Private ruling: Income tax ~ Deductions ~ Rental property expenses ~ Other
Date of advice: 19 March 2018
Published: June 2018
Ruling period: Year ended 30 June 2018 | Year ended 30 June 2019
Date scheme commenced: 1 July 2017

Ruling: Q1: Are you entitled to a deduction for the decline in value of the chattels in the rental property when you acquire it from your ex-spouse? | A1: No | Q2: Are you entitled to claim a deduction for capital works? | A2: Yes

Relevant facts and circumstances: Your ex-spouse purchased a rental property. The property is solely in their name and the loan is also solely in their name. The property has been used as a rental property by your ex-spouse. Your ex-spouse obtained a Quantity Surveyor report in 201X for the rental property. You and your ex-spouse have se parated. You will acquire the rental property from your ex-spouse which will be transferred to you through a family law settlement. You will take over the loan for the rental property as part of the family law settlement. You will become the sole owner of the property and intend to continue renting the property.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 40-25 | Income Tax Assessment Act 1997 section 40-27 | Income Tax Assessment Act 1997 section 43-10

Reasons for decision: Summary: When acquiring a rental property on or after 1 July 2017, you are unable to claim a deduction for the decline in value of assets where they are second hand. | Detailed Reasoning - Detailed reasoning: Section 40-25 of the ITAA 1997 allows a deduction for the decline in value (depreciation) of a depreciating asset you hold, to the extent the asset is used for a taxable purpose. You are not entitled to a deduction for the decline in value of depreciating assets in residential premises used to provide residential accommodation if you did not hold the asset when it was first used for that purpose (subsection 40-27(2) of the ITAA 1997). You will acquire a rental property from your ex-spouse after 1 July 2017. You cannot claim a deduction for any depreciating assets that were in the rental property at the time you acquire the property from your ex-spouse. | Summary: The quantity surveyor’s report obtained by your ex-spouse in 201X for the rental property can be continued to be used to calculate the capital works deduction. | Detailed Reasoning - Detailed reasoning: Under Division 43 of the ITAA 1997, you can deduct certain capital expenditure on buildings used to produce assessable income. Section 43-10 of the ITAA 1997 operates to allow a deduction for an amount of capital works used in a deductible way during the income year. The rate of deduction for capital works begun after 26 February 1992 which are used to produce rental income, even if that was not the original intention, is 2.5% over 40 years (section 43-25 of the ITAA 1997). In this case construction expenditure is the cost of constructing the building. During periods when the building is not used for income-producing purposes, the associated write-off is forgone as a deduction. Taxation Ruling TR 97/25 considers when a deduction for capital expenditure on the construction of income producing capital works is available. TR 97/25 states that where it is not possible for the purchaser of a property to establish the actual construction costs of the building, particularly in circumstances where the builder or previous owner becomes bankrupt or is not able, for other reasons, to provide the information, an estimate provided by an appropriately qualified person will be accepted. An appropriately qualified person might include: ● a quantity surveyor, who has expertise in the relevant type of construction ● a clerk of works, such as a project organiser for major building projects ● a supervising architect who approves payments at each stage in major projects and who may approve individual payments to subcontractors in smaller projects or ● a builder who is experienced in estimating construction costs of similar building projects. The attainment of relevant professional qualifications or recognition by an appropriate professional association or organisation is indicative of expertise in this field. Unless they are otherwise qualified, valuers, real estate agents, accountants and solicitors generally have neither the relevant qualifications nor experience to make such an estimate. In this case the quantity surveyor’s report offered to you can be used for substantiation if it was completed correctly.