days

Applicable rate = 0.025

Step 1

XXXX x XXXX x 0.025 = $XXXX

365

Step 2 is not applicable.

Step 3 does not reduce the Step 1 amount.

Step 4 is the lesser of the Step 3 amount ($XXXX) and the 'undeducted construction expenditure' of $XXXX which is calculated under section 43-240 of the ITAA 1997 and is explained below.

The lesser of these amounts is $XXXX which is your deduction for the 20XX year.

Undeducted construction expenditure

Section 43-240 of the ITAA 1997 relevantly provides as follows:

Step 1

Calculate for each day in the use period the amount worked out using the formula:

Your CE x Applicable rate

365

where:

your CE is your construction expenditure

applicable rate is:

a)    0.04 if the capital works began after 21 August 1984 and before 16 September 1987; or

b)    0.025 in any other case

Step 2

Deduct the sum of the amounts calculated under Step 1 from your construction expenditure.

Note: the use period for the purposes of the section 43-240 of the ITAA 1997 is the number of days from the completion of construction to the day prior to purchase which is XXXX days on your facts (This is explained in section 43-230 of the ITAA 1997).

The relevant inputs and calculation are therefore as follows:

Construction expenditure: $XXXX

Applicable rate: 0.025

Step 1

XXXX x (XXXX x 0.025) = $XXXX

365

Step 2

Construction expenditure less amount calculated under Step 1

$XXXX - $XXXX = $XXXX

The 'undeducted construction expenditure' for the purposes of the 20XX calculation is therefore $XXXX.

Conclusion

You can claim a deduction of $XXXX for the 20XX income year under Division 43 of the ITAA 1997.

No deduction is available under Division 43 of the ITAA 1997 for any years prior to the 20XX income year.