Limits to claiming capital works deductions
You can only claim a deduction for those periods during the year you used your rental property for income-producing purposes. You can't claim for the period you use the property for personal purposes.
Example: how to work out capital works deductions from the date construction starts
On 1 March 2024, Meg purchased a rental property for $300,000 and immediately rented it out. Meg obtained a report from a quantity surveyor stating:
Construction of the property commenced in February 2003.
The property is a residential townhouse.
Construction was completed in November 2003.
The townhouse was built by a developer.
The estimated cost of constructing the townhouse was $200,000.
Meg claims a capital works deduction in her 2024 tax return for her rental property based on the estimate of the construction costs she gets from the quantity surveyor. However, she only claims a deduction for that part of the year her property was used for an income producing purpose (1 March 2024 to 30 June 2024). The rate of deduction she claims was 2.5% as construction of her residential property started after 15 September 1987.
Her annual capital works deduction was calculated as follows:
$200,000 × 2.5% (see note) = $5,000
Note: See the date construction commenced for different rates of reduction.
As the property was only used for income producing purposes for 122 days in 2024, her 2023–24 claim was calculated as follows:
$5,000 × (122 ÷ 366) = $1,666
End of exampleWhat you need to know to work out your claim
As a general rule, you can claim a capital works deduction for the cost of construction for 40 years from the date the construction was completed. However, to make sure that you are eligible, you must have all of the following:
- details of the type of construction
- the date construction commenced
- the date construction was completed
- the construction cost (not the purchase price)
- details of who carried out the construction work
- details of the period during the year that the property was used for income producing purposes.
Capital works expenses you incur form part of the cost base of your property for capital gains tax purposes. If you claim a capital works deduction, you will need to take this into account when you work out your capital gain or loss.
If it isn't possible to determine the actual construction costs, you can obtain an estimate from a quantity surveyor or other independent qualified person. You can claim a deduction for the fees you pay to obtain this estimate.
For information about how capital works deductions affect the CGT cost base, see Cost base adjustments for capital works.
Types of construction and the date construction commenced
To be eligible to claim a capital works deduction, construction work must commence after the date relevant to that type of construction in the table below.
The amount you can claim for construction expenses depends on the type of construction and the date you start construction. Your capital works deductions can't exceed the construction expenses. This table shows the rate of deduction and the period over which you can claim the deduction depending on the type of construction.
Type of construction | Construction commenced after | Applicable years and deduction rate per year |
|---|---|---|
You intend to use the building on completion to provide short-term accommodation to travellers in:
| 21 August 1979 | 22 August 1979 to 21 August 1984 – 2.5% |
Building intended to be used on completion for non-residential purposes such as a shop or office. | 19 July 1982 | 20 July 1982 to 21 August 1984 – 2.5% |
Any building intended to be used on completion for residential purposes or to produce income. | 17 July 1985 | 18 July 1985 to 15 September 1987 – 4% |
Structural improvements intended to be used on completion for residential purposes or to produce income. | 26 February 1992 | 27 February 1992 onwards – 2.5% |
Environment protection earthworks intended to be used on completion for residential purposes or to produce income. | 18 August 1992 | 18 August 1992 onwards – 2.5% |
Any capital works used to produce income, even if they were not intended to be used for that purpose. | 30 June 1997 | The capital works must actually be used in a deductible way in the income year in which the deduction is claimed (see above onwards rates details for each type of construction). |
2.5% means that you can claim deductions for 40 years and 4% means for 25 years.
You can start claiming capital works deductions only when construction of the relevant capital works is completed.
Although you may be able to claim capital works deductions for your building costs, you may not be able to claim these deductions for certain costs such as for landscaping.
Construction cost
You must provide evidence of the construction costs by either of the following:
- precise documents that show the construction costs such as receipts
- a report written by an appropriately qualified person.
The following items can't be used as the construction cost:
- the purchase price of the building and land
- the insured cost
- the replacement cost.
If you were the owner builder
If you carried out the construction as an owner builder, the value of your contribution to the works does not form part of the construction cost. This includes:
- your labour and expertise
- any notional profit element – that is, an amount you might consider as a profit margin on the construction cost.
Obtaining the construction information
You should make sure you keep records that detail the construction costs whether:
- you carry out the construction
- you contract a builder to carry out the construction.
If you don't have a record of the construction costs (for example, where the vendor did not provide them) you will need to obtain this information from either the previous owner or an appropriately qualified person. This could be a:
- quantity surveyor
- clerk of works, such as a project organiser for major building projects
- supervising architect who approves payments at project stages
- builder with experience estimating construction costs of similar building projects.
You can claim a deduction for your costs of obtaining this information from an appropriately qualified person in the income year you pay it.
Quantity surveyor reports can also include a schedule of depreciable assets (capital allowances). You can claim a separate deduction for the decline in value of depreciating assets in a rental property:
- if you bought the rental property before 7:30 pm (AEST) on 9 May 2017 – it doesn't matter whether the property was brand new or not
- if the depreciating asset is brand new – purchased at or after 7:30 pm (AEST) on 9 May 2017
- as part of your brand-new property
- that you subsequently bought for your existing (non-new) property
- if you bought the property on or after 7:30 pm (AEST) on 9 May 2017 to provide residential accommodation, the property has to be brand new or substantially renovated if no one previously claimed any depreciation deductions on the asset, and
- either no one lived in the property when you acquired it, or
- if anyone lived in the property after it was built or renovated, you acquired it within 6 months of the property being built or renovated
- the property does not provide residential accommodation, or
- the asset is used in carrying on a business, or
- the entity claiming depreciation is a
- corporate tax entity
- superannuation plan other than a self-managed superannuation fund
- public unit trust
- managed investment trust
- unit trust or partnership whose members are any of the entities in this list.
You should provide the buyer with a capital works notice containing information to allow them to work out their capital works deduction if you both:
- are a vendor disposing of capital works begun after 26 February 1992
- were able to claim a deduction for those capital works.
The notice should be provided within 6 months following the income year that you dispose of the property or a further period allowed by us.
Where you don't use the property to gain rental income, the vendor disposing of the property doesn't need to provide the purchaser with a notice. In this situation, the purchaser can obtain an estimate, usually from an appropriately qualified person.
Remember to obtain your construction costs report as soon as possible, as these reports can take a long time to prepare. If you obtain a report after you lodge your tax return, you can amend your tax return by a certain later date. There is a time limit on amending tax returns for which we have already issued a notice of assessment.