ATO Interpretative Decision
ATO ID 2004/137
Income Tax
Capital Works: application of Division 43 - pre-1979 building - relocationFOI status: may be released
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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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 the taxpayer deduct an amount under Division 43 of the Income Tax Assessment Act 1997 (ITAA 1997) for the purchase price or original construction expenditure of a second hand house that is relocated to the taxpayer's land where it is subsequently altered and improved?
Decision
No. The taxpayer cannot deduct an amount under Division 43 of the ITAA 1997 for the purchase price or original construction expenditure of the house because it is a building that was begun in Australia before 21 August 1979 and Division 43 does not apply (paragraph 43-20(1)(a) of the ITAA 1997).
Facts
In the year ending 30 June 2003, the taxpayer was successful in a tender to purchase and remove a second hand timber house from a block of land. The amount paid by the taxpayer for the house was similar to the market value of second hand building materials. The house had been built prior to 21 August 1979.
The taxpayer paid a lump sum to a licensed builder to remove and relocate the house onto the taxpayer's block of land, so that it could be used as residential rental property.
The relocated house was subsequently placed on new stumps at the new location, with construction works then carried out to improve the house to a rentable state.
The house was available for rent after all of the construction activity was completed.
Reasons for Decision
Division 43 of the ITAA 1997 allows a deduction for certain construction expenditure on some income producing capital works. A deduction under this Division is dependent, among other things, on whether there are capital works to which the Division applies and whether the capital works have construction expenditure, as defined in section 43-70 of the ITAA 1997.
Subsection 43-20(1) states that Division 43 of the ITAA 1997 applies to capital works begun in Australian after 21 August 1979 and being a building, or an extension, alteration or improvement to a building.
A deduction for capital works under Division 43 of the ITAA 1997 is based on the amount of construction expenditure, rather than the acquisition costs of a capital work.
The relocation of the house does not alter the time when the capital works were constructed. The previously constructed building continues to exist, but has simply changed location.
As the house was built before 21 August 1979, it is a building that is a capital work to which Division 43 of the ITAA 1997 does not apply. Therefore, the taxpayer cannot deduct an amount for the original construction expenditure in respect of the relocated building.
As the taxpayer did not construct a new building, the purchase price, even though it was similar to the market value of second hand material, is not construction expenditure in respect of the relocated building, and therefore the taxpayer cannot deduct an amount for the purchase price of the relocated building.
However, the alterations or improvements carried out on the building at the new location are separate capital works from the relocated building. An amount for the construction expenditure in respect of these new capital works may be deductible under Division 43 of the ITAA 1997.
Date of decision: 2 February 2004Year of income: Year ended 30 June 2003
Legislative References:
Income Tax Assessment Act 1997
subsection 43-20(1)
paragraph 43-20(1)(a)
section 43-70
Division 43
ATO ID 2004/136 (withdrawn)
ATO ID 2004/138
ATO ID 2004/822
Keywords
Buildings
Removal & relocation expenses
Capital expenditure
Construction expenses
Date reviewed: 20 November 2014
ISSN: 1445-2782
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