Private ruling: Deductions following demolition of rental property
Date of advice: 30 August 2016
Published: October 2016
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Is a deduction allowable for your share of capital works for undeducted construction expenditure after the demolition of the property? | A1: No. | Q2: Is your share of a balancing adjustment deduction allowable for depreciating assets which were voluntarily demolished? | A2: No.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 40-85 | Income Tax Assessment Act 1997 Subsection 40-285(2) | Income Tax Assessment Act 1997 Section 40-295 | Income Tax Assessment Act 1997 Subsection 40-300(1) | Income Tax Assessment Act 1997 Section 43-40 | Income Tax Assessment Act 1997 Section 43-140 | Income Tax Assessment Act 1997 Section 43-160

Reasons for decision: Summary: Section 43-40 of the Income Tax Assessment Act 1997 (ITAA 1997) states you can deduct an amount if all or a part of your area is destroyed in an income year and: (a) you have been allowed, or can claim, a deduction under this Division, or former Division 10C or 10D of Part III of the Income Tax Assessment Act 1936 , for your area; and (b) there is amount of undeducted construction expenditure for your area; and (c) you were using your area in the way that applied to it under Table 43-140 (Current year use) immediately before the destruction or if not, neither you nor any other entity used your area for any purpose since it was last used by you in that way. Taxation Ruling TR 97/25 discusses deductions for capital expenditure on construction of income producing capital works, including buildings and structural improvements. Paragraph 18 states that the Commissioner considers that section 43-40 of the 1997 Act applies both to voluntary and involuntary destruction of capital works. As the requirements of paragraphs 43-40(1)(a) and (b) of the ITAA 1997 have been satisfied the issue to be considered is whether paragraph 43-40(1)(c) of the ITAA 1997 has been satisfied. Section 43-140 of the ITAA 1997 discusses using your area in a deductible way. It states in part after 30 June 1997 you must use your area of capital works in an income year for the purpose of producing assessable income. In considering if the requirements of paragraph 43-40(1)(c) of the ITAA 1997 are satisfied the meaning of 'immediately before the destruction' must be considered. The provisions of section 43-160 of the ITAA 1997 are also relevant in this consideration. That section provides that a part of your area is taken to be used, for use or available for use for a particular purpose at a time if, at that time: • it was maintained ready for use for that purpose, and • it was not used or for use for any other purpose, and • its use or intended use for that purpose had not been abandoned. In your case you voluntarily demolished your property. It is considered that at the time your tenants vacated the property, the intended use of the property had changed, in that it was no longer your intention to hold it for an income producing purpose, but to demolish and rebuild a house for your main residence. While it is acknowledged that the property was demolished within a short time of being vacated, the income producing nature of the property had changed. It is not considered that the property was maintained ready for an income producing purpose. Furthermore, the intended income producing use had been abandoned. Therefore the requirements of section 43-160 of the ITAA 1997 have not been satisfied and your property is not taken to be used for the purpose of producing assessable income immediately before its destruction. It follows that the requirements of paragraph 43-40(1)(c) of the ITAA 1997 have not been satisfied. Because of this, you are not entitled to a deduction for the undeducted construction expenditure amount under Division 43 of the ITAA 1997. Section 40-25 of the ITAA 1997 allows a deduction for the decline in value (depreciation) of a depreciating asset you hold, to the extent the asset is used for a taxable purpose. Subsection 40-25(2) of the ITAA 1997 states that you must reduce your deduction by the part of the assets decline in value that is attributable to your use of the asset, for a purpose other than a taxable purpose. Taxable purpose means for the purpose of producing assessable income. Subdivision 40-D of the ITAA 1997 may allow a balancing adjustment deduction in certain circumstances. Where an asset is held for a non-taxable purpose, no deduction is allowed under Division 40 of the ITAA 1997. In your case, as you no longer rented the property, the depreciating assets are no longer held for a taxable purpose. That is, from the date the tenant vacated the property, the use of the assets is for a non-taxable purpose. That is, the assets were no longer held for an income producing purpose, but were demolished to build a house for your main residence. As the assets were no longer held for a taxable purpose, no deduction is allowed under Division 40 of the ITAA 1997 after the tenants moved out.

Relevant facts: You became the joint owner of a rental property. The property started earning rent immediately, and has been managed by an agent, and rented at market value, when it was demolished. | The property was demolished shortly after the tenants vacated. | Following the demolition of the property you constructed a new dwelling on the land which has been used as your private residence. | The property was an older property, and the previous owners had done renovations. At the time of purchase you had a report done by a quantity surveyor, on the renovation valuation of capital works and capital allowance amounts. | You have claimed capital works deductions only on the value of the renovated part of the property. | You claimed both depreciation and capital works deductions during the time the property was rented. | When it was demolished there was a capital works residual amount as well as a depreciable item residual amount.