Private ruling: Rental property expenses - capital works deduction
Published: January 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a capital works deduction for costs involved in installing new utility service lines to your rental property? | A1: 

Relevant facts and circumstances: You own a 20% share of a holiday unit. You let the holiday unit out all year, apart from approximately 6 weeks each year in which you, or members of your family, utilise the unit. You were required to install new utility lines for power, gas, sewerage and water to the rental property as the lines were initially connected to another house on the block that is not owned by you and is being demolished. The cost of the works totalled approximately $20,000, which included; · Provision of electrical pit · Initial plumbing works · Sewerage works · Electrical works · Final plumbing works

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 43-10 | Income Tax Assessment Act 1997 Subsection 43-20(2) | Income Tax Assessment Act 1997 Subsection 43-25(1) | Income Tax Assessment Act 1997 Subsection 43-70(1) | Income Tax Assessment Act 1997 Section 43-110

Reasons for decision: Detailed Reasoning - Detailed reasoning: Section 43-10 of the Income Tax Assessment Act 1997 (ITAA 1997) operates generally to provide a deduction for capital expenditure on capital works used to produce assessable income. A deduction under section 43-10 of the ITAA 1997 is based on the amount of construction expenditure. Construction expenditure is defined in subsection 43-70(1) of the ITAA 1997 as capital expenditure incurred in respect of the construction of the capital works. Subsection 43-20(2) of the ITAA 1997 provides that Division 43 of the ITAA 1997 applies to capital works that are structural improvements or extensions, alterations, or improvements to structural improvements whose construction commenced after 26 February 1992. Under section 43-110 of the ITAA 1997, a taxpayer can only get a deduction for an income year if the taxpayer owns, leases, or holds part of a construction expenditure area of capital works. Subsection 43-25(1) of the ITAA 1997 provides that the rate of deduction for capital works which began after 26 February 1992 for a residential rental property, is 2.5%. The deduction can be claimed for 40 years from the date construction was completed. In your case, you own a 20% share of a rental property that is used to produce assessable income. You incurred construction expenditure in order to install new utility lines into your rental property for power, gas, sewerage and water. We consider that the installation of underground electricity cables and gas, sewerage and water pipelines is a structural improvement and therefore amounts to capital works under subsection 43-20(2) of the ITAA 1997. Accordingly, you are entitled to claim a capital works deduction for your share of the 2.5% allowable deduction under section 43-10 of the ITAA 1997, to the extent it relates to producing your assessable income.

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