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Is a deduction for the decline in value available under Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997) for removable ceiling batts attached to a rental property?

No. A deduction for the decline in value is not available under Division 40 of the ITAA 1997 because removable ceiling batts attached to a rental property form part of the 'fabric' of the building and section 40-45 of the ITAA 1997 precludes Division 40 of the ITAA 1997 from applying to capital works that are deductible under Division 43 of the ITAA 1997.

A taxpayer owns a rental property. Construction for the rental property was started on 5 July 1997 and was completed on 15 December 1997. It became available for renting on 20 January 1998.

On 18 July 2002, the taxpayer incorporated into the roof of the rental property removable ceiling batts to provide insulation from the weather. They are placed in between the rafters in the roof.

Section 40-25 of the ITAA 1997 states that you can deduct an amount for the decline in value of a depreciating asset you hold to the extent that you use it for a taxable purpose.

The term 'depreciating asset' is defined in subsection 40-30(1) of the ITAA 1997. Removable ceiling batts are considered to be depreciating assets. However, subsection 40-45(2) of the ITAA 1997 provides that Division 40 of the ITAA 1997 does not apply to capital works to the extent that an amount is or could have been deductible under Division 43 of the ITAA 1997.

Ceiling batts are considered to be an integral part of a building and form part of the 'fabric' of the building. Ceiling batts would have no other function if they are not being placed or connected with the rest of the ceiling framework to form part of the ceiling which is an essential part of a building. Once installed ceiling batts become permanent fixtures to a building.

Plant is defined in section 45-40 of the ITAA 1997. A primary factor in determining whether a particular item is a unit of plant is its function. Mahoney J. in Macquarie Worsteds Pty Ltd v. Commissioner of Taxation 74 ATC 4121 at 4125; (1974) 4 ATR 334 at 338 said: 'To be plant, a thing of the kind here in question must be more than mere setting for the taxpayer's operations'.

It is considered that ceiling batts are not plant within the definition of section 45-40 of the ITAA 1997 because they do no more than provide a setting or environment within which income-producing activities are conducted. Note: A deduction under Division 43 of the ITAA 1997 for capital works expenditure is however available at the rate of 2.5%.