Tax Facts - Capital Work Deductions

You can claim capital works deductions for construction costs for a rental property that satisfies certain conditions. When you start to have investment properties, you need to think about capital allowances, and you may need to find a depriciator to calculate for you.

Capital works deductions are income tax deductions that can be claimed for the expenses such as:

• building construction costs

• the cost of altering a building

• the cost of capital improvements to the surrounding property.

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What can you claim?

If you own a rental property, you may be able to claim a deduction for the construction costs of: buildings; extensions, such as a garage or patio; alterations, such as adding an internal wall, kitchen renovations or bathroom makeovers; structural improvements – such as a gazebo, carport, sealed driveway, retaining wall or fence.

Preliminary expenses such as architect fees, engineering fees, surveying fees, foundation excavation expenses and costs of building permits also form part of construction expenditure.

The rate of deduction, and the number of years you claim it for, are determined by the type of construction and the date construction commenced.

Limits to a claim

You can only claim a deduction for those periods during the year you used your rental property for income producing purposes, not when you used the property for private purposes.

Deductions for the decline in value of depreciating assets are available under the Uniform capital allowance (UCA) system. In addition to the rules for depreciating assets, deductions are allowed for certain other capital expenditure. 

Land, trading stock and most intangible assets (excluding exceptions such as intellectual property and in-house software) are not depreciating assets.

The decline in value is calculated by spreading the cost of the asset over its effective life, using one of two methods:

• Prime cost method – decline in value each year is calculated as a percentage of the initial cost of the asset

• Diminishing value method – decline in value each year is calculated as a percentage of the opening depreciated value of the asset.

For most depreciating assets, taxpayers can either self-assess the effective life, or use estimates published by the ATO. Taxpayers can recalculate, either up or down, the effective life of an asset if the circumstances of use change and the effective life initially chosen is no longer accurate. An improvement to an asset that increases its cost by 10% or more in a year may result in an obligation to recalculate the effective life of the asset.

The decline in value of certain depreciating assets with a cost or opening adjustable value of less than $1,000 can be calculated through a low-value pool. The decline in value for depreciating assets in the pool is calculated at an annual diminishing value rate of 37.5%.

Note: You can only claim a deduction for the capital works on residential rental properties if the properties were built after 17 July 1985.