Capital allowances: deduction for capital works

Is a deduction under Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997) allowed for buildings that are capital works for which an amount could have been deducted under Division 43 of the ITAA 1997 if the buildings had been used in a deductible way?

No. A deduction is not allowed under Division 40 of the ITAA 1997 for capital works for which an amount could have been deducted under Division 43 of the ITAA 1997 if the capital works had been used in a deductible way.

The taxpayer incurred capital expenditure on constructing capital works in an income year as part of restoring two buildings it owns. The taxpayer did not carry on business or use the capital works for the purpose of producing assessable income in that income year.

Division 43 of the ITAA 1997 sets out the rules for deductions for capital works such as buildings and extensions, alterations or improvements to buildings. You can only deduct an amount under Division 43 of the ITAA 1997 for an income year if, among other things, you use your capital works in a deductible way in the income year. Capital works are used in a deductible way in an income year if they are used for the relevant purpose under section 43-140 of the ITAA 1997.

Subsection 40-45(2) of the ITAA 1997 ensures that Divisions 40 and 43 of the ITAA 1997 interact correctly by ensuring that depreciating assets that are capital works are not deductible under both Division 40 and 43 of the ITAA 1997. It does this by excluding from Division 40 of the ITAA 1997 those capital works for which an amount can, or could be deducted under Division 43 of the ITAA 1997. It also excludes from Division 40 of the ITAA 1997 those capital works for which you could deduct an amount under Division 43 of the ITAA 1997 had you used the capital works for the purpose relevant under section 43-140 of the ITAA 1997.

The taxpayer cannot deduct an amount for the buildings under Division 43 of the ITAA 1997 because it did not use them for the purpose relevant under section 43-140 of the ITAA 1997. However it would have been able to deduct an amount under Division 43 of the ITAA 1997 had they been used for the relevant purpose.

Therefore, the taxpayer cannot deduct an amount for the capital works under Division 40 of the ITAA 1997 because of the operation of subsection 40-45(2) of the ITAA 1997.