Capital works: deductions for current year use based on intended use at the time of completion of construction

Is the taxpayer entitled to deductions for capital works under Division 43 (Time periods 3 and 4 of Table 43-90) of the Income Tax Assessment Act 1997 (ITAA 1997), for construction expenditure incurred by an income tax exempt entity?

Yes, the taxpayer is entitled to deductions for capital works under Division 43 (Time periods 3 and 4 of Table 43-90) of the ITAA 1997, for construction expenditure incurred by an income tax exempt entity.

The taxpayer purchased a building from the Commonwealth Government. The building is leased back to the Commonwealth Government at commercial rates. Under section 50-25 (Item 5.21) of the ITAA 1997 the Commonwealth Government is a tax exempt body. Various capital works were completed between 18 July 1985 to 20 November 1987 and 21 November 1987 to 26 February 1992. These periods represent Time periods 3 and 4 in Table 43-90 of the ITAA 1997.

Division 43 of the ITAA 1997 provides deductions for buildings, structural improvements and environment protection works.

Section 43-10 of the ITAA 1997 states: ' (1) You can deduct an amount for capital works for an income year. (2) You can only deduct the amount if: (a) the capital works have a construction expenditure area; and (b) there is a pool of construction expenditure for that area; and (c) you use your area in the income year in the way set out in Table 43-140 (Current year use).'

For pre 1 July 1997 capital works, the construction expenditure must have been intended for the purposes specified in Table 43-90 of the ITAA 1997. The capital works must also actually be used in a deductible way as specified in Table 43-140 of the ITAA 1997 in the income year in which the deduction is claimed.

The taxpayer purchased a building from the Commonwealth Government and derives assessable income from the lease back to the Commonwealth Government. The construction expenditure incurred by the Commonwealth Government on the building was incurred for the intended purpose of producing exempt income (Table 43-90 of the ITAA 1997). The taxpayer's current year use is for the purpose of producing assessable income (Table 43-140 of the ITAA 1997).

Therefore, the taxpayer is entitled to claim deductions under Division 43 of the ITAA 1997.