Private ruling: Rental property expense - Undeducted construction expenditure
Date of advice: 30 November 2015
Published: February 2016
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Are you entitled to a deduction for your share of the undeducted construction costs in relation to your rental property? | A1: Yes. | Q2: Are you entitled to a deduction for your share of the undeducted Division 40 deductions for plant and equipment in relation to your rental property? | A2: Yes.

Relevant facts and circumstances: You purchased a property. The property was rented after purchase. You obtained a report from a licensed quantity surveyor to determine the undeducted construction expenditure and the depreciation and capital works deductions available. It was decided that the property would be demolished. At the time of demolition, there were undeducted capital works deductions and undeducted Division 40 deductions for plant and equipment. The tenant vacated the property and the property was destroyed. The demolition was voluntary. It is anticipated that a new building will be constructed on the land. You did not receive any compensation or insurance proceeds for the demolition.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 40-85 | Income Tax Assessment Act 1997 section 40-285 | Income Tax Assessment Act 1997 section 40-300 | Income Tax Assessment Act 1997 section 43-40 | Income Tax Assessment Act 1997 section 43-250 | Income Tax Assessment Act 1997 section 43-255

Reasons for decision: Summary: Section 43-40 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a capital works deduction if the capital work that has been undertaken is destroyed. This applies to both voluntary destruction (such as site clearance for redevelopment) and involuntary destruction (such as damage caused by fire or flood) of capital works undertaken. You are allowed a deduction for unrecouped capital expenditure on a capital item included in a building that has been destroyed in an income year under section 43-40(1) of the ITAA 1997 provided that: • you have been allowed or are entitled to a deduction for capital works expenditure for your property; • there is an amount of undeducted construction expenditure for your property; and • you were using the property to produce assessable income immediately before the destruction or, if not neither you nor any other entity used your property for any other purpose since it was last used by you to produce assessable income. The amount of the balancing deduction is calculated using the formula set out in section 43-250 of the ITAA 1997. Generally, the deduction is equal to the undeducted construction expenditure at the date of the destruction of the capital works less amounts you have received or have the right to receive for the destruction of the capital works, including an amount received under an insurance policy for the destruction of capital works (section 43-255 of the ITAA 1997). Your circumstance fit the above requirements. Consequently, you are able to claim a deduction for destruction of your share of the capital works but only in so far that it can be calculated under section 43-250 of the ITAA 1997. Subsection 40-285(2) of the ITAA 1997 in part states you can deduct an amount: (a) if a balancing adjustment event occurs for a depreciating asset you held and whose decline in value you worked out under Subdivision 40-B; and (b) the asset's termination value is less than its adjustable value just before the event occurred. The amount you can deduct is the difference between those amounts, and you can deduct it in the income year in which the balancing adjustment event occurred. A balancing adjustment event occurs under section 40-295 of the ITAA 1997 when you stop holding a depreciating asset, including if it is destroyed. Subsection 40-300(1) of the ITAA 1997 states the termination value of a depreciating asset is worked out at the time when the balancing adjustment event occurs. At item 8 under the table in subsection 40-300(1) of the ITAA 1997 the termination value of a depreciating asset which is lost or destroyed is the amount or value received or receivable under an insurance policy or otherwise for the loss or destruction. Section 40-85 of the ITAA 1997 states in part that the adjustable value of a depreciating asset for a time after the income year in which you first use it or have it installed ready for use for any purpose is the sum of its opening adjustable value for that year and any amount included in the second element of its cost for that year up to that time, less its decline in value for that year up to that time. In your case a balancing adjustment event has occurred as you demolished the rental property including its plant and equipment. There is an adjustable value of the depreciable items in the rental property at the time of the event. The termination value was nil as the property was demolished and no amount has been or is receivable for the destruction of the plant and equipment. You can therefore claim the difference as a deduction in the 2015 financial year.