ATO Interpretative Decision
ATO ID 2003/703
Income Tax
Capital works: insurance proceeds - deduction for undeducted construction expenditure for building destroyedFOI status: may be released
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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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
What is the amount of the deduction that can be claimed under section 43-40 of the Income Tax Assessment Act 1997 (ITAA 1997) by a taxpayer where insurance proceeds received upon destruction of the taxpayer's building exceed that building's undeducted construction expenditure?
Decision
The amount of the deduction to which the taxpayer is entitled under section 43-40 of the ITAA 1997 is nil.
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.
Reasons for Decision
Section 43-40 of the ITAA 1997 allows a taxpayer to deduct an amount if all or part of their building is destroyed in an income year and:
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- they have been allowed or can claim a deduction for the building write off
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- the building was used for income producing purposes before it was destroyed, and
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- there is an amount of undeducted construction expenditure for the building.
The effect of this provision is to allow the taxpayer to deduct in the income year in which the building is destroyed, the amount of construction expenditure that has not yet been deducted. However, they must reduce the deduction by any insurance or salvage receipts received or receivable.
The amount deductible under section 43-40 of the ITAA 1997 is calculated by reducing the undeducted construction expenditure at the date of the building's destruction by the amount they received or have a right to receive for the destruction of the building (section 43-250 of the ITAA 1997).
As the insurance proceeds ($150,000) received by the taxpayer for the destruction of the building exceed the undeducted construction expenditure ($120,500), the amount available as a deduction under section 43-40 of the ITAA 1997 is nil.
Amendment History
| Date of Amendment | Part | Comment |
|---|---|---|
| 24 March 2016 | Issue | Correct grammatical error |
| Decision | Correct grammatical error | |
| 7 October 2004 | Reasons for Decision | Remove last paragraph of Reasons for Decision |
Year of income: Year ended 30 June 2002 Year ended 30 June 2003
Legislative References:
Income Tax Assessment Act 1997
section 43-40
section 43-250
Related Public Rulings (including Determinations)
Taxation Ruling TR 97/25
Taxation Ruling TR 95/35
ATO ID 2003/704
Keywords
Buildings
Building depreciation
Construction & real estate
Destruction of assets
ISSN: 1445-2782
| Date: | Version: | |
| 30 July 2003 | Original statement | |
| You are here | 24 March 2016 | Updated statement |
| 22 September 2017 | Archived |