Private ruling: Capital works deductions and goods and services tax (GST) input credits
Date of advice: 5 July 2017
Published: November 2017
Ruling period: Year ending 30 June 20XX | Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you able to claim a capital works deduction for the cost of laying road base in your income tax return? | A1: No. | Q2: Are you eligible to claim input tax credits (GST credits) for costs incurred in relation to laying the road base under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A2: You are eligible to claim input tax credits in relation to costs incurred from laying the road base to the extent the portion are creditable acquisitions under section 11-20 of the GST Act.

Relevant facts and circumstances: You (as a partnership entity) own and work on a property under an ABN that is registered for GST. You had a dirt driveway leading from the front gate connecting the house. The total distance of the driveway is approximately XXX metres. The driveway was in a state of disrepair and you decided to seal it with a combination of hot and cold road base. Approximately XXX metres of the sealed driveway has been completed. You use the driveway mainly for use in connection with the residential house. The total length of the driveway is not yet completed. It is expected to be completed by the end of the 20XX calendar year.

Relevant legislative provisions: Income Tax Assessment Act 1997 s ection 8-1 | Income Tax Assessment Act 1997 Division 43 | Income Tax Assessment Act 1997 section 43-10 | Income Tax Assessment Act 1997 section 43-20 | Income Tax Assessment Act 1997 section 43-75 | Income Tax Assessment Act 1997 section 43-80 | Income Tax Assessment Act 1997 section 43-85 | Income Tax Assessment Act 1997 section 43-30 | Income Tax Assessment Act 1997 section 43-140 | Income Tax Assessment Act 1997 section 43-170 | A New Tax System (Goods and Services Tax) Act 1999 section 11-20 | A New Tax System (Goods and Services Tax) Act 1999 section 11-25 | A New Tax System (Goods and Services Tax) Act 1999 section 11-30

