Where a new owner is unable to determine precisely the construction expenditure associated with a building, an estimate provided by an appropriately qualified person may be used. Appropriately qualified people include:
- a clerk of works, such as a project organiser for major building projects
- a supervising architect who approves payments at stages of projects
- a builder who is experienced in estimating construction costs of similar building projects
- a quantity surveyor.
Unless they are otherwise qualified, valuers, real estate agents, accountants and solicitors generally have neither the relevant qualifications nor the experience to make such an estimate.
Example: Capital works deductions
The Perth property acquired by the Hitchmans on 20 July 2002 was constructed in August 1991. At the time they acquired the property it also contained the following structural improvements.
Item |
Construction date |
|---|---|
Retaining wall |
September 1991 |
Concrete driveway |
January 1992 |
In-ground swimming pool |
July 1992 |
Protective fencing around the pool |
August 1992 |
Timber decking around the pool |
September 1992 |
In a letter to the Hitchmans, a supervising architect estimated the construction cost of the rental property for capital works deduction purposes at $115,800. This includes the cost of the house, the in-ground swimming pool, the protective fencing and the timber decking. Although the retaining wall and the concrete driveway are structural improvements, they were constructed before 27 February 1992. Therefore, they do not form part of the construction cost for the purposes of the capital works deduction and were not included in the $115,800 estimate.
The Hitchmans can claim a capital works deduction of 2.5% per annum of the construction costs. As they did not acquire the property until 20 July 2002, they can claim the deduction for the 346 days from 20 July 2002 to 30 June 2003. The maximum deduction for 2002-03 would be worked out as follows:
Construction cost × rate × portion of year = deductible amount
$115,800 × 2.5% × (346 ÷ 365) = $2,745
End of exampleThe cost of obtaining an appropriately qualified person's estimate of construction costs of a rental property is deductible in the year it is incurred. You make your claim for the expense, or your share of the expense if you jointly incurred it, at TaxPack question D10 Cost of managing tax affairs.
For more information about construction expenditure and capital works deductions, see Taxation Ruling TR 97/25 Income tax: property development: deduction for capital expenditure on construction of income producing capital works, including buildings and structural improvements.