Capital works: Construction expenditure - owner/builder travelling expenditure

Is the expenditure incurred by an owner/builder in travelling between home and the construction site of a rental property 'construction expenditure' as defined in subsection 43-70(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The travelling expenditure is not construction expenditure as defined in subsection 43-70(1) of the ITAA 1997 as the expenditure is not incurred in respect of the construction of capital works.

The taxpayer is a qualified civil engineer who purchased a house and subsequently relocated the house.

The taxpayer engaged individual tradesmen and builders to carry out some construction works to improve the house to a rentable condition.

During the construction period, the taxpayer travelled between home and the construction site in order to manage and supervise the work of the tradesmen and builders.

The house was available for rent after all of the construction activity was completed.

The construction works are capital works to which Division 43 of the ITAA 1997 applies.

A deduction under Division 43 of the ITAA 1997 for capital works is dependent, among other things, on whether there is construction expenditure for the capital works. Construction expenditure is defined in subsection 43-70(1) of the ITAA 1997 as 'capital expenditure incurred in respect of the construction of capital works'.

In this case, the travelling expenditure is capital in nature. However, to be construction expenditure, the expenditure must be incurred in respect of the construction of the capital works.

The context of the words 'in respect of the construction of capital works' in subsection 43-70(1) of the ITAA 1997 provides little guidance as to the intended meaning. However, the Explanatory Memoranda to the Bills (Income Tax Assessment Bill (No. 2) 1980 and Income Tax Assessment Bill 1983) which inserted former Divisions 10C and 10D into the Income Tax Assessment Act 1936 , state that construction costs include such preliminary expenses as architects' fees, engineering fees and the cost of foundation excavations.

This interpretation is consistent with the discussion of construction expenditure in Taxation Ruling TR 97/25. TR 97/25 added that some portion of indirect costs, such as the cost of facilities for construction workers, may be included in construction expenditure.

The types of construction expenditure mentioned in the Explanatory Memoranda and in TR 97/25 are all costs incurred in the actual constructing of capital works.

In this case, the purpose of incurring the travelling expenditure was to enable the taxpayer to get to the construction site. While at the construction site, the taxpayer managed and supervised the work of the tradesmen and builders. However, as the expenditure was not incurred by the taxpayer in actually constructing the capital works, it was not incurred 'in respect of the construction of the capital works'.

As the travelling expenditure was not incurred in respect of the construction of capital works, the expenditure is not construction expenditure as defined in subsection 43-70(1) of the ITAA 1997.

Date of Amendment Part Comment 21 November 2014 Reason for Decision Insert the word "former" when referring to Division 10C or 10D.

Date of Amendment | Part | Comment

21 November 2014 | Reason for Decision | Insert the word "former" when referring to Division 10C or 10D.