Claiming Deductions for Capital Works Replaced in Renovations

Question

Hi Julia
Earlier this year you replied to a question in relation to scrapping where a property investor renovates a newly acquired property and whether the investor is entitled to write-off the value of the original div 43 capital works.
In that case you referred to ATO ID 2010/35 with a final comment "note to qualify to scrap the item must be destroyed".
For me, ATO ID 2010/35, and perhaps inferred by your final note above, relates to capital works items "destroyed" ie by fire, natural disaster, etc and not by the property owner’s own hand.
With that in mind I pose the following question…
A property investor buys an investment property in 1996. The property was new at the time having been constructed in 1995/1996. The property is rented from 1996 til present. In 2011 the investor decides that the kitchen is looking tired and decides to renovate. The original kitchen joinery is dismantled, removed and taken to the dump and there is no salvage value. Is the investor entitled to claim an immediate deduction for the undeducted div 43 entitlements (say $6,250 assuming an original cost of $10,000 for the kitchen joinery less 15 years x $250/year claimed in previous tax returns)?
Simon Hanau
Redline Quantity Surveyors

Answer

Yes they are.
The relevant section number is below, as you can see it simply says destroyed. No requirements on how it is destroyed. Further ID 2010/35 discusses a situation where the taxpayer demolished the house intentionally to build a new one. While the write off wasn’t allowed this was because it was last used for private purposes, I am sure this ruling would have pointed out if the destruction had to be accidental. Here is the extract from ID 2010/35
Facts
The taxpayer acquired a house in mid 2004. It was listed with a property manager for holiday letting and was used for short term rentals throughout the period it was owned by the taxpayer.
The house was capital works as set out under subsection 43-20(1) of the ITAA 1997 and was the taxpayer’s ‘your area’ for the purposes of subsection 43-115(1) of the ITAA 1997. The taxpayer had claimed a deduction under subsection 43-10(1) of the ITAA 1997 in respect of the house. At the date of its destruction, there was an amount of undeducted construction expenditure for the house as worked out under Subdivision 43-G of the ITAA 1997.
In 2005, the taxpayer engaged the services of an architect to redevelop the site on which the house was located. The house was not let in the last few months before its destruction although it remained listed with a property manager. During this period, the taxpayer temporarily resided in the house on several occasions for weeks at a time in order to hold meetings with the architect, builder, and interior decorator. Several weeks before the house was demolished, the taxpayer sold their main residence and moved into the house. During this period, the taxpayer cleared it for demolition. The taxpayer moved out of the house just prior to its demolition.





CHAPTER 2 – LIABILITY RULES OF GENERAL APPLICATION
PART 2-10 – CAPITAL ALLOWANCES: RULES ABOUT DEDUCTIBILITY OF CAPITAL EXPENDITURE
Division 43 – Deductions for capital works
Subdivision 43-A – Key operative provisions
Operative provisions
SECTION 43-40 Deduction for destruction of capital works ITAA 36

43-40(1)
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 theIncome Tax Assessment Act 1936, for your area; and View history reference


(b) there is an amount of *undeducted construction expenditure for your area; and

(c) you were using your area in the way that applies to it under Table 43-140 (Current year use) immediately before the 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.
View history note
Hide history note
43-40(2)
The deduction is allowable in the income year in which the destruction occurs, and is calculated under section 43-250.
Note:
The effect of this provision is to allow you to deduct an amount in the income year in which the capital works are destroyed for all of your construction expenditure that has not yet been deducted. However, you must reduce the deduction by any insurance and salvage receipts.



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