Private ruling: Business - capital works deductions
Date of advice: 15 June 2016
Published: July 2016
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you limited to a deduction under Division 43 of the Income Tax Assessment Act 1997 (ITAA 1997) of 2.5% of the capital works expenditure event though you hold a lease to use the property for XX years? | A1: Yes.

Relevant facts and circumstances: You entered a XX year lease on premises to be used for your business activity. You spent money on renovations to the premises. The lease will not be renewed.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 43 | Income Tax Assessment Act 1997 Section 43-120 | Income Tax Assessment Act 1997 Section 43-125

Reasons for decision: Summary: You have incurred capital works expenditure. You are entitled to a deduction at a rate of 2.5% of the actual costs incurred while you hold the lease. There is no provision within the legislation to allow you to claim the full costs incurred over the period of the lease. | Detailed Reasoning - Detailed reasoning: Division 43 of the ITAA 1997 provides a system of deducting capital expenditure incurred in the construction of building and other capital works used to produce assessable income. You can deduction construction costs in respect of the following capital works: • buildings or extensions, alterations or improvements to a building • structural improvements or extensions, alterations, or improvements to a structural improvements • environmental protection earthworks. Deductions for construction costs and structural improvements must be based on actual costs incurred. Generally, the rate of the deduction is 2.5% over 40 years. A lessee can claim a deduction, under subsection 43-120(1) of the ITAA 1997, in respect of an area leased. To claim a deduction, the lessee must have: • incurred the construction expenditure or been an assignee of the lessee who incurred the expenditure • continuously leased the capital works area itself, or lease the area that has been so held by previous lessees or assignees since the completion of construction, and • used the area to produce assessable income. Subsection 43-125(1) of the ITAA 1997 states that: an amount that relates to a pool of construction expenditure that arises as a result of expenditure incurred by a lessee or a holder of a quasi-ownership right over land: a) can only be deducted by a lessee or a holder of a quasi-ownership right over land who satisfies subsection 43-120(1) or (2); and b) cannot be deducted by the owner of the capital works while there is a lessee or a holder of quasi-ownership right over land who satisfies that subsection. Under subsection 43-125(2) of the ITAA 1997, the owner of the capital works may deduct an amount that relates to that pool if there is no longer a lessee who is entitled to a capital works deduction. In this case, you have incurred capital works expenditure. You are entitled to a deduction at a rate of 2.5% of the actual costs incurred. There is no provision that allows you to write off the cost of the renovations over the period of the lease. As discussed in subsection 43-125(2) of the ITAA 1997, if there is a lapse in the lease the entitlement to the deduction reverts to the building owner. Therefore, when your lease comes to an end, a deduction for capital works will no longer be available to you. You are not able to claim the cost of the renovations over the period you hold the lease.