ATO ID 2004/593: Capital Works: attempted sale of residential rental property - ceasing to use in a deductible way
Date of decision: 21 April 2004
Year of income: Year ended 30 June 2001
Business line: Small Business/Individual Taxpayers

Issue
Under section 43-10 of the Income Tax Assessment Act 1997 (ITAA 1997), does the taxpayer use the capital works in a deductible way during a period in an income year?

Decision
No. Under section 43-10 of the ITAA 1997, the taxpayer does not use the capital works in a deductible way during a period in an income year.

Facts
During the year of income the taxpayer owned a residential rental property that was constructed after 18 July 1985. During the period that it was owned, the property was rented to tenants, or made available for rental, for the purpose of producing assessable income through deriving rental income. In a year of income commencing after 30 June 1997 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 abandoned. In order to sell the property, it was placed on the market during the year of income. While the property was vacant the taxpayer incurred capital expenditure on structural improvements to the property in preparation for its sale. 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. Construction of the structural improvements to the property had been completed before the property was again made available for rental.

Reasons for decision
Summary: Section 43-10 of the ITAA 1997 provides that an amount may be deducted for capital works for an income year if the capital works have a construction expenditure area, there is a pool of construction expenditure for that area and 'your area' (the area) is used in a deductible way. More specifically, the area must be used in a deductible way as prescribed by Table 43-140 in section 43-140 of the ITAA 1997 (Table 43-140). Generally, capital works are used in a deductible way in an income year if used for the purpose of producing assessable income (subsection 43-140(1) of the ITAA 1997). Sections 43-160 and 43-165 of the ITAA 1997 contain rules which affect the uses of capital works described in Table 43-140. In general terms, section 43-160 of the ITAA 1997 provides that the area is taken to be used for a particular purpose (relevantly, the purpose of producing assessable income) if it is maintained ready for use for that purpose, has not been used for another purpose, and its use for that purpose has not been abandoned. Section 43- 165 of the ITAA 1997 provides, among other things, that the area is taken to be used for a particular purpose if its use for that purpose temporarily ceases because of the construction of an extension, alteration or improvement, or the making of repairs. Construction of the structural improvements to the property began after it had ceased being available for rental. As the property was intended to be sold, there was intended to be a permanent cessation of use of the property in a deductible way. For the period from when construction of the structural improvements was completed until the property was again made available for rental, the taxpayer's area was not maintained ready for use for the purpose of producing assessable income and its use for that purpose had been abandoned. Further, the use of the property for the purpose of producing assessable income had ceased, in preparation for its sale, and not because of the construction of the structural improvements the taxpayer subsequently made. Neither section 43-160 of the ITAA 1997 nor section 43-165 of the ITAA 1997 apply to the taxpayer's area. As the property, including structural improvements that were constructed, was not used for the purpose of producing assessable income during the period it was unavailable for rental, the taxpayer's area was not used in a deductible way during that period.

Legislative references: Income Tax Assessment Act 1997 section 43-10 section 43-140 subsection 43-140(1) section 43-160 section 43-165
Related ATO interpretative decisions: ATO ID 2004/594
Other references: Rental Properties 2002-3 (NAT 1729-6.2003)
Subject references: Building alteration and renovation expenses Building depreciation Construction costs Capital Allowances CoE Rental property Structural improvement expenses