ATO ID 2002/806: Capital Gains Tax - Expenditure deduction for partial demolition of dwelling
Date of decision: 14 June 2002
Year of income: Year ending 30 June 2002
Business line: Public Groups and International

Issue
Is the value attributable to the portion of a dwelling that was demolished an expense incurred in redeveloping the property under section 8-1 of the Income Tax Assessment Act 1997 ('ITAA 1997')?

Decision
No. The value of the portion of the original dwelling that was demolished during the redevelopment is not an allowable deduction under section 8-1 of the ITAA 1997.

Facts
The taxpayer purchased two blocks of land for redevelopment. One house straddled both blocks of land. The taxpayer partially demolished the house, resulting in separate dwellings on each of the blocks. The taxpayer then made additions to each of those dwellings.

Reasons for decision
Summary: Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature or relate to the earning of exempt income. The cost of demolishing part of the existing dwelling is expenditure of a capital nature. Therefore, no deduction is allowed under section 8-1 of the ITAA 1997 for expenses related to the partial demolition. In addition, the notional value of the portion of the dwelling that was demolished does not constitute expenditure incurred, rather, it is part of the capital cost of the property at the time of acquisition.

Legislative references: Income Tax Assessment Act 1997 section 8-1
Related ATO interpretative decisions: ATOID 2002/633
Subject references: Capital gains tax Capital expenditure Deductions & expenses Demolition expenses Redevelopment expenses