If you own a rental property, it’s possible that you can claim capital works deductions for certain construction costs. A capital works deduction is effectively claiming a tax deduction for the cost of constructing a rental property over a period of time. This can apply to a property that you have purchased at any time or a builder may have a constructed for you.
The annual percentage of deduction to claim in your tax return, and the number of years you claim it for, are determined by the type of construction and the date construction commenced.
Capital works costs form part of the cost base of your property for capital gains tax purposes. If you choose to claim a capital works deduction, you will need to take this into account when you work out your capital gain or loss. Taking a capital works deduction will allow you to save tax now, but it will increase your capital gain, or reduce your capital loss in future.
Information you need to work out your claim
For the majority of rental properties, you can claim a capital works deduction for the cost of construction for 40 years from the date the construction was completed, residential property from 1985, commercial property from 1982. See the table below however for more detail on this.
To assess whether you are eligible to claim a tax deduction fort eh capital works, you need the following information:
- details of the type of construction (commercial, long-term residential, short-term residential), and
- the date construction commenced, and
- the date construction was completed, and
- the construction cost (1) (this is the cost to build, not the purchase price for a subsequent purchase of the property), and
- details of who carried out the construction work (builder), and
- date the property commenced being used by you for income producing purposes.
(1) If it isn’t possible to determine the actual construction costs, you can obtain an estimate from a quantity surveyor or other independent qualified person. You can claim a deduction for the fees you pay to obtain this estimate.
When can you claim a capital works deductions
A tax deduction can only be claimed for a period of time during the year that you used your rental property for income-producing purposes. You can’t claim a tax deduction if you live in the property (ie you use the property for personal purposes).
How do I claim a capital works deductions
A tax deduction for capital works is made in your tax return each year. There is a section in your tax return dealing specifically with rental properties called a “rental schedule”. You will need to work out the deduction based on the information above and table below and enter this amount in the rental schedule.
Construction types and the date of construction commencement
To be able to claim a capital works tax deduction in your rental schedule, construction work must have commenced after the date relevant to that type of construction in the table below.
The below table sets out the applicable rate of deduction and the time period over which you can claim the deduction depending on the type of construction. This table is taken directly from the ATO website.
Table: Capital works deductions for buildings and structural improvements
|Type of construction||Construction commenced after||Applicable years and deduction rate per year|
|You intend to use the building on completion to provide short-term accommodation to travellers in: apartment buildings in which you own or lease at least 10 apartments units or flats hotels motels guest houses with at least 10 bedrooms.||21/8/1979||22/8/1979 to 21/8/1984 – 2.5% 22/8/1984 to 15/9/1987 – 4% 16/9/1987 to 26/2/1992 – 2.5% (where the construction related to certain pre-16/9/1987 contracts, the rate is 4%) 27/2/1992 onwards – 4%|
|Building intended to be used on completion for non-residential purposes such as a shop or office.||19/7/1982||20/7/1982 to 21/8/1984 – 2.5% 22/8/1984 to 15/9/1987 – 4% 16/9/1987 onwards – 2.5%|
|Any building intended to be used on completion for residential purposes or to produce income.||17/7/1985||18/7/1985 to 15/9/1987 – 4% 16/9/1987 onwards – 2.5% (where the construction related to certain pre-16/9/1987 contracts, the rate is 4%)|
|Structural improvements intended to be used on completion for residential purposes or to produce income.||26/2/1992||27/2/1992 onwards – 2.5%|
|Environment protection earthworks intended to be used on completion for residential purposes or to produce income.||18/8/1992||18/8/1992 onwards – 2.5%|
|Any capital works used to produce income, even if they were not intended to be used for that purpose. For pre-1 July 1997 works only, the capital works must have been intended for use for specified purposes at the time of completion.||30/6/1997||The capital works must actually be used in a deductible way in the income year in which the deduction is claimed (see above onwards rates details for each type of construction).|
The tax deduction rate of 2.5% means that you can claim deductions for 40 years and 4% means for 25 years.
You can only start claiming capital works deductions can be from the date when construction of the relevant capital works is completed.
How do you know your construction cost?
You will need to provide evidence of the construction costs by either of the following:
- documents that show the construction costs such as receipts or a builders summary of costs, or
- a report written by an appropriately qualified person such as a quantity surveyor or other independent qualified person.
The following items are not part of the construction cost:
- the purchase price of the building
- the purchase price of the land prior to construction
- the insured cost of the building
- the replacement cost of the building
- landscaping is generally not a construction cost and treated differently to capital works
- In the case of an owner builder, your labour and expertise or any profit margin applied to the project.
How to get hold of the construction information you need
If you are involved in the construction you should make sure you maintain records that detail the construction costs. If you have engaged a builder, ensure that they maintain and provide to you adequate records.
In the case that you are not in possession of any records of the construction costs you will need to obtain this information from either the previous owner or an appropriately qualified person.
This could be any of the following:
- quantity surveyor
- clerk of works, such as a project organiser for major building projects
- supervising architect who approves payments at project stages
- builder with experience estimating construction costs of similar building projects.
You can claim a deduction for your costs of obtaining this information from an appropriately qualified person in the income year you pay it.
Capital allowance schedules and depreciation
If you do not have construction costs, a quantity surveyor report can also include a schedule of depreciable assets (capital allowances). You are able to claim a separate tax deduction for the decline in value of depreciating assets in a rental property:
- if you bought the rental property before 7.30pm (AEST) on 9 May 2017
- if the depreciating asset is brand new, you purchased it after 7.30pm (AEST) on 9 May 2017 whether you nought this as part of your brand new property or, you subsequently bought it for your existing rental property
- for property purchased on or after 7.30pm (AEST) on 9 May 2017 to provide residential accommodation, the property has to be brand new or substantially renovated to claim a deduction. Also, you can only claim a tax deduction for capital allowances if no one previously claimed any depreciation deductions on the asset, and
- either no one lived in the property when you acquired it, or
- if anyone lived in the property after it was built or renovated, you acquired it within six months of the property being built or renovated,
- the property does not provide residential accommodation, or
- the asset is used in carrying on a business, or
- the entity claiming depreciation is a:
- corporate tax entity
- superannuation plan other than a self-managed superannuation fund
- public unit trust
- managed investment trust
- unit trust or partnership whose members are any of the entities in this dot-point.
Selling a rental property where capital allowances have been claimed
If you are a seller of a property you should provide the buyer with a capital works schedule containing information to allow them to work out their capital works deduction if you both:
- are a vendor disposing of capital works begun after 26 February 1992, and
- you were able to claim a tax deduction for those capital works.
The notice should be provided within six months following the income year that the you dispose of the property or a further period allowed by us.
Can I claim past years if I have overlooked this?
A construction costs report can take some time to prepare, so try to obtain one as soon as possible. There are a number of quantity surveyors that you can use via a quick search.
If you obtain a report after you lodge your tax return, you can amend your tax return by a certain later date. There is a time limit on amending tax returns for which we have already issued a notice of assessment.
If you need help with working out if you need an amendment book a meeting and we can assist.
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