ATO ID 2003/377: Capital works: interim rental of trading stock by property developer
Date of decision: 7 April 2003
Year of income: Year ended 30 June 2002
Business line: PGH

Issue
Can the taxpayer, a property developer, claim a capital works deduction under Division 43 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of a building that they developed and otherwise held as trading stock for an interim period the building was rented out?

Decision
No. The taxpayer cannot claim a capital works deduction under Division 43 of the ITAA 1997 in respect of a building that is trading stock, even though the building was rented out for an interim period, because the construction expenditure on the building is revenue and not capital expenditure.

Facts
The taxpayer carries on a business of property development. The taxpayer bought a block of land on which they constructed a building. The building was an integral part of the property development business. The building was constructed for the sole purpose of resale and was always held as trading stock. During the period from when the building was completed until it was sold, the building was rented out.

Reasons for decision
Summary: Broadly speaking, Division 43 of the ITAA 1997 provides a deduction for certain expenditure on income producing capital works, including a building. The deduction is based, amongst other things, on the construction expenditure in respect of the building. Subsection 43-70(1) of the ITAA 1997 broadly defines construction expenditure as capital expenditure incurred on the construction of capital works. A building held by a property developer for sale in the ordinary course of their development business is trading stock of the developer. Expenditure incurred on trading stock in the ordinary sense of that term will be on revenue account 'in almost all cases that can be envisaged' ( Federal Commissioner of Taxation v. Raymor (NSW) Pty Ltd (1990) 24 FCR 90; 90 ATC 4461; (1990) 21 ATR 458). The building was developed and otherwise held by the taxpayer as an item of trading stock. The interim rental of the building does not alter that position. In these circumstances, the taxpayer cannot claim a capital works deduction under Division 43 of the ITAA 1997 in respect of the building because the construction expenditure on it is revenue and not capital.

Legislative references: Income Tax Assessment Act 1997 subsection 43-70(1) Division 43
Case references: Federal Commissioner of Taxation v. Raymor (NSW) Pty Ltd (1990) 24 FCR 90 90 ATC 4461
Subject references: Building depreciation Buildings Capital allowances CoE Real estate as trading stock Rental property Trading stock