Private ruling: business deductions - shop alterations
Published: December 2011
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Are you entitled to a capital works deduction for painting, new walls and retiling carried out at leased premises used to run a business? | A1: Yes.

Relevant facts and circumstances: You commenced a business during the 2010-11 financial year. You rented a property to carry out operations and undertook improvements in order to make it workable for your business. You had the premises painted. You had several walls added. You had the floor retiled.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 43, | Income Tax Assessment Act 1997 section 43-20(1) and | Income Tax Assessment Act 1997 section 43-25.

Reasons for decision: Summary: Division 43 of the Income Tax Assessment Act 1997 (ITAA 1997) operates generally to provide owners and lessees a deduction for capital expenditure on capital works used to produce assessable income. A deduction is based on applying the rate of deduction to the amount of construction expenditure. Capital works generally include improvements made to buildings as per subsection 43-20(1) of the ITAA 1997. Some examples of structural improvements include sealed roads, sealed driveways, sealed car parks, sealed airport runways, bridges, pipelines, lined road tunnels, retaining walls, fences, concrete or rock dams and artificial sports fields. Section 43-25 of the ITAA 1997 provides that the rate of deduction for capital works which began after 26 February 1992 is generally 2.5%, increasing to 4% in certain instances. ATO ID 2003/795 discusses that expenditure incurred in remedying defects, damage or deterioration in existence at the date of acquisition (initial repairs) is capital in nature. This means that such expenditure is not deductible as repairs under section 25-10 of the ITAA 1997. Also, it means that a deduction is not available under section 8-1 of the ITAA 1997 (the general deduction provision). In your case you incurred expenditure to have a leased premises painted, retiled and for new walls to be inserted prior to commencing your business. The retiling, painting and new walls are considered to be improvements you have made to the premises and hence will be capital expenditure. Therefore, you are entitled to a capital works deduction for these improvements under Division 43 of the ITAA 1997.

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