Private ruling: Entitlement to accelerated capital works deduction
Published: January 2014
Ruling period: Year ended 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016
Date scheme commenced: 1 July 2012

Ruling: Q1: Is the entity entitled to claim a deduction for capital works over the shorter term at an increased rate instead of the normal rate over the 40 year period? | A1: No


Relevant legislative provisions: Income Tax Assessment Act 1997 section 43-10 | Income Tax Assessment Act 1997 section 43-15 | Income Tax Assessment Act 1997 section 43-25 | Income Tax Assessment Act 1997 section 43-110 | Income Tax Assessment Act 1997 section 43-140 | Income Tax Assessment Act 1997 section 43-145

Reasons for decision: Summary: Division 43 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for certain expenditure incurred in constructing capital works, including buildings and structural improvements. Section 43-10 of the ITAA 1997 states you can deduct an amount for capital works for an income year. You can only deduct this amount if: · the capital works have a construction expenditure area; and · there is a pool of construction expenditure for that area; and · you use your area in the income year in the way set out in table 43-140 (current year use) Section 43-15 of the ITAA 1997 states the amount you can deduct is a portion of your construction expenditure. However, it cannot exceed the amount of undeducted construction expenditure for your area. Section 43-25 of the ITAA 1997 outlines the rates of deduction. For capital works begun after 26 February 1992, there is a basic entitlement to a rate of 2.5% for parts used as described in Table 43-140 (current year use) however, the rate increases to 4% for parts used as described in Table 43-145. Table 43-140 sets out the way that you must use your area in an income year for a deduction to be allowed under section 43-10 of the ITAA 1997 which is the main deduction provision. The table states that for any capital works which commenced after 30 June 1997 you must use your area for the purpose of producing assessable income or carrying out research and development activities. Table 43-145 sets out the way that you must use your area in an income year to be entitled to claim a capital works deduction at a rate of 4%. It basically covers short term accommodation for travellers and industrial activities. Section 43-110 of the ITAA 1997 in part states you can only get a deduction under Division 43 for an income year if you own, lease or hold part of a construction expenditure area of capital works. The area you own, lease or hold is called your area. In application to this case the entity incurred expenditure on capital items including buildings and structural improvements in relation to the leased land. The entity is the tenant as outlined in the lease agreement. The trust is entitled to claim 2.5% in each income year as the capital works are not used for activities outlined under Table 43-145 (4% manner) There is no provision which allows an accelerated rate for capital works in line with the term of the lease agreement.

Relevant facts: The entity entered into a lease with a landlord for a period which is less than 40 years. | There is no option for an extension or further lease options. | A condition of the lease is that at the end of the lease all capital works are surrendered to the landlord or another entity.