Private ruling: Capital works affecting rental property
Published: March 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to claim an immediate deduction for the costs incurred in constructing a path on the nature strip adjoining your rental property? | A1: No. | Q2: Are you entitled to claim a deduction for capital works in respect of the path constructed on the nature strip adjoining your rental property? | A2: No. | Q3: Does the fee paid by you for the construction of the path on the nature strip of your property form part of the cost base of the property for Capital Gains Tax (CGT) purposes? | A3: Yes.

Relevant facts and circumstances: You are the owner of a rental property. You incurred a cost due to the local council constructing a footpath on the nature strip adjoining your property. The work was carried out on the nature strip which is situated outside the boundary fence line of your property, up to the roadway.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Division 43 | Income Tax Assessment Act 1997 Section 110-25

Reasons for decision: Detailed Reasoning - General deduction: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income. Though your contribution to the cost of capital works for the path construction on the nature strip adjoining, but not part of your rental property was necessarily incurred while you were gaining assessable income from your rental property, the fact that it was an outgoing of a capital nature (paragraph 8-1(2)(a) ITAA 1997)) means that it cannot be claimed as a general deduction under section 8-1 (ITAA 1997). | Detailed Reasoning - Deduction for capital works: Under Division 43 of the ITAA 1997 taxpayers are entitled to a deduction for expenditure incurred on certain capital works where you own, lease or hold part of a construction expenditure area. In your situation, the path and nature strip is owned by your local council and thus the work was carried out on council property. Therefore as you do not own, lease or hold the construction expenditure area you are not entitled to claim a deduction for capital works for your contribution to the cost of the capital works expenditure for the construction of the path. | Detailed Reasoning - Cost base of the property for CGT purposes: As the construction of the path is treated as a capital expense and cannot be regarded as a deduction, we need to consider where this expenditure can form part of the cost base of the property for CGT purposes. Under section 110-25 of the ITAA 1997, the cost base of a CGT asset consists of five elements. The fourth element as outlined in subsection 110-25(5) of the ITAA 1997 includes capital expenditure you incurred for the purpose or the expected effect of which is to increase or preserve the asset's value. It is considered that the addition of the path adjoining your property increases the value of your property. Therefore, it is a capital expense which forms part of the fourth element of the cost base of a CGT asset. You can only include the amount outlaid by you. The amount is limited to the charges paid by you as your contribution for the construction of the path.