Private ruling: Capital works and capital allowance deductions
Published: November 2013
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Is a deduction allowable for capital works for undeducted construction expenditure after the demolition of an asset? | A1: Yes | Q2: Is a balancing adjustment deduction allowable under the capital allowance provisions for an asset which was voluntarily demolished? | A2: Yes


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 40-85 | Income Tax Assessment Act 1997 Subsection 40-285(2) | Income Tax Assessment Act 1997 Section 40-295 | Income Tax Assessment Act 1997 Subsection 40-300(1) | Income Tax Assessment Act 1997 Section 43-40 | Income Tax Assessment Act 1997 Section 43-140

Reasons for decision: Summary: Section 43-40 of the Income Tax Assessment Act 1997 (ITAA 1997) states you can deduct an amount if all or a part of your area is destroyed in an income year and: a) you have been allowed, or can claim, a deduction under this Division, or former Division 10C or 10D of Part III of the Income Tax Assessment Act 1936 , for your area; and b) there is amount of undeducted construction expenditure for your area; and c) you were using your area in the way that applied to it under Table 43-140 (Current year use) immediately before the destruction or if not, neither you nor any other entity used your area for any purpose since it was last used by you in that way. Section 43-140 of the ITAA 1997 discusses using your area in a deductible way. It states in part after 30 June 1997 you must use your area of capital works in an income year for the purpose of producing assessable income. Taxation Ruling TR 97/25 discusses deductions for capital expenditure on construction of income producing capital works, including buildings and structural improvements. Paragraph 18 states that the Commissioner considers that section 43-40 of the 1997 Act applies both to voluntary and involuntary destruction of capital works. In your case you voluntarily demolished your asset. You were entitled to claim capital works deduction before the demolition. There is an undeducted construction expenditure amount and neither you nor any other entity used your area for any purpose since it was last used by you in that way. You are entitled to claim the undeducted construction expenditure amount in the 2011-12 financial year. Subsection 40-285(2) of the ITAA 1997 in part states you can deduct an amount: (a) if a balancing adjustment event occurs for a depreciating asset you held and whose decline in value you worked out under Subdivision 40-B; and (b) the asset's termination value is less than its adjustable value just before the even occurred. The amount you can deduct is the difference between those amounts, and you can deduct it in the income year in which the balancing adjustment event occurred. A balancing adjustment event occurs under section 40-295 of the ITAA 1997 when you stop holding a depreciating asset, including if it is destroyed. Subsection 40-300(1) of the ITAA 1997 states the termination value of a depreciating asset is worked out at the time when the balancing adjustment event occurs. At item 8 under the table in subsection 40-300(1) of the ITAA 1997 the termination value of a depreciating asset which is lost or destroyed is the amount or value received or receivable under an insurance policy or otherwise for the loss or destruction. Section 40-85 of the ITAA 1997 states in part that the adjustable value of a depreciating asset for a time after the income year in which you first use it or have it installed ready for use for any purpose is the sum of its opening adjustable value for that year and any amount included in the second element of its cost for that year up to that time, less its decline in value for that year up to that time. In your case a balancing adjustment event has occurred as you demolished the asset. The adjustable value of the depreciable items in the rental property at the time of the event was more than nil. The termination value was nil as the property was demolished and no amount has been or is receivable for the destruction of the plant and equipment. You can therefore claim the difference as a deduction in the 2011-12 financial year.

Relevant facts: An entity acquired an asset. | The asset was income-producing for a number of years. | The asset ceased to be used for any purpose when it was no longer income producing. | Shortly after the asset was no longer producing income it was demolished. | No amount has been, or is receivable, for the destruction of the asset.