Private ruling: GST - construction expenses
Date of advice: 13 June 2025
Published: 11 August 2025
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 31 January 20XX

Ruling: Q1: Are you allowed a deduction under section 43-40 of the Income Tax Assessment Act 1997 (ITAA 1997) for the undeducted construction expenditure of the house due to its destruction? | A1: Yes. Section 43-40 of the ITAA 1997 allows a capital works deduction if the capital work that has been undertaken is destroyed. This applies to both voluntary destruction (such as site clearance for redevelopment) and involuntary destruction (such as damage caused by fire or flood) of capital works undertaken. You are allowed a deduction for unrecouped capital expenditure on a capital item included in a building that has been destroyed in an income year under section 43-40(1) of the ITAA 1997 provided that: • you have been allowed or are entitled to a deduction for capital works expenditure for your property; • there is an amount of undeducted construction expenditure for your property; and • you were using the property to produce assessable income immediately before the destruction or, if not neither you nor any other entity used your property for any other purpose since it was last used by you to produce assessable income. The amount of the balancing deduction is calculated using the formula set out in section 43-250 of the ITAA 1997. Generally, the deduction is equal to the undeducted construction expenditure at the date of the destruction of the capital works less amounts you have received or have the right to receive for the destruction of the capital works, including an amount received under an insurance policy for the destruction of capital works (section 43-255 of the ITAA 1997). Your circumstance fit the above requirements. Consequently, you are able to claim a deduction for destruction of your share of the capital works but only in so far that it can be calculated under section 43-250 of the ITAA 1997.

Relevant facts and circumstances: You purchased a property in 20XX. The property was tenanted shortly after acquisition and produced assessable income until 31 January 20XX. Notice of intent to enter a contract for construction was entered into in December 20XX. Tenants were given three months' notice to vacate and vacated on 31 January 20XX Building contract was signed in March 20XX and the current house was demolished in June 20XX. The period of time between the property being vacated and demolished was relatively short.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 43-40