Reasons for decision: Detailed Reasoning - Detailed reasoning: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent that they are incurred in gaining or producing assessable income, or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income. Division 43 of the ITAA 1997 provides that deductions may be made for capital works. Section 43-10 of the ITAA 1997 allows a deduction for capital works in an income year if certain criteria are met. The limitations in subsection 43-10(2) of the ITAA 1997 are that you can only deduct an amount if: (a) The capital works have a construction expenditure area; and (b) There is a pool of construction expenditure for that area; and (c) You use your area in the income year in the way set out in Table 43-140 of the ITAA 1997. Capital works are described in section 43-20 of the ITAA 1997 to include structural improvements such as sealed roads. Your construction expenditure area is defined in section 43-75 of the ITAA 1997 to be capital works begun after 30 June 1997, on which the construction expenditure was incurred that, at the time it was incurred by an entity, was to be owned by the entity. Subsection 43-75(4) of the ITAA 1997 provides that before a construction expenditure area can be determined, the construction of the capital works must be complete. Section 43-80 of the ITAA 1997 provides that the capital works are taken to have begun when the first step in the construction phase starts. For example: the pouring of foundations or sinking of pilings for a building. Section 43-85 of the ITAA 1997 provides that a pool of construction expenditure is so much of the construction expenditure incurred by an entity on capital works as attributable to the construction expenditure area. Section 43-30 of the ITAA 1997 provides that you cannot deduct an amount for any period before the completion of the capital works even though you used them, or part of them, before completion. The table is section 43-140 of the ITAA 1997 provides that in order for capital works to be deductible, they must be used in a way as described. For any type of capital works begun after 30 June 1997 if it is used for the purpose of producing assessable income, then this will be an allowable deduction purpose. There are special rules about deductibility of capital expenditure that are found in subdivision 43-E of the IATA 1997. Subsection 43-170(1) of the ITAA 1997 provides that a part of capital works is taken not to be used for the purpose of producing assessable income if that part is for use mainly for, or in association with, residential accommodation by you or an associate. Subsection 43-170(3) provides that if the property that constitutes the capital works is part of an individual’s home, the property is taken to be used, or for use, wholly or mainly for or in association with residential accommodation. | Detailed Reasoning - Application to your circumstances: In your circumstances you had a dirt driveway on your property that travels from the main gate past the house and then ends in a ramp, leading into a paddock. This driveway was in a state of disrepair and you decided to lay a mixture of hot and cold road base, resulting in a sealed driveway. You have completed construction of approximately XXX metres of XXX metres of the intended sealed driveway. The expected completion for the total sealed driveway is the end of the 20XX calendar year. A sealed road or driveway is construction of capital or capital in nature, therefore a deduction is not allowed under section 8-1 of the ITAA 1997. The sealed driveway is of a type that would be classified under section 43-20 of the ITAA 1997 to be capital works and a deduction may be found under Division 43 of the ITAA 1997. The work on the driveway was commenced after 30 June 1997 and the expenditure that has been incurred by you is in relation to a driveway that you own. The driveway is not yet complete, so a construction expenditure area cannot yet be determined. As you have not yet completed the driveway, subsection 43-75(4) of the ITAA 1997 provides that you cannot determine the construction expenditure area. As you cannot determine the construction expenditure area, section 43-10 of the ITAA 1997 is not met and a deduction is not allowed. Further, section 43-30 of the ITAA 1997 disallows a deduction until the capital works are completed. You use the driveway mainly for private use involving travel to and from the residential house located opposite the sheep pens. The driveway does not connect to the house, but is used for the purpose of travelling to and from the house. Section 43-170 of the ITAA 1997 disallows a deduction for the driveway, because its main use is in association with travel to and from the house. Therefore, you are not entitled to claim a capital works deduction for the expense of the driveway, as it is not yet completed, and is mainly used for travel to and from the residential accommodation that you own. | Detailed Reasoning - Detailed reasoning: The GST issue arises on whether you able to claim input tax credits (GST credits) from laying the road base. Goods and Services Tax Ruling GSTR 2006/4: Goods and services tax: determining the extent of creditable purpose for claiming input tax credits and for making adjustments for changes in extent of creditable purpose provides the Commissioner's view on the meaning of creditable purpose and the extent of creditable purpose. It also provides examples of apportionment methods that an entity can use to determine its correct entitlement to input tax credits. To calculate the amount of its input tax credits, an entity will need to make an estimate of the extent of creditable purpose for its acquisitions. The requirement that the estimation is fair and reasonable in the circumstances is a prerequisite for any decision the entity makes. Paragraph 34 of GSTR 2006/4 states that the apportionment method that an entity chooses needs to: ● Be fair and reasonable; ● Reflect the planned use of that acquisition (or in the case of an adjustment, the actual use); and ● Be appropriately documented in the entities individual circumstances. In your case, you have an ABN and are GST registered and provided that your supplier is GST registered in providing the materials and any work to be done on the new or improved road base or driveway (these will be taxable supplies generally). You may be entitled to input tax credits for creditable acquisitions as part of your enterprise (refer to sections 11-20, 11-25 and 11-30 of the GST Act). Paragraph 40 and 44 of GSTR 2006/4 relevantly provides as follows: | Detailed Reasoning - Meaning of creditable purpose: 40. The meaning of 'creditable purpose' is stated in the same terms for both acquisitions and importations in the GST Act. It requires you to consider both of the following conditions: (i) you acquire a thing or import goods for a creditable purpose to the extent that you do so in carrying on your enterprise; and (ii) you do not acquire a thing or import goods for a creditable purpose to the extent that: (a) the acquisition or importation relates to making supplies that would be input taxed; or (b) the acquisition or importation is of a private or domestic nature. | Detailed Reasoning - Calculating input tax credits: 44. Formulae are specified in the GST Act for the calculation of input tax credits for acquisitions and importations that are partly creditable. A different formula is specified for importations, as the extent to which consideration is provided is not relevant for importations. The formulae are: For acquisitions: Full input tax credit x Extent of creditable purpose x Extent of consideration | Detailed Reasoning - Application to your circumstances: In your case, you use the road base (driveway) mainly for private use involving travel to and from the residential house. The driveway which is not completed as yet does not connect to the house, but is used for the purpose of travelling to and from the house. You cannot claim GST credits for any portion of the driveway which is used for private and domestic purposes. Acquisitions or part of acquisitions by the taxpayer which are private and domestic are generally not creditable acquisitions for a creditable purpose for GST purposes (see section 11-15 of the GST Act). From the information provided, in this case, the road’s purpose and use needs to be reasonably apportioned if there is a private or domestic component. In your case, a fair and reasonable apportionment method is acceptable. In your circumstances you operate a business under an ABN that is registered for GST. You had a dirt driveway on your property. This driveway was in a state of disrepair and you decided to lay a mixture of hot and cold road base, resulting in a sealed driveway. You have completed construction of approximately XXX metres of XXX metres of the intended sealed driveway. The expected completion for the total sealed driveway is the end of the 20XX calendar year. Accordingly, you are eligible to claim input tax credits in relation to costs incurred from laying the road base to the extent the portion are creditable acquisitions under section 11-20 of the GST Act.