division 40 and division 43 basics · division 40 and division 43 basics page 2 of 19 15/02/17...

Division 40 and Division 43 Basics

of 19 15/02/17

2. Capital Works – Division 43 References

• Division 43 of the Income Tax Assessment Act 1997 - http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s43.1.html

• “Rental properties 2016” -

https://www.ato.gov.au/uploadedfiles/content/mei/downloads/rental-properties-2016.pdf

• Taxation Ruling TR 97/25 “Income tax: property development:

deduction for capital expenditure on construction of income producing capital works, including buildings and structural improvements” - http://law.ato.gov.au/atolaw/view.htm?DocID=TXR/TR9725/NAT/ATO/00001

• Taxation Ruling TR 2004/16 “Income tax: plant in residential rental

properties” - http://law.ato.gov.au/pdf/pbr/tr2004-016.pdf

• Taxation Ruling TR 97/23 “Income tax: deductions for repairs” - http://law.ato.gov.au/atolaw/print.htm?DocID=TXR%2FTR9723%2FNAT%2FATO%2F00001&PiT=99991231235958&Life=19971203000001-99991231235959

• “Holiday homes” - https://www.ato.gov.au/General/Property/In-

detail/Holiday-homes/

2.1 A brief introduction to Division 43 Section 43-1 of the Income Tax Assessment Act 1997 states:

“You can deduct certain capital expenditure on assessable income producing buildings and other capital works. This Division sets out the rules for working out those deductions.”

And it is important that there is a way to deduct this expenditure. Buildings and capital works will not generally be “depreciating assets” under Division 40

Ken Mansell [email protected] www.taxrambling.com 0429 566 516

http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s43.1.html

http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s43.1.html



http://law.ato.gov.au/atolaw/view.htm?DocID=TXR/TR9725/NAT/ATO/00001

http://law.ato.gov.au/atolaw/view.htm?DocID=TXR/TR9725/NAT/ATO/00001

http://law.ato.gov.au/pdf/pbr/tr2004-016.pdf

http://law.ato.gov.au/atolaw/print.htm?DocID=TXR%2FTR9723%2FNAT%2FATO%2F00001&PiT=99991231235958&Life=19971203000001-99991231235959



https://www.ato.gov.au/General/Property/In-detail/Holiday-homes/

https://www.ato.gov.au/General/Property/In-detail/Holiday-homes/

mailto:[email protected]

http://www.taxrambling.com/


of 19 15/02/17

(defined as “A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used”). Even if they were, in section 40-45, Division 40 depreciation deductions are denied where Division 43 deductions can be claimed… “This Division does not apply to capital works for which you can deduct amounts under Division 43”. So if you pay for capital expenditure on buildings and capital works that are used to produce assessable income, the only deduction you can get is through Division 43.

In summary, Division 43 permits a deduction for some, but not all, capital works expenditure, at the rate of 2.5% or 4% each year, depending on the use of the capital works and the time when the capital works commenced.

To determine whether a taxpayer is entitled to a Division 43 deduction, there are three important questions.

QUESTION 1: Does the taxpayer own or lease “capital works” that are used for income producing purposes and qualify for deductions under Division 43? QUESTION 2: Has someone incurred construction expenditure in relation to the capital works? QUESTION 3: Is that construction expenditure permitted to be deducted by the taxpayer because it is in respect of capital works owned or leased by the taxpayer in a specified way?

If we pass these three questions we then can work out what we can claim. So lets try to answer the first question by working out… 2.2 What are capital works? Section 43-20 defines the types of capital works that this Division applies to. These include:

• Buildings, or extensions, alterations or improvements to buildings, in and out of Australia (subsection 43-20(1));

• Structural improvements, or extensions, alterations or improvements to structural improvements, in and out of Australia (subsection 43-20(2)); and


of 19 15/02/17

• Earthworks, or extensions, alterations or improvements to earthworks, if they are constructed as a result of carrying out of “environmental protection activities” (subsection 43-20(5)).

