Capital Works: effect of input tax credits on construction expenditure

Is the construction expenditure that is used to calculate a capital works deduction under Division 43 of the Income Tax Assessment Act 1997 (ITAA 1997) reduced, pursuant to section 27-20 of the ITAA 1997, by the amount of any input tax credit entitlement related to that expenditure?

Yes. In calculating a deduction under Division 43 of the ITAA 1997, the construction expenditure is reduced, pursuant to section 27-20 of the ITAA 1997, by the amount of any input tax credit entitlement related to that expenditure.

The taxpayer bought a new house from a speculative builder and was entitled, under Division 43 of the ITAA 1997, to a capital works deduction in respect of it. The builder was entitled to an input tax credit in relation to their construction cost of the house.

The deduction allowed under Division 43 of the ITAA 1997 for capital works is calculated by reference to the amount of construction expenditure incurred by the entity that was the owner, lessee or quasi-owner of the capital works at the time the works were undertaken. Subsections 43-75(3) and 43-85(2) of the ITAA 1997 make capital works purchased from a speculative builder eligible for deduction in the hands of the first and subsequent purchasers. In these circumstances, it is the expenditure incurred by the builder that is used in calculating the deduction that may be available to such a purchaser.

In calculating the amount a taxpayer may be able to deduct, section 27-20 of the ITAA 1997 requires that an element in the calculation that is an amount paid or payable be treated as not including any amount of input tax credit related to that amount.

In terms of section 27-20 of the ITAA 1997, the calculation of a deduction under Division 43 of the ITAA 1997 is an amount the taxpayer may be able to deduct. The construction expenditure incurred by the builder is an amount paid or payable and, in turn, is an element in the calculation. There is an input tax credit related to the payment because the section only requires that 'any' input tax credit be related to the payment.

It follows that the construction expenditure used in calculating the deduction under Division 43 of the ITAA 1997 is reduced, under section 27-20 of the ITAA 1997, by the amount of any input tax credit entitlement of the builder in relation to their construction expenditure on the building.