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Is the taxpayer entitled to claim a capital works deduction of 2.5% under section 43-10 of the Income Tax Assessment Act 1997 (ITAA 1997) for the cost of installing a roof on the verandah of a residential rental property?

Yes. The taxpayer is entitled to claim a capital works deduction of 2.5% under section 43-10 of the ITAA 1997 for the cost of installing a roof on the verandah of a residential rental property.

The taxpayer owns a residential rental property that is used to produce assessable income.

During the year of income the taxpayer installed a roof on the verandah where no roof had previously been constructed. The roof provided additional protection to the tenants in the building. Construction took place over 4 weeks and was completed on 1 January.

The installation of the roof began after the 1997 year of income.

Division 43 of the ITAA 1997 provides an income tax deduction for capital works attributable to a construction expenditure area that is owned or leased by the taxpayer and used during the income year for the purposes of producing assessable income. Capital works includes buildings and structural improvements and also extensions, alterations or improvements to buildings and structural improvements.

To claim a capital works deduction, section 43-10 of the ITAA 1997 requires that: • the capital works has a construction expenditure area. The construction expenditure area of capital works that commenced after 30 June 1997, is the part of the capital works on which the construction expenditure was incurred and was owned or leased by the taxpayer (section 43-75 of the ITAA 1997); • there is a pool of construction expenditure for that area. The pool of construction expenditure is the amount of construction expenditure incurred on capital works that is attributable to the construction expenditure area (section 43-85 of the ITAA 1997); and • the construction area must be used in a deductible way. Table 43-140 in section 43-140 of the ITAA 1997 provides that for capital works which began after 30 June 1997, the area must have been used at some time during the year of income for the purposes of producing assessable income.

Subsection 43-25(1) of the ITAA 1997 provides that the rate of deduction for capital works which began after 26 February 1992 for a residential rental property is 2.5%. However, a deduction cannot be made prior to the completion of the capital works (section 43-30 of the ITAA 1997).

The taxpayer satisfies the conditions contained in section 43-10 of the ITAA 1997 as follows: • the construction expenditure area is the verandah area of the rental property which is owned by the taxpayer; • the pool of construction expenditure is the amount incurred to construct the roof over the verandah; and • the construction expenditure area was used by the taxpayer to produce assessable income.

The taxpayer is therefore entitled to a capital works deduction under section 43-10 of the ITAA 1997 for 2.5% of the cost of the construction of the roof. However, the deductible amount must be reduced to reflect the number of days from the date of completion to the end of the year of income. Accordingly, the amount deductible in the year of income is the cost of the roof multiplied by 0.025 multiplied by the number of days from 1 January to 30 June in the relevant year and dividing that amount by 365.