Some examples of structural improvements the Division 43 applies to are:

• Sealed roads, sealed driveways, sealed car parks, sealed airport runways, bridges, pipelines, lined road tunnels, retaining walls, fences, concrete or rock dams and artificial sports fields; and

• Earthworks that are integral to the construction of a structural improvement, for example, embankments, culverts and tunnels associated with a runway, road or railway.

Some examples of structural improvements the Division 43 does not apply to are:

• Earthworks that:

◦ Are not integral to the installation or construction of a structure; and

◦ Are permanent (assuming they are maintained in reasonably

good order and condition); and ◦ Can be economically maintained in reasonably good order and

condition for an indefinite period; for example, unlined channels, unlined basins, earth tanks and dirt tracks; or

• Earthworks that merely create artificial landscapes, for example, grass golf course fairways and greens, gardens, and grass sports fields

Examples of these types of capital works in relation to rental properties (from the Commissioner’s guide to Rental Properties) include:

• A building or an extension, for example, adding a room, garage, patio or pergola

• Alterations, such as removing or adding an internal wall, or

• Structural improvements to the property, for example, adding a gazebo, carport, sealed driveway, retaining wall or fence.

And just to finish off possible capital works, in order for earthworks to be eligible for Division 43 deductions:

• They must be constructed as a result of carrying out of environmental protection activities, which are broadly preventing, fighting or


of 19 15/02/17

remedying pollution; or treating, cleaning up, removing or storing waste. In either case, the pollution or waste must result, or be likely to result, from an income-producing activity of the taxpayer or from a business activity of the previous owner of the business on the polluted site, or be on the site of the taxpayer’s income-earning activity;

• They can be economically maintained in reasonably good order and condition for an indefinite period; and

• They are not integral to the construction of capital works. 2.3 The right type of Capital Works at the right time? Not only do you have to find the right type of capital works, you need to ensure it is the right type of Capital Work, and its construction started at the right time. Have a look at the following table…

First thing to notice is since 1997 any income producing Capital Work as we discussed above is the right type of capital work. But where you are looking at older buildings, maybe rental properties that are pre 1985, it will not be the right type of capital work. So no deductions!


of 19 15/02/17

Other things to note, Division 43 deductions became available for buildings outside Australia only if the capital works commenced after 21 August 1990. Also, note that in the case of environmental protection earthworks, the relevant test is not whether the capital works commenced after 18 August 1992, but rather whether the relevant expenditure was incurred after that date. 2.4 Deductible capital works? We have capital works, that are the right type of capital works at the right time but we are not quite there yet. According to the first substantive section in Division 43 (section 43-10) we need three more things:

• The capital works must have a construction expenditure area;

• There is a pool of construction expenditure for that area; and

• The taxpayer must use its area in the way set out in the Division. 2.4.1 Construction expenditure area Each time that an entity constructs capital works, a construction expenditure area comes into existence and is separate from other construction expenditure areas. For capital works beginning after 30 June 1997, the construction expenditure area is simply the part of the capital works on which construction expenditure has been incurred, provided that the expenditure is incurred by an entity that is to own or lease the capital works. Further, certain quasi-ownership rights may also qualify for this purpose. 2.4.2 Construction expenditure A pool of construction expenditure is the amount of construction expenditure incurred by an entity on capital works that is attributable to the construction expenditure area. This is just the actual cost incurred in relation to the construction of capital works, including preliminary expenses such as architect’s fees, engineering fees, surveying fees, building fees, costs associated with obtaining the necessary building approvals and the cost of foundation excavations. They also include the cost of structural features that are an integral part of the income-producing buildings or income-producing structural improvements, such as atriums and lift wells.


of 19 15/02/17

COMMON MISTAKE: THE ACTUAL COST AND NOT THE SUBSEQUENT PURCHASE PRICE. Section 43-70 states clearly that the construction expenditure is the ACTUAL COSTS of construction. In Taxation Ruling TR 97/25 the Commissioner states that… “it is not always possible for the purchaser of a building to establish the actual cost of the building, particularly in circumstances where the builder or previous owner becomes bankrupt or is not able, for other reasons, to provide the information.” He then goes on to state that in these circumstances, he will “accept a building cost estimate by an appropriately qualified person.” The only reason the Commissioner states that QSs can do this work is that the average taxpayer cannot estimate the cost of construction of a building in prior years. Anyone can work out what they paid for the building but only a QS can estimate its construction costs many years ago. And finally the Commissioner states in his rental property guide “Remember, none of the following can be used as the construction cost: the purchase price of the building and land, the insured cost or the replacement cost.”

