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ATO Interpretative Decision

ATO ID 2003/704

Income Tax

Capital works: deduction for capital works after rental property destroyed
FOI status: may be released

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CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Can a taxpayer deduct an amount for capital works under section 43-10 of the Income Tax Assessment Act 1997 (ITAA 1997) after the rental property was destroyed even though the taxpayer received compensation for the loss of rent from their insurance company until the new building was constructed?

Decision

No. The taxpayer cannot deduct an amount for capital works under section 43-10 of the ITAA 1997 when the rental property was destroyed as the taxpayer could not use their area (or their building) for the purpose of producing assessable income as required by Table 43-140 (Current year use) in section 43-140 of the ITAA 1997.

Facts

A taxpayer owned a rental property. Capital works deductions were claimed under Division 43 of the ITAA 1997 from the 1995-96 income year when the rental property was originally constructed. The property has always been used for income producing purposes.

The rental property was destroyed by fire in March 2002. The undeducted construction expenditure for the building at the date of destruction was $120,500. The total proceeds received from the taxpayer's insurance company for the construction of a new or replacement building were $150,000.

In addition, the taxpayer received weekly compensation for the loss of rent from their insurance company until the end of December 2002.

Reasons for Decision

Section 43-10 of the ITAA 1997 allows a taxpayer to deduct an amount for capital works for an income year if:

•
their capital works have a construction expenditure area
•
there is a pool of construction of expenditure for that area, and
•
they use that area in a deductible way as set out in Table 43-140 (Current year use).

[HISTORY: This ATO ID has been amended by replacing the phrase 'they incurred expenditure attributable to that area' in the reasons for decision with 'there is a pool of construction of expenditure for that area' in order to clarify the operation of section 43-10 of the ITAA 1997.]

Table 43-140 (Current year use) in section 43-140 of the ITAA 1997 sets out the various ways that an area can be used in order for it to be used in a deductible way for that income year. Common amongst the requirements of use for each time period is that an area is used in a deductible way if it is used to produce assessable income.

After the rental property was destroyed by fire in March 2002, the taxpayer could not use their area (or their building) in a deductible way as set out in Table 43-140 (Current year use). Therefore a deduction under Division 43 of the ITAA 1997 for the 2001-02 income year would not be available to the taxpayer for the number of days in that year the building was not present and was, therefore, not available for use in a deductible way as set out in Table 43-140 (Current year use).

Date of decision:  30 July 2003

Year of income:  Year ended 30 June 2002 Year ended 30 June 2003

Legislative References:
Income Tax Assessment Act 1997
   section 43-10
   section 43-140
   Division 43

Related ATO Interpretative Decisions
ATO ID 2003/703

Keywords
Building depreciation
Construction expenditure area
Depreciation of new buildings
Destruction of assets
Newly constructed buildings and structures
Pool of construction expenditure

Business Line:  Small Business/Individual Taxpayers

Date of publication:  8 August 2003

ISSN: 1445-2782

history
  Date: Version:
You are here 30 July 2003 Original statement
  15 May 2015 Updated statement
  22 September 2017 Archived

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