Division 43 allows certain capital expenditure incurred on income producing buildings to be eligible for capital works deductions/building write-off. It is actually a capital allowance, and not a claim for depreciation. Subsequent owners can continue the same claim each year until the cost of construction of the building has been completely written-off for income tax purposes.
The types of capital works to which the building write-off applies include:
- Buildings used for accommodation e.g. hotels.
- Commercial, residential and industrial buildings.
- Structural improvements made to buildings including sealed roads, car parks, driveways, and retaining walls.
Depending upon the type of capital expenditure and when it was incurred, the cost of the building and other structural improvements may be deducted at either 2.5% or 4% a year. Generally, the 2.5% rate will apply where construction commenced after 15 September 1987.
The building write-off is based on the amount of ‘construction expenditure’ which is limited to the actual costs of construction, and not the purchase price of the building. Write-off commences the first day the building is used for income producing purposes after construction is complete.
For Capital Gains Tax (CGT) purposes, the cost base of the building must be reduced to the extent that the taxpayer claims, or was entitled to claim, a deduction for capital works under Division 43.