1 Are you able to immediately deduct under Division 43 of the Income Tax Assessment Act 1997 (ITAA 1997) your share of the undeducted amounts of capital expenditure after voluntarily demolishing your rental property?
1 Yes. Question 2 Are you able to immediately deduct under Division 40 of the ITAA 1997 your share of the undeducted amounts of depreciation after voluntarily demolishing your rental property? Answer 2 Yes. Question 3 Are you able to deduct from your assessable income your share of the amounts incurred for the voluntary demolition of your rental property? Answer 3 No. This ruling applies for the following period: Year ended XX XXXXX 20XX The scheme commenced on: XX XXXXX 20XX
The property was constructed in 19XX, but improvements were made to the property after 26 February 1992. You and your spouse purchased the property as co-owners on a XX:XX basis. You signed the contract to purchase the property on XX XXXXX 20XX with the settlement taking place on XX XXXXX 20XX. You used the property as a rental property from XX XXXXX 20XX - XX XXXXX 20XX, to generate assessable income. You purchased the property as an investment property and rented the property for the entire period of ownership. You never used the property for personal use. You demolished the house on the property and built a new house after considering the age and condition of the building, deciding it was not economical to repair and renovate the house. You handed the property over to Company A for demolition on XX XXXXX 20XX. The property was demolished on XX XXXXX 20XX, with the demolition being completed on XX XXXXX 20XX. You obtained a depreciation report after you purchased the property from a licenced quantity surveyor, which provided valuations and the deductible building allowance and depreciation on chattels. The valuations are as follows:
• Total claimable building allowance - $XXX,XXX.XX • Total building allowance claim until XX XXXXX 20XX - $XX,XXX.XX • Balance - $XXX,XXX.XX • Total claimable depreciation on chattels - $XX,XXX.XX • Total depreciation claimed until XX XXXXX 20XX - $XX,XXX.XX • Balance - $XX,XXX.XX No proceeds from the demolition were received.
Income Tax Assessment Act 1997 subsection 43-20(2) Income Tax Assessment Act 1997 subsection 40-285(2) Income Tax Assessment Act 1997 section 43-40 Income Tax Assessment Act 1997 section 40-25 Income Tax Assessment Act 1997 paragraph 43-70(2)(b) Income Tax Assessment Act 1997 section 43-250 Income Tax Assessment Act 1997 section 43-255
Question 1 Are you able to immediately deduct under Division 43 of the Income Tax Assessment Act 1997 (ITAA 1997) your share of the undeducted amounts of capital expenditure after voluntarily demolishing your rental property? Answer 1 Yes. Detailed reasoning Taxation Ruling TR 97/25 Income tax: property development: deduction for capital expenditure on construction of income producing capital works, including building and structural improvements discusses deductions for capital expenditure in construction of income producing capital works, including buildings and structural improvements. Paragraph 18 states that the Commissioner considers that section 43-40 of the ITAA 1997 applies both to voluntary and involuntary destruction of capital works. Subsection 43-40(1) of the ITAA 1997 advises you can deduct an amount if all or a part of your area is destroyed in an income year and: (a) you have been allowed, or can claim, a deduction under this Division or former Division 10C or 10D of Part III of the Income Tax Assessment Act 1936 , for your area; and (b) there is an amount of un-deducted construction expenditure for your area; and
(c) you were using your area in the way that applied to it under Table 43-140(Current year use) immediately before destruction or if not, neither you nor any other entity used your area for any purpose since it was last used by you in that way. You have deducted construction expenditure and there are amounts that have not yet been deducted for construction expenditure. As the requirements of paragraph 43-40(1)(a) and (b) of the ITAA 1997 have been satisfied the issue to be considered is whether paragraph 43-40(1)(c) of the ITAA 1997 has been satisfied. Paragraph 43-40(1)(c) of the ITAA 1997 has two limbs. The first limb is satisfied if 'your area' was used immediately before the destruction in a way that applied to it under the table in section 43-140 of the ITAA 1997. The required use for a house constructed in time period three of the table is that the area is used for the purpose of producing assessable income. If it has not been used for this purpose, then the second limb allows a deduction if no entity has used the area for any purpose since it was last used by the taxpayer for the purpose of producing assessable income.
