Private ruling: Capital works deductions
Date of advice: 5 December 2017
Published: April 2018
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Are capital works deductions under Division 43 of the Income Tax Assessment Act 1997 (ITAA 1997) calculated with reference to the construction expenditure of the works? | A1: Yes.

Relevant facts and circumstances: You purchased a property in 201X. The property was built in 199X. You have engaged a quantity surveyor to prepare a capital allowance and tax depreciation report for the property.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 43-20, | Income Tax Assessment Act 1997 Section 43-85 and | Income Tax Assessment Act 1997 Section 43-140.

Reasons for decision: Summary: Capital works deductions Division 43 of the ITAA 1997 allows a deduction for capital expenditure incurred in constructing capital works, including buildings and structural improvements. The capital works must be used in a deductible way during the income year in accordance with section 43-140 of the ITAA 1997. A deduction for capital works under Division 43 of the ITAA 1997 is based on the amount of construction expenditure, that is, capital expenditure (including expenditure assumed, by operation of subsection 43-85(2) of the ITAA 1997, to be capital expenditure) incurred in respect of the construction of those capital works. Section 43-20 of the ITAA 1997 recognises three categories of capital works: ● buildings or extensions, alterations or improvements to buildings; ● structural improvements or extensions, alterations or improvements to structural improvements; and ● environment protection earthworks. You can only claim deductions for the period during the year that the property is rented or is available for rent. Rate of deductions The rate of the deduction you can claim, and the number of years you can claim it for, are determined by the type of construction and the date the construction commenced (not the date you acquired the property if you were not the original owner). For further information on working out the amount you can claim you can visit our website, ato.gov.au and search for ‘QC 21620’. Estimating construction costs Where a new owner is unable to ascertain the actual construction expenditure incurred on the capital works, an estimate provided by an appropriately qualified person may be used. Appropriately qualified people might include a quantity surveyor, who has expertise in the relevant type of construction. The amount paid to purchase the property is not relevant in determining or estimating the actual construction expenditure.