ATO Interpretative Decision
ATO ID 2003/553
Income Tax
Capital Works: effect of input tax credits on construction expenditureFOI status: may be released
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is the construction expenditure that is used to calculate a capital works deduction under Division 43 of the Income Tax Assessment Act 1997 (ITAA 1997) reduced, pursuant to section 27-20 of the ITAA 1997, by the amount of any input tax credit entitlement related to that expenditure?
Decision
Yes. In calculating a deduction under Division 43 of the ITAA 1997, the construction expenditure is reduced, pursuant to section 27-20 of the ITAA 1997, by the amount of any input tax credit entitlement related to that expenditure.
Facts
The taxpayer bought a new house from a speculative builder and was entitled, under Division 43 of the ITAA 1997, to a capital works deduction in respect of it. The builder was entitled to an input tax credit in relation to their construction cost of the house.
Reasons for Decision
The deduction allowed under Division 43 of the ITAA 1997 for capital works is calculated by reference to the amount of construction expenditure incurred by the entity that was the owner, lessee or quasi-owner of the capital works at the time the works were undertaken. Subsections 43-75(3) and 43-85(2) of the ITAA 1997 make capital works purchased from a speculative builder eligible for deduction in the hands of the first and subsequent purchasers. In these circumstances, it is the expenditure incurred by the builder that is used in calculating the deduction that may be available to such a purchaser.
In calculating the amount a taxpayer may be able to deduct, section 27-20 of the ITAA 1997 requires that an element in the calculation that is an amount paid or payable be treated as not including any amount of input tax credit related to that amount.
In terms of section 27-20 of the ITAA 1997, the calculation of a deduction under Division 43 of the ITAA 1997 is an amount the taxpayer may be able to deduct. The construction expenditure incurred by the builder is an amount paid or payable and, in turn, is an element in the calculation. There is an input tax credit related to the payment because the section only requires that 'any' input tax credit be related to the payment.
It follows that the construction expenditure used in calculating the deduction under Division 43 of the ITAA 1997 is reduced, under section 27-20 of the ITAA 1997, by the amount of any input tax credit entitlement of the builder in relation to their construction expenditure on the building.
Date of decision: 21 May 2003Year of income: Year ended 30 June 2002
Legislative References:
Income Tax Assessment Act 1997
section 27-20
subsection 43-75(3)
subsection 43-85(2)
Division 43
Keywords
Building depreciation
Capital Allowances CoE
Capital expenditure
Construction costs
Input tax credit entitlement
Input tax credits
Date reviewed: 12 March 2018
ISSN: 1445-2782