ATO Interpretative Decision

ATO ID 2010/35

Income Tax

Issue

Is the use requirement in paragraph 43-40(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) satisfied in respect of a vacant house that was demolished, if before it was vacated, the house was used for private accommodation for a period since it was last used for the purpose of producing assessable income?

Decision

No. The use requirement under paragraph 43-40(1)(c) of the ITAA 1997 is not satisfied, in respect of a vacant house that was demolished, if before it was vacated, the house was used for private accommodation for a period since it was last used for the purpose of producing assessable income. A deduction is not available under section 43-40 of the ITAA 1997 for the undeducted construction expenditure for the house when the house is demolished.

Facts

The taxpayer acquired a house in mid 2004. It was listed with a property manager for holiday letting and was used for short term rentals throughout the period it was owned by the taxpayer.

The house was capital works as set out under subsection 43-20(1) of the ITAA 1997 and was the taxpayer's 'your area' for the purposes of subsection 43-115(1) of the ITAA 1997. The taxpayer had claimed a deduction under subsection 43-10(1) of the ITAA 1997 in respect of the house. At the date of its destruction, there was an amount of undeducted construction expenditure for the house as worked out under Subdivision 43-G of the ITAA 1997.

In 2005, the taxpayer engaged the services of an architect to redevelop the site on which the house was located. The house was not let in the last few months before its destruction although it remained listed with a property manager. During this period, the taxpayer temporarily resided in the house on several occasions for weeks at a time in order to hold meetings with the architect, builder, and interior decorator. Several weeks before the house was demolished, the taxpayer sold their main residence and moved into the house. During this period, the taxpayer cleared it for demolition. The taxpayer moved out of the house just prior to its demolition.

Reasons for Decision

Broadly, subsection 43-40(1) of the ITAA 1997 provides that you can deduct an amount if all or a part of your area is destroyed in an income year. However the deduction is subject to meeting the following conditions set out in paragraphs 43-40(1)(a) to 43-40(1)(c) of the ITAA 1997:

(a)

you have been allowed, or can claim, a deduction under Division 43, or Division 10C or 10D of Part III of the Income Tax Assessment Act 1936, for your area; and

(b)

there is an amount of undeducted construction expenditure for your area; and

(c)

you were using your area in the way that applies to it under Table 43-140 (Current year use) immediately before the destruction or, if not, neither you nor any other entity used your area for any purpose since it was last used by you in that way.

As the requirements of paragraph (a) and (b) have been satisfied the issue to be considered is whether the taxpayer has satisfied paragraph 43-40(1)(c) of the ITAA 1997.

Paragraph 43-40(1)(c) of the ITAA 1997 has two limbs. The first limb is satisfied if 'your area' was used immediately before the destruction in the way that applies to it under Table 43-140 of the ITAA 1997 (the required use for a house constructed in the relevant periods is use 'for the purpose of producing assessable income': see 'Time period 2' in Table 43-140). If not, the second limb allows a deduction if no entity has used the area for any purpose since it was last used by the taxpayer for the purpose of producing assessable income.

Therefore, the requirements of paragraph 43-40(1)(c) of the ITAA 1997 establish that the threshold condition that must be satisfied before a deduction is allowed is that the last use of the capital works was for the required purpose (in this case, the purpose of producing assessable income).

In considering if the requirements of paragraph 43-40(1)(c) of the ITAA 1997 are satisfied the meaning of 'immediately before the destruction' must be considered. The provisions of section 43-160 of the ITAA 1997 are also relevant in this consideration. That section provides that a part of your area is taken to be used, for use or available for use for a particular purpose at a time if, at that time:

•

it was maintained ready for use for that purpose, and

•

it was not used or for use for any other purpose, and

•

its use or intended use for that purpose had not been abandoned.

The expression 'immediately before' was considered by Hill, Finn and Sackville JJ in Macquarie Health Corporation Ltd & Ors v. FC of T (1999) 43 ATR 650; 2000 ATC 4015. Their Honours stated at ATR 673 and ATC 4035-4036 that:

The term "immediately before", like other expressions incorporated into statutes, must take its meaning from the statutory context:

R v Justices of Berkshire (1878) 4 QBD 469 at 471, per Cockburn CJ; Loizos v Carlton and United Breweries Ltd (1994) 117 FLR 135 at 137-139 (S Ct NT, CA), per Kearney J. In Litster v Forth Dry Dock and Engineering Co Ltd (In Receivership) [1990] 1 AC 546, Lord Oliver observed (at 567) that

"[t]he expression 'immediately before' is one which takes its meaning from its context, but in its ordinary signification it involves the notion that there is, between two relevant events, no intervening space, lapse of time or event of any significance. If, for instance the question is whether a deceased person was seized of property immediately before his death, attention is focused upon the very instant at which the death occurred."

In Litster itself, his Lordship considered that the expression "employed immediately before the transfer" required the Court to consider whether the contract of employment was subsisting at the moment of transfer: at 575. In other cases, of which Loizos gives examples (at 138-139), the expression has been construed as encompassing a relatively short interval of time between the two identified events.

In the context of paragraph 43-40(1)(c) of the ITAA 1997, immediately before refers to a relatively short period of time between the last use of your area and its destruction. In this case, the house was not let in the last few months before its destruction. This and the activities undertaken in preparation for its destruction as well as the taking up of residence prior to destruction show that the taxpayer's use, or intended use, of the house for the purpose of producing assessable income had been abandoned in the period leading up to the destruction. Therefore, the house was not used for the purpose of producing assessable income immediately before the destruction. For the same reasons, the house cannot, under section 43-160 of the ITAA 1997, be taken to be used for the purpose of producing assessable income immediately before its destruction. Accordingly, the first limb of paragraph 43-40(1)(c) of the ITAA 1997 is not satisfied.

As the house was not used for the purpose of producing assessable income immediately before the destruction, paragraph 43-40(1)(c) of the ITAA 1997 can only be satisfied if no entity has used the house for any purpose since it was last used by the taxpayer for the purpose of producing assessable income (that is, the last use of the house must be for the purpose of producing assessable income). In this case the house was last used to provide private accommodation for the taxpayer. Therefore, the second limb of 43-40(1)(c) of the ITAA 1997 is also not satisfied.

Accordingly, a deduction is not available under section 43-40 of the ITAA 1997 for the undeducted construction expenditure following its demolition.

Year of income:  Year ended 30 June 2006

Legislative References:
Income Tax Assessment Act 1997
   subsection 43-10(1)
   subsection 43-20(1)
   section 43-40
   subsection 43-40(1)
   paragraph 43-40(1)(c)
   paragraph 43-40(1)(a)
   paragraph 43-40(1)(b)
   section 43-160
   subsection 43-115(1)
   Table 43-140
   Subdivision 43-G
   Division 43

Case References:
Macquarie Health Corporation Ltd &amp Ors V FC of T
   2000 ATC 4015
   43 ATR 650

Related ATO Interpretative Decisions

Keywords
Deductions & expenses
Construction expenditure area

Siebel/TDMS Reference Number:  5428168

Business Line:  Small Business/Individual Taxpayers

Date of publication:  12 February 2010

ISSN: 1445 - 2782