Private ruling: Rental - capital improvement
Published: September 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you entitled to a capital works deduction for the work carried out installing a stormwater management system on your rental property? | A1: Yes.

Relevant facts and circumstances: You and your spouse purchased a property which has always been available for rent. You received a letter from the council stating that a complaint had been lodge alleging stormwater flowing from your property to neighbouring properties. An inspection of your property by council revealed that stormwater from the building and sealed surfaces were insufficient and poorly managed, permitting collected stormwater to flow across the ground surface and into the neighbour's yard potentially causing damage. You were given 28 days to rectify the issue. It was determined that when rain falls on your property in extreme or stormy conditions it falls onto the garden beds and flows over a grass area and onto neighbouring properties. There was no existing stormwater management system on the property. You engaged a plumber to carry out work installing a stormwater management system on the property.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Division 43

Reasons for decision: Summary: Division 43 of the ITAA 1997 allows a deduction for capital expenditure incurred in constructing capital works including building and structural improvements where a property is used for income producing purposes. The deduction is referred to as a capital works deduction. The deduction is available on the cost of constructing structural improvements or extensions, alterations or improvements to structural improvements if the construction started after 26 February 1992 (subsection 43-20(2) of the ITAA 1997). For structural improvements, the annual capital works deduction allowable is 2.5% of the construction expenditure for a period of 40 years. Construction expenditure is the actual cost of constructing the capital works (section 43-25 of the ITAA 1997). In your case, the works undertaken to your rental property to install a stormwater management system is considered to be capital works for the purposes of Division 43 of the ITAA 1997. As such, you are entitled to claim an annual capital works deduction at a rate of 2.5% of the construction costs. This deduction is available only while the property is being rented or available for rent, up to a maximum period of 40 years.