FROM TIME TO TIME, the Tax Office will provide Rulings on various aspects — designed to assist practitioners and their clients, and generally simplify proceedings.
The details of Tax Ruling 97/25
Subsection 262A (4AJA) of the 1936 Income Tax Assessment Act requires the previous owner of a property to provide the new owner with relevant construction cost information.
This is designed to allow the new owner to determine any capital works deductions that may be available.
Capital works deductions refer to claims that can be made due to the wear and tear of the building structure — including things like walls, floors and roofs.
It is the requirements outlined in Subsection 262A (4AJA) which allows you to request any available construction costs and details from property owners each and every time a tax depreciation schedule is being produced.
Let’s be practical
Legislation recognises that this transfer of information between owners is not always possible for a many reasons.
And it has included a provision in the Act to allow the construction cost estimates prepared by a qualified professional to be submitted.
Outlined within TR 97/25 is the list of professionals deemed qualified to provide construction cost estimates.
This list includes Quantity Surveyors, Clerks of Works such as Project Officers for major building projects, supervising Architects (who approve payments on major projects) and Builders experienced in estimating construction costs for similar projects.
TR 97/25 enables investors and Developers of projects to retain a suitably qualified professional with the most relevant experience, and the most comprehensive schedule — even if that particular professional was not involved during the construction phase of the property.
This ruling has been strengthened by an ATO Issues Log in October 2006 (A235 Building Cost Estimate Acceptance).
The ATO Issues Log confirmed that construction cost estimates from an appropriately qualified professional (such as a Quantity Surveyor) would be accepted in the case where a property owner had not made a reasonable effort to obtain the actual cost details from the previous owner.
The provision of construction costs as required by Subsection 262A (4AJA) is just a portion of the deductions calculated when completing a tax depreciation schedule.
Key aspects involved
When discussing depreciation, it is important to note that there are two areas in which a Quantity Surveyor will estimate and calculate deductions: The division 43 capital works deduction, and division 40 plant and equipment depreciation.
Bottom Line: It is the deductions related to plant and equipment items which lead to the greatest difference between depreciation schedules. Subsection 262 (4AJA) only refers to the deductions available from capital works deductions.
Plant and equipment will have a substantial impact on the depreciation deductions an investor or commercial property owner can claim when a specialist Quantity Surveyor compiles a comprehensive Capital Allowance and Tax Depreciation Schedule.
Would you like a copy of Issue Log A235?