In determining if the requirement of paragraph 43-40(1)(c) of the ITAA 1997 are satisfied the meaning of 'immediately before the destruction' must be considered. It has been interpreted by the courts and the Commissioner applied this view in ATO Interpretive Decision ATO ID 2010/35 Income Tax Capital works: destruction and balancing deduction - using 'your area' immediately before destruction of capital works . The Commissioner's view is that 'immediately before' refers to a relatively short period of time between the last use of the area and its destruction. In your circumstances, the tenants vacated the property on XX XXXXX 20XX and demolition began on XX XXXXX 20XX. Therefore, the property was not used for the purpose of producing assessable income for the intervening period, which the Commissioner would regard as a reasonably short period of time. For the period between the tenant moving out and demolition commencing on the property, neither you nor any other party used the property for any purpose. Therefore, a deduction under subsection 43-40(1) of the ITAA 1997 is allowed for the construction expenditure that has not yet been deducted. Question 2
Are you able to immediately deduct under Division 40 of the ITAA 1997 your share of the undeducted amounts of depreciation after voluntarily demolishing your rental property? Answer 2 Yes. Detailed reasoning Section 40-25 of the ITAA 1997 allows a deduction for the decline in value or depreciation of a depreciating asset you hold, to the extent that the asset is used for a taxable purpose. Subsection 40-25(2) of the ITAA 1997 states that you must reduce your deduction by the part of the asset's decline in value that is attributable to your use of the asset, for a purpose other than a taxable purpose. Taxable purpose means for the purpose of producing assessable income. Subdivision 40-D of the ITAA 1997 may allow a balancing adjustment deduction in certain circumstances. Subsection 40-300(2) of the ITAA 1997 contains a table of the termination values of certain balancing adjustment events. Item 8 is where a depreciating asset is lost or destroyed and column three demonstrates that the termination value is the amount or value received or receivable under an insurance policy or otherwise for the loss of destruction.
Subsection 40-285(2) of the ITAA 1997 specifies that you can deduct an amount if: (a) a balancing adjustment event occurs for a depreciating asset you held: (i) whose decline in value you worked out under Subdivision 40-B; or (ii) whose decline in value you would have worked out under that Subdivision if you had used the asset and (b) the asset's termination value is less that its adjustable value just before the event occurred. The amount you can deduct is the difference between these amounts, and you can deduct it for the income year in which the balancing adjustment event occurs. In applying this to your circumstances, the depreciating assets that were contained with the property at the time of destruction were lost or destroyed. You did not receive an amount from the demolition company for the depreciating assets with the property. Therefore, as the amount you received for the depreciating assets is less that the opening adjustable value of the depreciating assets, subsection 40-285(2) of the ITAA 1997 will apply, and you can deduct the undeducted expenditure from the depreciating assets that were destroyed during the demolition.
Question 3 Are you able to deduct from your assessable income your share of the amounts incurred for the voluntary demolition of your rental property? Answer 3 No. Detailed reasoning Expenditure on demolishing existing structures is not an amount that can contribute to a deduction for capital works under section 43-10 of the ITAA 1997 as it is not construction expenditure (paragraph 43-70(2)(b) of the ITAA 1997). However, such an expenditure may be taken into account in calculating a deduction under section 43-40 of the ITAA 1997. The amount a taxpayer is entitled to deduct under section 43-40 of the ITAA 1997 is determined using the method statement contained in section 43-250 of the ITAA 1997. Under this method statement you are required to reduce your deduction where you have received or have a right to receive amounts for the destruction of the capital works. Section 43-255 of the ITAA 1997 provides that the amounts you have received or have a right to receive for the destruction of the capital works include: • an amount received under an insurance policy or otherwise for the destruction of the capital works, and
• an amount received for disposing of any property salvaged from the demolition, less any demolition expenditure incurred on the property. Thus, in calculating the balancing deduction under section 43-250 of the ITAA 1997, demolition expenditure acts to offset the lessening of a deduction that occurs because of the fact that an amount has been received for disposing of the destroyed capital works. ATO Interpretive Decision ATO ID 2003/833 Income Tax - Capital works: demolition expenditure and deduction for destruction considers an example where a taxpayer has $50,000 undeducted construction expenditure for a building, they incurred $5,000 in demolition costs and did not receive an amount for the destruction of capital works: Example 3 The taxpayer did not receive any amount for the destruction of the building, and did not receive any amounts for disposing of the destroyed building. The reduction amount calculated as being received under section 43-255 of the ITAA 1997 is zero. The $5,000 excess of demolition expenditure over the amount received for disposing of the destroyed building is not deductible under Division 43 of the ITAA 1997.
The balancing deduction under section 43-250 of the ITAA 1997 is $50,000 ($50,000-$0) In your case, you are not entitled to a deduction for the demolition expenses you incurred. As you received no amounts for the destruction of the capital works the demolition expenses will not act to increase the deduction available to you under section 43-40 of the ITAA 1997. In summary, you are able to claim a deduction for your share of the construction expenditure that has not yet been deducted. You are able to deduct your share of the undeducted expenditure from the depreciating assets that were destroyed as part of the demolition. However, you are not entitled to a deduction for the demolition expenses that you incurred being that you received no amounts for the destruction of the capital works and the demolition expenses will not allow an increase to the deduction that is available to you.