It also excludes certain types of outgoings including:

• The cost of acquiring land (as it goes to the cost base of land and land generally does not depreciate in value);

• The cost of demolishing existing structures (as it goes to the cost base

immediately and possibly results in a deduction or capital loss, or a lower capital gain, depending on the taxpayer’s business);

• The cost of preparing a construction site (for example, clearing,

levelling, filling or draining) before carrying out excavation works;

• The cost of landscaping (note artificial landscapes are not capital works to which Division 43 applies);

• The cost of depreciable items like:

– Articles, machinery, tools and rolling stock; – Animals (except in a primary production business); – Fences, dams and other structural improvements on land used

for agricultural or pastoral operations; – Structural improvements on land used for forestry plantations; – Structural improvements used wholly for operations relating

directly to the extraction of certain fruits of the sea that are situated at or near a port or harbour from which the business is conducted;

– Structural improvements provided for the accommodation of employees, tenants or sharefarmers who are engaged in or in


of 19 15/02/17

connection with the activities referred to in the three preceding bullet points; and

– Plumbing fixtures and fittings, including wall and floor tiles, provided by the taxpayer mainly for employees or children of employees in a business carried on by the taxpayer (or an entity in the same wholly owned group);

• The cost of property for which a deduction is otherwise allowable (or

would be allowable if the property was for use for the purpose of producing assessable income) under various other parts of the Tax Act;

• The following types of expenditure for which a deduction is otherwise

allowable (or would be allowable if property had been used for the purpose of producing assessable income) under various other parts of the Tax Act:

– Mining capital expenditure; – Transport capital expenditure; – Expenditure on a forestry road in connection with carrying on a

timber operation for a taxable purpose; and – Expenditure for the construction or acquisition of a timber mill

building;

• The cost of property for which a deduction is otherwise allowable (or would be allowable if the property was for use for carrying on research and development activities (but only if the works or use started before 21 November 1987); and

• Heritage conservation expenditure that is rebatable under the Tax Act.

Taxation Ruling TR 97/25 states that indirect costs should be allocated between elements to which they relate in the same proportion that the direct costs of those elements bear to one another. So some indirect costs might be construction expenditure. The ruling also states that where any other method is employed, it must be justified by sound accounting principles and practical considerations. Example from the Ruling

A company undertakes the construction of a building on land it owns with a view to retaining it as an investment. In the course of constructing the building, the company incurs direct construction expenditure in respect of the building, plant and landscaping totalling $87,000, $6,000 and $12,000 respectively, and pays a further sum of $9,000 to furnish the building. In addition, it incurs costs of $1,000 for facilities erected on the building site for the use of all construction workers. 37. The cost of the facilities for the construction workers is considered to be an indirect expense that is applicable to the cost of plant, the building


of 19 15/02/17

and landscaping works. In calculating the construction expenditure of the building for the purposes of Division 43, this indirect cost is allocated between plant, buildings and other works in the ratio that the direct costs of those elements bear to one another. The cost of the furniture is not included for the purposes of apportionment because there is no nexus between the furniture and the indirect costs. 38. The capital expenditure on each element of the construction project is:

Allocation of indirect expenses is calculated as follows: Building: (87,000 * 1,000)/(87,000 + 6,000 + 12,000) = $829 Plant: (6,000 * 1,000)/(87,000 + 6,000 + 12,000) = $57 Landscaping: (12,000 * 1,000)/(87,000 + 6,000 + 12,000) = $114

2.4.3 Construction expenditure and the speculative builder In TR 97/25 the Commissioner has stated…

“12. Where a taxpayer buys capital works from a speculative builder, that builder's contributions to capital works (such as labour and expertise) and any profit element on the sale of the capital works do not form part of construction expenditure for the purposes of Division 43 in relation to those works.”

