Private ruling: Capital works balancing adjustment
Published: December 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to claim a deduction for the balance of written down capital expenditure when you demolish your rental property? | A1: Yes.

Relevant facts and circumstances: You purchased a property over two years ago, and it has been rented since then. At no stage have you lived in the property. You demolished the property this year in preparation for building your principal place of residence on the land. You had a tax depreciation report prepared by a quantity surveyor. At the time you demolished the property, you had unclaimed capital works on the property.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 43-40 | Income Tax Assessment Act 1997 Section 43-250

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. If a deduction for capital works is to be allowable, the property must be used in a deductible way as described in section 43-10 of the ITAA 1997. Capital works that were started after 30 June 1997 are deductible if the property was used for the purposes of producing assessable income during an income year. Section 43-40(2) of the ITAA 1997 advises that deductions are allowable in the income year in which the building was destroyed and is calculated under section 43-250 of the ITAA 1997. In your case, you had been claiming capital works deduction on your rental property. This year you demolished the property, and at that time there were unclaimed capital works deductions. You were using the property to produce assessable income immediately before the demolition of the building. As you satisfy all of the conditions set out in section 43-40 of the ITAA 1997 you are entitled to a deduction for the balance of your unrecouped capital works.