ATO Interpretative Decision
ATO ID 2004/862
Income tax
Capital works: balancing deduction - treatment of insurance proceeds for destroyed capital works where proceeds received in later yearFOI status: may be released
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Under Division 43 of the Income Tax Assessment Act 1997 (ITAA 1997), if a taxpayer receives insurance proceeds in respect of the destruction of capital works that occurred in a previous year, can the taxpayer choose to offset the proceeds against the construction cost of the replacement capital works?
Decision
No. Under Division 43 of the ITAA 1997, section 43-250 of the ITAA 1997 provides that amounts received for the destruction of capital works are taken into account in working out any balancing deduction for those destroyed capital works. This does not change if the proceeds are received in a later year and applied towards the construction of replacement capital works.
Facts
The taxpayer purchased a residential rental property in 2001. They carried out extensive renovations during a period of three months from the purchase date to the time the property was first rented out.
Capital works deductions were claimed for the renovation expenditure under section 43-10 of the ITAA 1997. The taxpayer had entered into a contract of insurance over the property.
In the income year ended 30 June 2003, the property was completely destroyed as a result of an arson attack. Fire was a specified event in the insurance policy, but the fact of arson meant that payment of a claim by the insurance company was not certain.
At the time of preparing the income tax return for that income year, the taxpayer had not received any amount of insurance proceeds and the insurer had not determined any amount due to the taxpayer. At that time it was expected that, if the taxpayer received any insurance payout, it would not be until the income year ended 30 June 2005. The taxpayer's return was lodged prior to determination of the payout.
The taxpayer intended to use any insurance proceeds received for the destruction of the original capital works to build new capital works on the site.
Reasons for Decision
Section 43-40 of the ITAA 1997 allows a deduction up to the amount of undeducted construction expenditure at the time of destruction of capital works. This amount is calculated as set out in the formula in section 43-250 of the ITAA 1997, and is reduced by the amount of any insurance proceeds received in respect of the destruction of those capital works, or any right to receive such proceeds. If the proceeds are received at a later time, under section 43-250, this amount reduces the deduction for the destroyed capital works. The taxpayer may need to adjust the amount previously claimed as calculated under section 43-250.
The receipt of the insurance proceeds in a year after destruction of the capital works is in respect of the original capital works. The subsequent expenditure of those proceeds is in respect of the new capital works. Because section 43-250 of the ITAA applies, there is no basis in Division 43 of the ITAA 1997 on which the taxpayer can reduce a pool of construction expenditure for replacement capital works, by any portion of the insurance proceeds they received for the destruction of the original capital works, even though the insurance proceeds were used to finance the construction of the replacement capital works.
Date of decision: September 17 2004Year of income: Year ended 30 June 2003
Legislative References:
Income Tax Assessment Act 1997
Division 43
section 43-10
section 43-40
section 43-250
Related Public Rulings (including Determinations)
Taxation Ruling TR 97/25
ATO ID 2004/860
ATO ID 2004/861
ATO ID 2003/1086
Keywords
Capital expenditure
Construction expenditure area
Destruction of assets
Insurance
Pool of construction expenditure
ISSN: 1445-2782