For example:

Guiseppe is a builder and land developer who constructs dwellings of standard design either on land that he owns, for sale as a house and land package, or on the client's own site. One of his more popular designs is the 'Outback Manor' that costs him $95,000 to construct but has a list price of $110,000 when sold from a display village. Mary, an investor, contracts for this house to be built on a site she owns. Upon completion she lets the house. Mary can deduct an amount under Division 43 based on the construction cost of $110,000, which was the cost to her of constructing the building.


of 19 15/02/17

Guiseppe owns a site near Mary's site that is intended for speculative development and sale as a house and land package. Because of the time he can save by overseeing two construction projects in close proximity, he decides to undertake the construction of buildings on Mary's and his own land concurrently. After the house on his land is completed, Guiseppe decides to retain it for some time, as the real estate market is sluggish and he cannot get the price he wants. He lets the property. Guiseppe is not entitled to a deduction under Division 43 as he has incurred expenditure on revenue account rather than capital account in constructing this building. After two years, house prices improve and he sells the property to Tom, an investor. In accordance with sections 43-75 and 43-85 of the 1997 Act, expenditure on the construction of the house is assumed to be capital expenditure because the house had been purchased from an entity that is not an associate and it had been built as part of a business of constructing houses for sale. Therefore, Tom is entitled to claim a deduction for capital expenditure on the building under Division 43, based on the $95,000 that it cost Guiseppe to construct the house. No amount for Guiseppe's time and profit margin for constructing the building is included in the calculation of the construction expenditure.

2.4.4 Construction expenditure exceeds purchase price In TR 97/25 the Commissioner has stated…

17. Where a taxpayer purchases capital works at a price lower than the construction expenditure for those works, the deduction for the capital works is calculated by reference to the construction expenditure, not the purchase price.

For example:

Damian is a property developer who constructs a condominium of 38 units in a popular holiday resort. All units are intended for sale. During the construction period, he sells 28 of the units off the plan. After completion of the project, real estate prices drop significantly and he decides to sell the last of the units below cost. David, an investor, buys one of the last units for $95,000. The actual construction cost of the unit to Damian was $105,000. David is entitled to a deduction under Division 43 based on construction expenditure of $105,000.

2.5 Must use its area… what type of ownership? First, a taxpayer can claim Division 43 deductions for the portion of the pool of construction expenditure that is attributable to the construction expenditure area that a taxpayer owns.


of 19 15/02/17

Second, a taxpayer can claim Division 43 deductions for construction expenditure that is:

• Incurred by the taxpayer in respect of a construction expenditure area that is leased by the taxpayer (or held by the taxpayer under a quasi-ownership right) and has been leased (or held) by the taxpayer continuously since the construction was completed; or

• Incurred by another lessee (or holder) of the construction expenditure area that is leased (or held) by the taxpayer and has been leased (or held) by that lessee (or holder), or an assignee of that lease or quasi-ownership right, continuously since the construction was completed.

2.6 Must use its area in a certain way Since 30 June 1997 the capital works have had to be used to gain assessable income (or undertake R&D). It is worth remembering that if you are not using the capital works the right way, there are no Division 43 deductions…

“You can only claim [Div 43] deductions for the period during the year that the property is rented or is available for rent.” ATO Rental Property Guide

But the asset has to be genuinely available for rent. The Commissioner has stated that factors that may indicate a property is not genuinely available for rent include:

• It is advertised in ways that limit its exposure to potential tenants – for example, the property is only advertised at your workplace or by word of mouth or outside annual holiday periods when the likelihood of it being rented out is very low;

• The location, condition of the property, or accessibility to the property, mean that it is unlikely tenants will seek to rent it;

• You place unreasonable or stringent conditions on renting out the property that restrict the likelihood of the property being rented out, including setting the rent above the rate of comparable properties in the area or placing a combination of restrictions on renting out the property (requiring prospective tenants to provide references for short holiday stays and having conditions like "no children" and "no pets").

