Private ruling: Division 43
Date of advice: 6 August 2015
Published: August 2015
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Are you entitled to a deduction for your share of the undeducted construction costs in relation to your rental property? | A1: Yes.

Relevant facts and circumstances: You owned a rental property. Due to damage by the tenants, it was necessary for some capital works items to be replaced. These items were removed from the property and dumped.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 43-40, | Income Tax Assessment Act 1997 Section 43-250 and | Income Tax Assessment Act 1997 Section 43-255.

Reasons for decision: Summary: Section 43-40 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a capital works deduction if the capital work that has been undertaken is destroyed. This applies to both voluntary destruction (such as site clearance for redevelopment) and involuntary destruction (such as damage caused by fire or flood) of capital works undertaken. You are allowed a deduction for unrecouped capital expenditure on a capital item included in a building that has been destroyed in an income year under section 43-40(1) of the ITAA 1997 provided that: • you have been allowed or are entitled to a deduction for capital works expenditure for your property; • there is an amount of undeducted construction expenditure for your property; and • you were using the property to produce assessable income immediately before the destruction or, if not neither you nor any other entity used your property for any other purpose since it was last used by you to produce assessable income. The amount of the balancing deduction is calculated using the formula set out in section 43-250 of the ITAA 1997. Generally, the deduction is equal to the undeducted construction expenditure at the date of the destruction of the capital works less amounts you have received or have the right to receive for the destruction of the capital works, including an amount received under an insurance policy for the destruction of capital works (section 43-255 of the ITAA 1997). Your circumstance fit the above requirements. Consequently, you are able to claim a deduction for destruction of your share of the capital works but only in so far that it can be calculated under section 43-250 of the ITAA 1997.