Issue
What is the amount of the deduction that can be claimed under section 43-40 of the Income Tax Assessment Act 1997 (ITAA 1997) by a taxpayer where insurance proceeds received upon destruction of the taxpayer's building exceed that building's undeducted construction expenditure?
Decision
The amount of the deduction to which the taxpayer is entitled under section 43-40 of the ITAA 1997 is nil.
Facts
A taxpayer owned a rental property. Capital works deductions were claimed under Division 43 of the ITAA 1997 from the 1995-96 income year when the rental property was originally constructed. The property has always been used for income producing purposes.
The rental property was destroyed by fire in March 2002. The undeducted construction expenditure for the building at the date of destruction was $120,500. The total proceeds received from the taxpayer's insurance company for the construction of a new or replacement building were $150,000.
Reasons for Decision
Section 43-40 of the ITAA 1997 allows a taxpayer to deduct an amount if all or part of their building is destroyed in an income year and: • they have been allowed or can claim a deduction for the building write off • the building was used for income producing purposes before it was destroyed, and • there is an amount of undeducted construction expenditure for the building.
The effect of this provision is to allow the taxpayer to deduct in the income year in which the building is destroyed, the amount of construction expenditure that has not yet been deducted. However, they must reduce the deduction by any insurance or salvage receipts received or receivable.
The amount deductible under section 43-40 of the ITAA 1997 is calculated by reducing the undeducted construction expenditure at the date of the building's destruction by the amount they received or have a right to receive for the destruction of the building (section 43-250 of the ITAA 1997).
As the insurance proceeds ($150,000) received by the taxpayer for the destruction of the building exceed the undeducted construction expenditure ($120,500), the amount available as a deduction under section 43-40 of the ITAA 1997 is nil.
Amendment History
Date of Amendment Part Comment 24 March 2016 Issue Correct grammatical error Decision Correct grammatical error 7 October 2004 Reasons for Decision Remove last paragraph of Reasons for Decision
Date of Amendment | Part | Comment
24 March 2016 | Issue | Correct grammatical error
Decision | Correct grammatical error
7 October 2004 | Reasons for Decision | Remove last paragraph of Reasons for Decision