• You refuse to rent out the property to interested people without adequate reasons.


of 19 15/02/17

But previously the rules were much more difficult… As shown in the table in section 43-140.

2.7 Now lets claim the Division 43 deduction! 2.7.1 Timing Capital works may commence when the first step in the construction phase starts (section 43-80). However, a deduction is not permitted until construction is completed, even though the works may be used in part prior to the completion of construction (section 43-30). 2.7.2 Rate of deduction Generally the rate is 2.5% straight-line depreciation of the construction costs until all the taxpayers who owned the capital works (or lease – see above) have had a chance to claim over the 40 years. This means every year, for 40 years, if the taxpayer is using the capital works in the right way, they can claim a Division 43 deduction of 2.5% of the original construction costs. However, in the past larger rates were available.


of 19 15/02/17

2.7.3 Calculating the Division 43 deduction Sections 43-200 to 43-220 set out formulae for the calculation of the Division 43 deduction. It is:

Construction expenditure x rate x Days used / 365 x Income producing %

Construction expenditure is the construction expenditure attributable to the capital works you own. Days used is the number of days in the income year that the taxpayer owned or leased or held (as applicable) the capital works area and used it in the manner giving rise to the relevant deduction rate (it is possible in some cases that both rates may apply in the one year); Rate is the relevant deduction rate (almost always 2.5%); and Income producing % is the extent to which the capital works area was used for income producing purposes (note special rules relating to hotel buildings and apartment buildings). 2.8 Undeducted Construction Expenditure It should reasonably obvious that the undeducted construction expenditure is the amount of the construction expenditure that is still available to be claimed as a deduction. This amount (generally) reduces by 2.5% of the initial construction expenditure each year. This is irrespective of whether the Capital


of 19 15/02/17

Works have been used in the appropriate way to be able to claim a Division 43 deduction. 2.9 Capital Works deductions increase Capital Gains Tax There is one problem in finding Division 43 deductions. In working out a capital gain or capital loss from a Capital Work, like 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 for which you have claimed or can claim a capital works deduction. You must exclude from the cost base of a CGT asset (including a building, structure or other capital improvement to land that is treated as a separate asset for CGT purposes) the amount of capital works deductions you have claimed or can claim in respect of the asset if:

• You acquired the asset after 7.30pm (by legal time in the ACT) on 13 May 1997, or

• You acquired the asset before that time and the expenditure that gave rise to the capital works deductions was incurred after 30 June 1999.

This will be the case for almost every Division 43 deduction claimed today. For example…

Zoran acquired a rental property on 1 July 1998 for $200,000. Before disposing of the property on 30 June 2014, he had claimed $10,000 in capital works deductions. At the time of disposal, the cost base of the property was $200,000. Zoran must reduce the cost base of the property by $10,000 to $190,000. This will increase his capital gain by $10,000.

Remember that Capital Gains are reduced by 50% for most assets owned for 12 months by an individual. So it is worth claiming Division 43 deductions – but only half as valuable as most people think. 2.10 Destruction of capital works If a taxpayer’s Capital Works is eligible for deductions under Division 43 and the capital works are destroyed, then a deduction is permitted for that Undeducted Construction Expenditure (section 43-245). However, if you receive an amount in the form of;

• An amount received under an insurance policy or otherwise for the destruction of that part; or


of 19 15/02/17

• An amount received for disposing of property that was included in that part of your area, less any demolition expenditure incurred on the property;

You will reduce the Undeducted Construction Expenditure by this amount. For example:

Lindsay operates a service station and garage. In 1989, he constructed a new lubrication/service bay. In 1997, due to new technology and increased business demand, the existing service bay is not adequate and he builds a larger lubrication/service bay that can accommodate more cars and also the latest tools and equipment required for the later model cars. After completing the new bay, he demolishes the 1989 extension and replaces it with a self-service car wash. In his return of income for the 1997-98 year, Lindsay can deduct an amount in respect of undeducted construction expenditure related to the 1989 extension under section 43-40 of the 1997 Act. The fact that the demolition is voluntary does not affect his entitlement to a deduction under that section.

