Capital Works: calculation of deduction - number of days used - leap year

Is the number of 'days used' in the formula in section 43-210 of the Income Tax Assessment Act 1997 (ITAA 1997) 366 if the taxpayer used their capital works in the requisite manner for the whole of the 2003-04 income year which is a leap year?

Yes. The taxpayer would use 366 for the component 'days used' in the formula in section 43-210 of the ITAA 1997 because that is the number of days in the 2003-04 income year that they used their capital works for the requisite purpose.

The taxpayer purchased a rental property in December 2002 that had been constructed in 1994. In a letter to the taxpayer, a supervising architect estimated the construction cost of the rental property for capital works deduction purposes to be $100,000.

During the whole of the 2003-04 income year the taxpayer owned and used the property solely for the purpose of producing assessable income. The 2003-04 income year was a leap year and, therefore, contained 366 calendar days.

Subdivision 43-F of the ITAA 1997 sets out how the amount of a capital works deduction under section 43-10 of the ITAA 1997 is calculated. For capital works begun after 27 February 1992, the calculation formulas are contained in section 43-210. These formulas include a reference to 'days used'.

Section 43-210 of the ITAA 1997 sets out a number of steps for calculating an amount of capital works deduction. Step 3 applies to the circumstances of this case and defines 'days used' as the number of days in the income year that: (a) you owned or were the lessee of that part of your area and used it in the 2.5% manner; or (b) you were the holder of that part of your area under a quasi-ownership right over land granted by an exempt Australian government agency or an exempt foreign government agency, and used that part of your area in the 2.5% manner.

As the capital works were used by the taxpayer in the requisite way for 366 days in the 2003-04 income year, that is the number of 'days used' to be used in the formula. The maximum deduction for the 2003-04 income year for the taxpayer is worked out as follows: ($100,000 * 366 * 0.025) / 365 = $2506

Although the deduction available in a leap year is potentially greater than that for other years, the deduction for any particular income year is limited to the undeducted construction expenditure for the capital works (see Step 6 of section 43-210 of the ITAA 1997). Similarly, the total deduction available under Division 43 of the ITAA 1997 cannot exceed 100% of construction expenditure for the particular capital works.