Capital works expenses you can claim as deductions against income can't be included in either:
- the cost base of an asset (including a structure or other capital improvement treated as a separate asset for capital gains tax purposes)
- the reduced cost base of an asset.
There are 2 exceptions to this rule:
- You acquired the asset at or before 7:30 pm (ACT time) on 13 May 1997 and incurred the capital works expense by 30 June 1999 – see the Guide to capital gains tax for more information about this situation.
- You were unable to claim a deduction because you didn't know the full amount or exact nature of the construction expense – you can include the expense in your cost base or reduced cost base.
Example: adjusting cost for capital works
Brett purchased a residential rental property on 1 July 2004 for $150,000.
- As part of the purchase he had non-deductible expenses of $20,000 for pest and building inspections, stamp duty and solicitor’s fees.
- Over the next few years, Brett incurred deductible expenses of $33,000 for interest on money borrowed, council rates and deductible (non-capital) repairs.
- In 2023 Brett decided to sell the property. Prior to the sale he spent $30,000 on major structural repairs to increase the value of the property. The repairs were completed on 1 October 2023.
- On 1 February 2024 he sold the property. The real estate agent’s fees and solicitor’s fees for the sale of the property totalled $12,500.
The purchasing expenses of $20,000 and sale expenses of $12,500 are capital costs and not deductible. These are added to the cost base of the property.
The deductible expenses of $33,000 are not added to the cost base because Brett is able to claim deductions for them.
Brett can claim a capital works deduction for the major structural repairs:
- at the depreciation rate for capital works of 2.5% per year
- for the period between completing the capital works and selling the property (124 days).
Therefore, Brett's deduction for the major structural repairs is:
- $30,000 × 2.5% × (124 days ÷ 366 days) = $254
When working out his cost base, Brett reduces the capital costs element by the amount that he was able to claim as a deduction:
|
Purchase price of property |
$150,000 |
|
Purchase-related costs |
$20,000 |
|
Capital costs (major structural repairs): $30,000 less capital works deduction ($254) |
$29,746 |
|
Sale-related costs |
$12,500 |
|
Cost base |
$212,246 |
End of example