2.11 Construction expenditure where original construction cost unknown

And this is where a QS comes in very handy… Subsection 262A(4AJA) of the 1936 requires the transferor of Capital Works to provide the transferee with information that enables the latter to determine any entitlement under Division 43. But this often does not happen Therefore, it is not always possible for the purchaser of a building to establish the actual cost of the building, particularly in circumstances where the builder or previous owner becomes bankrupt or is not able, for other reasons, to provide the information. In those circumstances, the Commissioner has indicated he will accept a building cost estimate by an appropriately qualified person (TR 97/25). An appropriately qualified person has expertise in the calculation of building construction costs and is likely to be accepted by a court or tribunal as an expert witness on the issue of calculating the cost of construction of the particular building. That expertise may have been acquired through a course of study or through relevant experience in providing building cost estimates over a significant period of time. The attainment of relevant professional qualifications or recognition by an appropriate professional association or organisation is indicative of expertise in this field.


of 19 15/02/17

Unless they are otherwise qualified, valuers, real estate agents, accountants and solicitors generally have neither the relevant qualifications nor experience to make such an estimate. Appropriately qualified people include:

• A quantity surveyor, who has expertise in the relevant type of construction;

• A clerk of works, such as a project organiser for major building

projects;

• A supervising architect who approves payments at each stage in major projects and who may approve individual payments to subcontractors in smaller projects; or

• A builder who is experienced in estimating construction costs of similar

building projects. The Commissioner does not accept the use of published building cost guides to estimate the actual cost of construction, unless they are used merely as a guide by an appropriately qualified person. Building cost guides typically provide a cost per square metre of a range of building projects, based on industry averages. They are not sufficiently specific to the particular building being valued. 2.12 What is Capital Works, what is a depreciable asset, what is a repair and what do I get no deduction for at all? The final and hardest thing about Division 40 deductions is establishing whether:

• There is an immediate deduction available as the costs are a repair;

• There is deduction over an effective life (much less than 40 years) under the depreciation deductions in Division 40;

• There is a Capital Works deduction under Division 43: or

• The costs just go into the cost base of the asset and therefore reduce

any Capital Gains tax that will be paid in the future when the asset is sold.

2.12.1 Immediate deductions and no deductions This paper is about tax depreciation but before we consider what is depreciable under Division 40 or under Division 43 we nee to understand that not every cost falls into these two sections. This is best shown through a series of examples:


of 19 15/02/17

• The fence is damaged on a rental property and the owner spends money on repairing it. You see the cost the owner has spent, include it in the tax depreciation schedule and depreciate it over 40 years at 2.5%. But it is a repair and should have been claimed 100% in the year in which it was incurred.

• Legal costs and stamp duty was paid to buy the rental property. You apportion this cost across the building and the depreciable assets so the cost is reflected in the tax depreciation schedule. But these costs where not the cost of the depreciable assets and definitely were not the cost of construction is relation to a rental property that was build 20 years ago, so the cost cannot be included in a tax depreciation schedule. These costs are included in the capital gains tax calculations when the rental property is sold.

• My favourite example of this is where the taxpayer claims a deduction for their strata title levies, and then is told in a tax depreciation schedule to claim the same amount again over a series of years to reflect the common assets. Double dipping at its best… and very wrong.

The reason these costs are often incorrectly claimed in a tax depreciation schedule is that the top down approach is used (find all the costs and push them down to the depreciable assets). As discussed earlier, this is legally wrong. 2.12.2 Repairs The Commissioner has summarised his position on what is a repair in Taxation Ruling TR 97/23. Generally, expenditure for repairs made to an income producing property are immediately deductible. However, the repairs must relate directly to wear and tear or other damage that occurred as a result of your renting out the property. Repairs generally involve a replacement or renewal of a worn out or broken part, for example, replacing some guttering damaged in a storm or part of a fence that was damaged by a falling tree branch. However, the following expenses are capital, or of a capital nature, and are not deductible:

• Replacement of an entire structure or unit of property (such as a complete fence or building, a stove, kitchen cupboards or refrigerator)

• Improvements, renovations, extensions and alterations, and


of 19 15/02/17

• Initial repairs, for example, in remedying defects, damage or deterioration that existed at the date you acquired the property.

