ATO Interpretative Decision

ATO ID 2003/703

Income Tax

Capital works: insurance proceeds - deduction for undeducted construction expenditure for building destroyed
FOI status: may be released

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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 a taxpayer's building exceed that building's undeducted construction expenditure?

Decision

The amount of the deduction to which the taxpayer is entitled to 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:

•
they have been allowed or can claim a deduction for the building write off
•
the building was used for income producing purposes before it was destroyed, and
•
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.

History note: The last paragraph of the 'Reasons for Decision' was removed on 7 October 2004

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 43-40
   section 43-250

Related Public Rulings (including Determinations)
Taxation Ruling TR 97/25
Taxation Ruling TR 95/35

Related ATO Interpretative Decisions
ATO ID 2003/704

Keywords
Buildings
Building depreciation
Construction & real estate
Destruction of assets

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
  24 March 2016 Updated statement
  22 September 2017 Archived

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