Private ruling: Depreciation and capital works
Date of advice: 2 September 2016
Published: October 2016
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Are you entitled to a decline in value deduction in relation to the property? | A1: No. | Q2: Are you entitled to a capital works deduction in relation to the property? | A2: No.

Relevant facts and circumstances: You owned a property. The property was transferred to another entity. The other entity entered into a lease agreement with a tenant. You receive the rent from the tenancy. You do not own the property and you do not have a lease entitling you to the income from the property.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 40-25 | Income Tax Assessment Act 1997 section 40-30 | Income Tax Assessment Act 1997 section 40-40 | Income Tax Assessment Act 1997 section 43-10 | Income Tax Assessment Act 1997 section 43-115 | Income Tax Assessment Act 1997 section 43-120

Reasons for decision: Detailed Reasoning - Depreciation: Section 40-25 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for the decline in value of a depreciating asset that you hold. A depreciating asset is an asset that can reasonably be expected to decline in value over the time it is used (section 40-30 ITAA 1997). The table in section 40-40 of the ITAA 1997 identifies the holder of a depreciating asset in any particular circumstance. In broad terms a holder of a depreciating asset is its economic owner. In most cases the economic owner will also be the legal owner. | Detailed Reasoning - Is held by this entity:: 1 A *car in respect of which a lease has been granted that was a *luxury car when the lessor first leased it The lessee (while the lessee has the *right to use the car) and not the lessor ........... 2 A *depreciating asset that is fixed to land subject to a *quasi-ownership right (including any extension or renewal of such a right) where the owner of the right has a right to remove the asset The owner of the quasi-ownership right (while the right to remove exists) ........... 3 An improvement to land (whether a fixture or not) subject to a *quasi-ownership right (including any extension or renewal of such a right) made, or itself improved, by any owner of the right for the owner's own use where the owner of the right has no right to remove the asset The owner of the quasi-ownership right (while it exists) ........... 4 A *depreciating asset that is subject to a lease where the asset is fixed to land and the lessor has the right to recover the asset The lessor (while the right to recover exists) ........... 5 A right that an entity legally owns but which another entity (the economic owner ) exercises or has a right to exercise immediately, where the economic owner has a right to become its legal owner and it is reasonable to expect that: The economic owner and not the legal owner (a) the economic owner will become its legal owner; or (b) it will be disposed of at the direction and for the benefit of the economic owner ........... 6 A *depreciating asset that an entity (the former holder ) would, apart from this item, hold under this table (including by another application of this item) where a second entity (also the economic owner ): The economic owner and not the former holder (a) possesses the asset, or has a right as against the former holder to possess the asset immediately; and (b) has a right as against the former holder the exercise of which would make the economic owner the holder under any item of this table; and it is reasonable to expect that the economic owner will become its holder by exercising the right, or that the asset will be disposed of at the direction and for the benefit of the economic owner ........... 7 A *depreciating asset that is a partnership asset The partnership and not any particular partner ........... 8 *Mining, quarrying or prospecting information that an entity has and that is relevant to: The entity (a) *mining and quarrying operations carried on, or proposed to be carried on by the entity; or (b) a *business carried on by the entity that includes *exploration or prospecting for *minerals or quarry materials obtainable by such operations; whether or not it is generally available ........... 9 Other *mining quarrying or prospecting information that an entity has and that is not generally available The entity ........... 10 Any *depreciating asset The owner, or the legal owner if there is both a legal and equitable owner A quasi-ownership right over land is defined as: (a) a lease of the land; or (b) an easement in connection with the land; or (c) any other right, power or privilege over the land, or in connection with the land. | Detailed Reasoning - Capital works: The provisions covering deductions for capital works in relation to income-producing buildings and structural improvements (often referred to as building depreciation) are contained in Division 43 of the ITAA 1997. Subsection 43-10(2) of the ITAA 1997 provides that You can only deduct the amount if: (a) the capital works have a * construction expenditure area; and (b) there is a * pool of construction expenditure for that area; and (c) you use * your area in the income year in the way set out in Table 43-140 (Current year use). Note 2 to subsection 43-10(2) advises that: Amongst other things, the definition of your area ensures that only owners and certain lessees of capital works, and certain holders of quasi-ownership rights over land on which capital works are constructed, can deduct an amount under this Division. Subsection 43-115(1) of the ITAA 1997 states that your area is the part of the construction expenditure area that you own. Subsection 43-120(1) of the ITAA 1997 deals with lessees and quasi-ownership holders and provides that: Your area is the part of the * construction expenditure area that you lease, or hold under a * quasi-ownership right over land granted by an * exempt Australian government agency or an * exempt foreign government agency, and that: (a) is attributable to a * pool of construction expenditure that you incurred; and (b) you have continuously leased or held since the construction was completed. | Detailed Reasoning - Application to your circumstances: In your case, you transferred ownership of a property to another entity. Consequently you no longer own the asset. Although you continue to receive the income generated from the asset this is considered to be a private and non-commercial arrangement. A deduction for the decline in value of an asset is only allowed if you hold the asset. None of the items in the table in section 40-40 of the ITAA 1997 which identify if you hold an asset apply to you. Therefore you are not considered to be the holder of the depreciating assets and you are not entitled to a decline in value deduction under Division 40 of the ITAA 1997. Additionally, the property does not meet the definition of your area under the capital works provisions and you do not lease the property or have a quasi-ownership right granted by an exempt government agency or an exempt foreign government agency. Consequently, you are also not entitled to a deduction for capital works under Division 43 of the ITAA 1997.