Capital works deductions for rental property

Capital works deductions for rental property

Rental property investors can claim capital works deductions for construction costs for a rental property, however there are limits imposed in relation to the dates such works were completed. The deductions are only available on residential properties built after 17 July 1985. Generally, up to 15 September 1987 the rate is 4% a year (over 25 years) and after then it is 2.5% (but over 40 years).

Residential property investors seeking capital works deductions need to remember that they can only make a claim for periods when the rental property was used for income producing purposes, not when used for private purposes.

Subsequent purchasers of a property can claim for the balance of the period, because unlike a depreciating asset there is no balancing adjustment on disposal of the property, unless the building is destroyed. The balance of any claim is passed on, on the same basis, to any later owners.

The seller of a property is required by legislation to provide the buyer with the cost of construction of the original building and any structural improvements. However, this does not always occur and there is no enforcement mechanism in the legislation. If it is not possible to determine the actual construction costs, it is allowable to obtain an estimate from a quantity surveyor or other independent qualified person. It is also permissible to claim a deduction for the cost of that estimate.

Capital works expenses incurred form part of the cost base of the property for capital gains tax purposes. If you claim a capital works deduction, this will need to be taken into account when working out a future capital gain or loss.

Constructive expenditure that can be claimed
Some costs that may be included in construction expenditure are:

Construction expenditure that cannot be claimed
Some costs that are not included in construction expenditure are:

Required Details
To make sure that you are eligible to make a capital works deduction claim, all of the following is required:

Adjustments to the CGT cost base
In calculating a capital gain or capital loss from a rental property, the cost base and reduced cost base of the property may need to be reduced to the extent that it includes construction expenditure that has been claimed or can be claimed as a capital works deduction.

However, the ATO states that it will accept that a taxpayer cannot deduct an amount for construction expenditure in respect of a rental property if the taxpayer:

This means that in working out a capital gain or loss arising from a CGT event happening in relation to the rental property, the taxpayer is not required to reduce the asset’s cost base by the amount not deducted under the capital works deduction rules in relation to the asset.

For professional advice please contact your accountant directly on 1300 447 007.