ATO ID 2003/600: Capital Works: deductibility of expenditure on capital works constructed at a private residence
Date of decision: 12 June 2003
Year of income: Year ended 30 June 2002
Business line: Private Groups and High Wealth Individuals

Issue
Can a taxpayer claim a deduction under section 43-10 of the Income Tax Assessment Act 1997 (ITAA 1997) for construction expenditure incurred on capital works, undertaken at their private home, to provide storage and parking for assets used in a business operated from the site?

Decision
Yes. The taxpayer is entitled to a deduction under section 43-10 of the ITAA 1997 for construction expenditure incurred on capital works begun after 30 June 1997 which are used in a deductible way at the rate of 2.5% per annum.

Facts
A taxpayer owns and lives in a residential home. The taxpayer also operates a business out of that property. In the 2001-02 income year a shed was constructed to store materials, tools and works-in-progress, and an area was excavated and a retaining wall constructed to enable vehicles used exclusively in the business to be parked onsite. Given the nature of the taxpayer's business there is no other business premises, as most work is undertaken at building sites. Neither the shed nor the parking space created by the excavation and retaining wall will be used for a private purpose. A separate private carpark and driveway also exists. Both of the capital works are situated away from the private residence.

Reasons for decision
Summary: Division 43 of the ITAA 1997 provides a deduction for capital works attributable to a construction expenditure area that is owned or leased by the taxpayer and used during the income year for the purposes of producing assessable income. Eligible capital works include buildings begun in Australia after 21 August 1979, and structural improvements, such as sealed driveways, sealed car parks and retaining walls, begun after 26 February 1992 (paragraph 43-20(1)(a) and subsection 43-20(2) of the ITAA 1997). Earthworks that are not integral to the installation or construction of a structure are excluded from the definition of capital works covered by this Division (paragraph 43-20(4)(a) of the ITAA 1997). Construction expenditure is capital expenditure incurred in respect of the construction of capital works. Although certain land preparation costs are excluded (subsection 43-70(2) of the ITAA 1997), the cost of excavating for the construction of a retaining wall is included in the construction expenditure. However, the value of an owner/builder's contribution to the capital works does not form part of construction expenditure (Taxation Ruling TR 97/25). The table in section 43-140 of the ITAA 1997 provides, that to be used in a deductible way, capital works which began after 30 June 1997 must be used for the purposes of producing assessable income. The shed will be used to store works-in-progress, spare materials and tools and the retaining wall is necessary to create parking space for vehicles used in the business to produce assessable income. However, if any part of the capital works is used mainly for, or in association with, residential accommodation, including where it constitutes the whole or part of an individual's home, section 43-170 of the ITAA 1997 provides that such capital works are not taken to be used for the purpose of producing assessable income. Taxation Determination TD 93/21 states that a taxpayer is only entitled to a deduction for improvements at their residential home if the improvements relate to an area which is separate and distinct from the home and set aside for carrying on their business. As the garage and the retaining wall are constructed for the sole purpose of carrying on a business and are positioned away from the residential home in their own self contained areas, these capital works are considered to be separate and distinct areas from the residential home. Section 43-170 of the ITAA 1997 does not apply to the capital works. They satisfy the requirement to be used in a deductible way under section 43-140 of the ITAA 1997. Subsection 43-25(1) of the ITAA 1997 provides that the rate of deduction for capital works which began after 26 February 1992 is 2.5% per annum. However, a deduction is not allowed prior to the completion of the capital works (section 43-30 of the ITAA 1997). The deduction in the first year must be reduced by the number of days in the income year that had passed before the construction was completed. Therefore, the taxpayer is entitled to a deduction for construction expenditure incurred on capital works begun after 30 June 1997 under section 43-10 of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 section 43-10 paragraph 43-20(1)(a) subsection 43-20(2) paragraph 43-20(4)(a) subsection 43-25(1) section 43-30 subsection 43-70(2) section 43-140 section 43-170
Related public rulings and determinations: Taxation Ruling TR 97/25 | Taxation Determination TD 93/21
Subject references: Building depreciation Construction expenditure area Pool of construction expenditure