Examples of repairs for which you can claim deductions are:

• Replacing broken windows

• Maintaining plumbing

• Repairing electrical appliances. Examples of improvements for which you cannot claim deductions are:

• Landscaping

• Insulating the house

• Adding on another room. 2.12.3 Depreciable assets The Commissioner has summarised his position on what is deductible under Division 43 and what is deductible under Division 40 (in relation to residential rental properties) in Taxation Ruling TR 2004/16. According to this ruling the factors to consider are:

• Whether the item appears visually to retain a separate identity;

• The degree of permanence with which it has been attached;

• The incompleteness of the structure without it; and

• The extent to which it was intended to be permanent or whether it was likely to be replaced within a relatively short period.

For example (x4):

Example 1 Kitchen cupboards form part of the premises and therefore are part of the setting of the landlord's rental income earning activities and so not within the ordinary meaning of plant. Kitchen cupboards form part of the premises as they are fixed to the premises, intended to remain in place indefinitely and are necessary to complete the premises. Any separate visual identity is outweighed by the other factors. Since kitchen cupboards form part of the premises they are not depreciable under Division 40 but under Division 43.


of 19 15/02/17

Example 2 Insulation batts form part of the premises and therefore are part of the setting of the landlord's rental income earning activities and so not within the ordinary meaning of plant. Insulation batts form part of the premises, although they are generally not fixed to the premises, as they are intended to remain in place indefinitely, lose their separate visual identity and add to the completeness of the premises. Since insulation batts form part of the premises they are they are not depreciable under Division 40 but under Division 43. Example 3 59. A 'built-in' wardrobe, whether it be the type built-in to an alcove shaped wall or the type labelled 'built-in' by the manufacturer because its side panels create the appearance of a wardrobe which is created out of the walls of the property, 44 forms part of the premises and therefore is part of the setting of the landlord's rental income earning activities and so not within the ordinary meaning of plant. Built-in wardrobes form part of the premises as they are fixed to the premises, intended to remain in place indefinitely, do not retain a separate visual identity and add to the completeness of the premises. Since built-in wardrobes form part of the premises they are they not depreciable under Division 40 but under Division 43. Example 4 In a ducted (built-in) vacuum system inlet valves are installed in various locations throughout the home. Those valves are connected via tubing installed in the walls to a power unit (essentially a motor) located in an out-of-the way location such as a garage. A hose attached to the brush unit (the vacuum head and rod) is plugged into one of the inlets to begin vacuuming. The power unit is machinery and is therefore plant. The hose and brush unit are articles and therefore plant. The tubing installed in the walls is not machinery as it is merely a conduit, although it is connected to the power unit which is machinery. 6We do not accept an alternative view that the hose, brush unit, tubing and power unit are together a single unit of machinery because they operate together to perform the function of vacuuming. The tubing forms part of the premises and therefore is part of the setting of the landlord's rental income earning activities and so not within the ordinary meaning of plant. The tubing forms part of the premises as it is fixed to the premises, intended to remain in place indefinitely and loses any separate visual identity. Those factors


of 19 15/02/17

outweigh the fact that the premises are probably not incomplete without the tubing. Since the tubing forms part of the premises it is also not an article. Since the power unit, hose and brush unit in this example are plant, deductions for their decline in value may be available under Division 40. Since the kitchen cupboards, insulation batts, built-in wardrobes and tubing in the examples are not plant, deductions for their decline in value are not available under Division 40, but deductions may be available under Division 43.

Further, in the tables at the back of the Commissioner’s “Rental Property Guide” he has listed 9 pages of assets in these residential rental properties and identified what is subject to Division 43 and what is subject to Division 40. This is an amazing product for establishing what items in a residential rental property are able to be claimed under Division 43. An example of these tables is:

division 40 and division 43 basics · division 40 and division 43 basics page 2 of 19 15/02/17...

Documents