Capital Works: undeducted construction expenditure - reduction attributable to period of non-deductible use

During a period that the capital works are not used in a deductible way, does the undeducted construction expenditure for your construction expenditure area, calculated under Subdivision 43-G of Division 43 of the Income Tax Assessment Act 1997 (ITAA 1997), take this period into account?

Yes. During a period that the capital works are not used in a deductible way, the undeducted construction expenditure for your construction expenditure area, calculated under Subdivision 43-G of Division 43 of the ITAA 1997, takes this period into account.

During the year of income the taxpayer owned a residential rental property that was constructed after 26 February 1992. From its purchase, the property was rented to tenants, or made available for rental, for the purpose of producing assessable income through deriving rental income.

During the year of income, the property became vacant. Instead of attempting to rent the property, the taxpayer sought to sell it. At the time of attempting to sell the property, the intended use of the property to produce assessable income through deriving rental income was discontinued.

In order to sell the property, it was placed on the market. Despite having the property available for sale for a number of months, the property did not sell. At the end of that period the property was once again made available for rental.

The undeducted construction expenditure for your construction expenditure area (your area) is the part of your construction expenditure you have left to write off (sections 43-230 and 43-235 of the ITAA 1997). Section 43-15 of the ITAA 1997 provides that the amount that you can deduct cannot exceed the amount of undeducted construction expenditure for your area.

For capital works constructed after 26 February 1992 the undeducted construction expenditure for your area is calculated under sections 43-230 and 43-235 of the ITAA 1997. The effect of the calculations required by these sections is that the undeducted construction expenditure for your area is taken into account, from the time when your area, or a part of it, was first used by an entity for any purpose after completion of the relevant construction, irrespective of whether or not an amount is deducted for the capital works for an income year.

The undeducted construction expenditure for your area is, broadly, the original construction expenditure for your area less the aggregate of amounts calculated at the rate of 2.5% per annum of that expenditure, from the time when the property, or a part of it, was first used by an entity for any purpose after completion of the relevant construction.

During the period that the property was for sale and was not available for rental it was not being used in a deductible way by the taxpayer. No deduction for the capital works is available to the taxpayer for that period under section 43-10 of the ITAA 1997. The taxpayer's undeducted construction expenditure continued to be taken into account for the whole of the income year, including during the period of non-deductible use.