ATO ID 2014/38: Capital Works: undeducted construction expenditure - period where no capital works deduction is available
Date of decision: 7 November 2014
Year of income: Year ended 30 June 2014
Business line: Private Groups and High Wealth Individuals

Issue
Is the undeducted construction expenditure, calculated under Subdivision 43-G of Division 43 of the Income Tax Assessment Act 1997 (ITAA 1997), affected by the period that capital works deductions are not available to the taxpayer?

Decision
No. The undeducted construction expenditure, calculated under Subdivision 43-G of Division 43 of the ITAA 1997, is not affected by the period that capital works deductions are not available to the taxpayer.

Facts
During the year of income, the taxpayer owned a residential rental property that was constructed after 26 February 1992. From its purchase, the property was rented to tenants, or made available for rental, for the purpose of producing assessable income through deriving rental income. During the year of income, the property became vacant. Instead of attempting to rent the property, the taxpayer sought to sell it. At the time of attempting to sell the property, the intended use of the property to produce assessable income through deriving rental income was discontinued. In order to sell the property, it was placed on the market. Despite having the property available for sale for a number of months, the property did not sell. At the end of that period the property was once again made available for rental.

Reasons for decision
Summary: The undeducted construction expenditure calculated under Subdivision 43-G of Division 43 of the ITAA 1997 is the part of the construction expenditure that is left to write off. For capital works constructed after 26 February 1992, the undeducted construction expenditure is calculated under sections 43-230 and 43-235 of the ITAA 1997. Broadly, the undeducted construction expenditure is the original construction expenditure less the aggregate of amounts calculated at the rate of 2.5% per annum of that expenditure, from the time the capital works, or a part of it, was first used by any entity for any purpose after completion of the relevant construction. For the purpose of the calculation of the undeducted construction expenditure under sections 43-230 and 43-235 of the ITAA 1997, the capital works can be used by any entity for any purpose after the relevant construction is completed and, therefore, is not affected by the period that the capital works deduction is not available to the taxpayer. During the period that the property was for sale and was not available for rental, no capital works deductions were available to the taxpayer under section 43-10 of the ITAA 1997. However, this period does not affect the taxpayer's calculation of the undeducted construction expenditure under sections 43-230 and 43-235 of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 Division 43 Subdivision 43-G section 43-10 section 43-230 section 43-235
Subject references: Building depreciation Capital works deduction Construction expenditure area