Assets and depreciation
Capital works deduction
The capital works deduction lets owners claim the construction cost of buildings and structural improvements over time, generally at 2.5% a year, separate from depreciation of equipment.
The capital works deduction, sometimes called the building write-off, allows owners to deduct the cost of constructing a building or making structural improvements. It is separate from depreciation of plant and equipment, and it applies to the construction cost rather than the land. The land the building sits on is never deductible this way.
For most buildings and structures where construction began after 15 September 1987, the deduction is generally 2.5% of the construction cost each year for 40 years. Some older buildings or specific types of structure have different rates or are excluded. The deduction is available to owners who use the property to produce assessable income, such as rent or business income, and it is reduced if the property is partly private.
Qualifying costs can include the original construction, extensions, alterations, and structural improvements such as driveways, fences and retaining walls. Costs of repairs do not count, since they are separately deductible as revenue items. When you buy an existing building, you may be able to claim based on the original construction cost if you have the information, and a quantity surveyor can prepare a report for this purpose.
The deduction interacts with capital gains tax. Capital works deductions you have claimed generally reduce the cost base of the property, which can increase the capital gain when you sell. This is something to weigh up when deciding whether to claim, though the deduction is generally beneficial while you hold the property.
For GST, the building costs interact separately. A GST-registered business that constructs or buys a commercial building generally claims the GST credit on the purchase or construction costs in the BAS, even though the income tax deduction is spread over 40 years. Residential rental property is generally input-taxed, so no credits are available for costs connected with residential rent. The capital works deduction itself is based on the GST-exclusive cost where a credit is claimed.
Common mistakes include trying to claim on land, claiming repairs as capital works, and not keeping the construction cost records. This is general information only, so confirm your situation with the ATO or a registered tax professional.
Worked example
A registered company builds a new commercial warehouse for $440,000 including GST, so the GST-exclusive cost is $400,000 and the GST credit is $40,000, claimed in the BAS for the relevant period. The capital works deduction at 2.5% is $400,000 x 2.5% = $10,000 per year for a full year, for up to 40 years while the building is used to produce income.
Practical tips
- Keep construction cost records. A quantity surveyor report can help if you buy an existing building without them.
- Claims reduce the cost base for CGT, so factor that into sale planning.
- Do not claim on land, and keep repairs and capital works separate.