Capital Works: deduction for common property - Australian Capital Territory

Can the taxpayer claim a deduction, under section 43-10 of the Income Tax Assessment Act 1997 (ITAA 1997), in respect of capital expenditure for capital works forming part of the common property of an existing residential unit complex located in the Australian Capital Territory (ACT) as a result of the enactment of the Unit Titles Act 2001 (ACT) (UTA 2001)?

Yes. The taxpayer can claim a deduction, under section 43-10 of the ITAA 1997, in respect of qualifying capital expenditure for capital works forming part of the common property of an existing residential unit complex located in the ACT as a result of the enactment of the UTA 2001.

The taxpayer acquired a unit in a residential complex located in the ACT prior to 6 October 2001. The unit has been used to produce rental income since its acquisition. Construction of the complex commenced after 17 July 1985.

Under this type of strata title development, the owners corporation becomes the holder of an estate of leasehold in the common property on registration of the units plan. The unit owners are members of the owners corporation which is a separate legal entity with specified powers, authorities, duties and functions.

Common property is that part of a strata plan not comprised in any owner's lot and includes both fixed and moveable property and facilities intended for common use. The common property may include depreciating assets and buildings and other structures.

The enactment of the UTA 2001, with effect from 6 October 2001, resulted in the estate of leasehold in the common property, including existing common property, in strata title developments in the ACT being held by the owners corporation as agent for the unit owners as tenants in common. Under the former act, Unit Titles Act 1970 (UTA 1970), common property was held by the owners corporation (formerly body corporate) as trustee for the unit owners as tenants in common.

Broadly speaking, Division 43 of the ITAA 1997 provides a deduction for construction expenditure on capital works (including buildings) used for residential accommodation if the construction of the buildings commenced after 17 July 1985 and the capital works are used to produce assessable income. Construction expenditure does not include expenditure on plant (paragraph 43-70(2)(e) of the ITAA 1997).

More specifically, section 43-10 of the ITAA 1997 provides that an amount may be deducted for capital works for an income year if there is a construction expenditure area, a pool of construction expenditure for that area and 'your area' is used in a deductible way (including used to produce assessable income; section 43-140 of the ITAA 1997).

The deduction is available for 'your construction expenditure' which is that part of the pool of construction expenditure that is attributable to 'your area'. A construction expenditure area is the part of the capital works that, at the time construction expenditure was incurred, was or was to be owned or leased by the person incurring the expenditure (section 43-75 of the ITAA 1997).

For a lessee (including property owners in the ACT where land is held as leasehold from the Crown) 'your area' is the part of the construction expenditure area that has been continuously leased from the time of completion by the lessee who incurred the expenditure. If an earlier lessee incurred the expenditure, 'your area' is that part of the construction expenditure area that has been continuously leased from the time of completion by that lessee or successive assignees of the lease.

As the owners corporation has continuously held the estate of leasehold in the common property either as trustee or agent for the unit owners, the construction expenditure area related to a unit owner's interest in the capital works forming part of the common property will be treated as being continuously leased from the time of completion. After the enactment of the UTA 2001, the taxpayer may treat that part of the capital works forming part of the common property as 'your area'. The taxpayer may also treat so much of the pool of construction expenditure that reasonably relates to their interest in the common property as 'your construction expenditure'.

A deduction is, therefore, available to the taxpayer in respect of their interest in the common property where the requirements of Division 43 of the ITAA 1997 are otherwise met.

Note - This accords with the principles outlined in Taxation Ruling IT 2505. In accordance with those principles, deductions were available to the owners corporation only and not the unit owners PRIOR to the enactment of the UTA 2001.