Private ruling: Deductibility of a structural improvement
Published: June 2013
Ruling period: Year ending 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the cost of a structural improvement erected at your residence? | A1: No | Q2: Are you entitled to a deduction under Division 43 of the ITAA 1997 for the cost of a structural improvement which was erected at your residence? | A2: Yes | Q3: Are there capital gains tax (CGT) implications when the property is sold? | A3: Yes


Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 43-170 | Income Tax Assessment Act 1997 section 118-110 | Income Tax Assessment Act 1997 section 118-115 | Income Tax Assessment Act 1997 subsection 118-120(1) | Income Tax Assessment Act 1997 subsection 118-120(2)

Reasons for decision: Summary: The structural improvement is capital in nature therefore it is not deductible under section 8-1 of the ITAA 1997. A deduction can be claimed under Division 43 of the ITAA 1997. There will be capital gains tax implications on sale of the property. | Detailed Reasoning - Deduction under section 8-1: Under section 8-1 of the ITAA 1997 you can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income or is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. However you cannot deduct a loss or outgoing to the extent that it is of a capital, private or domestic nature. In your case you are proposing to erect a structural improvement at your principal place of residence. A structural improvement is capital in nature. Therefore you are not entitled to a deduction under section 8-1 of the ITAA 1997. | Detailed Reasoning - Deduction under Division 43: Division 43 of the ITAA 1997 allows you to deduct certain capital expenditure on assessable income producing buildings and other capital works. Division 43 also applies to structural improvements. Structural improvements include among other items sealed driveways. Section 43-170 of the ITAA 1997 operates to deny a deduction where the relevant property is part of a taxpayer's home. Taxation Ruling IT 2397 discusses the application of Division 10D (now Division 43) where residential buildings are used partly for income-producing purposes. Paragraph 9 states a deduction is allowable in respect of an area which, although in the same building as the taxpayer's home, is a separate and distinct area used for producing assessable income, for example a self-contained area in which the taxpayer carries on his or her business. In this case even though the structural improvement will be erected at your home, it will be used exclusively in your business. As the structural improvement relates to an area which is separate and distinct from the home and set aside for the exclusive use in the business then you are entitled to a capital works deduction under Division 43 of the ITAA 1997. You are only able to claim a capital works deduction while the structural improvement is being used in connection with producing assessable income. | Detailed Reasoning - Capital Gains Tax implications.: Section 118-110 of the ITAA 1997 outlines that a full CGT exemption is available for capital gains and losses from CGT events affecting a dwelling or an ownership interest in it if the dwelling was the main residence of the taxpayer throughout the taxpayer's ownership period. However, where a dwelling is used for income-producing purposes for part or all of a period and interest on money borrowed to acquire the dwelling would have been deductible the CGT main residence exemption is reduced. Section 118-115 outlines the meaning of "dwelling" to include: (a) a unit of accommodation that: (i) is a building or is contained in a building; and (ii) consists wholly or mainly of residential accommodation; and (b) a unit of accommodation that is a caravan, houseboat or other mobile home; and (c) any land immediately under the unit of accommodation. Under subsection 118-120(1), Subdivision 118-B applies to land that is adjacent to a dwelling (if the same CGT event happens to the land or your ownership interest in it) to the extent that you used the land primarily for private or domestic purposes in association with the dwelling as if it were a dwelling. Subsection 118-120(2) states the maximum area of land covered by the exemption (including the area of the land on which the dwelling is built) is 2 hectares. In this case the structural improvement is on land which is within 2 hectares of the dwelling therefore it is included in the main residence exemption. As the structural improvement will be used in connection with producing assessable income, the CGT main residence exemption will be reduced on sale of the property.

You conduct the business from your home. | You are proposing to construct a structural improvement at your principal place of residence. | The residence is also used for administration of the business. | The structural improvement will be used solely for business purposes. | The structural improvement is separate from other structural improvements at the residence.