Capital Allowances: capital works - construction expenditure - preliminary expense

Is the capital expenditure incurred to meet a condition of a building permit, for the construction of holiday cabins, 'construction expenditure' as defined in section 43-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The capital expenditure incurred to meet a condition of a building permit, for the construction of holiday cabins, is 'construction expenditure' as defined in section 43-70 of the ITAA 1997 as the expenditure is incurred in respect of the construction of capital works.

The taxpayer derived assessable income from providing short-term accommodation in cabins constructed on their land. The cabins are capital works to which Division 43 of the ITAA 1997 applies.

The taxpayer obtained a development approval from the council for the construction of the cabins.

The development approval imposed a condition that the taxpayer construct, at their expense, road access works on public land adjoining the taxpayer's land (the 'condition').

The taxpayer constructed the cabins and incurred capital expenditure on the road access works to meet the development approval condition.

All legislative references are to the Income Tax Assessment Act 1997 unless expressed otherwise.

A deduction for capital works under Division 43 is based on the amount of construction expenditure. 'Construction expenditure' is defined in subsection 43-70(1) as capital expenditure incurred in respect of the construction of capital works. This definition is subject to the exclusions listed at subsection 43-70(2).

Taxation Ruling TR 97/25 identifies certain expenses that are included in construction expenditure. The ruling provides at paragraph 9 that construction expenditure includes preliminary expenses such as architect fees, engineering fees, foundation excavation expenses and costs of building permits. These expenses are accepted as being in respect of the construction of capital works.

In the present case, the development approval is a 'building permit' and the road access works must be completed to meet a condition of the building permit.

The capital expenditure incurred to meet a condition of a building permit is a cost of the building permit and as such is a preliminary expense as described in paragraph 9 of Taxation Ruling TR 97/25.