Many people ask how capital allowances impact on the calculation of the capital gain when disposing of a property. Capital allowances are covered by Division 43 of the Tax Act. Effectively this allows someone to claim a write-off for the building construction costs over a period of time.
If a taxpayer is selling an investment property that was acquired after 13 May 1997 then they must reduce the cost base of that property by any Division 43 capital allowances that they have claimed. If a capital loss is made on the sale of an investment property the reduced cost base must generally be reduced by any Division 43 capital allowances that the taxpayer was entitled to claim regardless of when the property was acquired.
If a taxpayer is selling an investment property that was acquired on or before 13 May 1997 the cost base of that property will only be reduced where the deductions relate to improvement expenditure incurred after 30 June 1999 and which is included in the fourth element of the cost base.
It is important for people selling investment properties that if capital allowances have been claimed the vendor is required to provide the purchaser with a written notice containing information that will allow the purchaser to calculate the remaining capital allowances. The vendor needs to consider this as part of the sale if the building commenced construction after 26 February 1992. This notification must be provided within 6 months after the end of the year of the income in which the property was sold or penalties can apply for the vendor. This is something frequently overlooked by both parties.
If the taxpayer has not claimed the Division 43 capital allowance they are however required to reduce the cost base by the amounts they could have claimed regardless of whether they have been claimed or not by virtue of s110-45(2) of ITAA 1997 and s 110-45(4) of the ITAA 1997. Taxation Determination TD 2005/47 also deals with this issue http://law.ato.gov.au/atolaw/view.htm?docid=TXD/TD200547/NAT/ATO/00001. This is something which is frequently identified during audit and can result in penalties and interest if the taxpayer or their accountant have not identified this during their calculation of the capital gain.
However the ATO does provide a concession to not reduce the cost base where
- the taxpayer does not have sufficient information to determine the property’s construction expenditure ; and
- the taxpayer does not seek to claim any deduction for the capital allowance.