Find out What Capital Works Are and How You Can Claim Them

Not all people buy an investment property in Australia and leave it just the way it is. Many invest in improvements, so they can charge more rent to tenants. Buying a property and making improvements to it is one of the best investment property tips for beginners in its own right. But did you know there are plenty of tax deductions in Australia that you can claim for the extra features you build?

You have to know about capital works before you can do that. If you examine the Income Tax Assessment Act (ITAA), you will find a section called Division 43. This covers any of the materials you bought or the work you put into making improvements to your property.

Such costs include the following:

  • The materials you use in construction, such as timber and tiles
  • New extensions, such as a garage
  • The construction of internal walls
  • Excavation of new foundations for your construction work
  • Improvements to the property’s structure, such as a new carport or fencing for the garden
  • Renovations to the bathroom and kitchen

These are the practical costs related to getting the building work done. However, you can also claim for a lot of the other fees associated with the work. Any money that you pay to engineers, architects, and surveyors is claimable, as are the fees you had to pay to get permits for your work.

Can I Claim Capital Works?

It depends on your situation. Your building needs to generate income, which means it must be an investment property in Australia. If the building has produced income within one financial year of your claim, you can claim tax deductions as part of Division 43 of the ITAA.

You don’t have to be an individual investor to claim capital works. You can also claim it if you’re part of a company, or if you did the work through a trust. The same goes for anybody who has a self-managed superannuation fund.

How Do I Calculate My Capital Works Deductions?

The first thing to remember is that any valuations you have for the work are not relevant. Your capital works tax deductions in Australia must relate to the actual construction costs.

There are two rates may apply to your capital works — 2.5% and 4%. Which of these is relevant to your work depends on several factors. These include when you started construction, how you use the capital work, and the type of work undertaken. Furthermore, you have to take the amount of time the capital work generated an income for during the last financial year into account.

It’s best to speak to a professional to find out which rates apply to your capital work. Making claims you’re not entitled to could land you in trouble.

How Do I Make a Claim?

You can make claims for tax deductions in Australia on any capital works for a maximum of 40 years after the construction completion date. However, you’ll also have to provide several details in your claim, which include the following:

  • Information about the type of capital work undertaken
  • The start and end dates for construction
  • Information about who did the work
  • The actual cost of construction, which is not the same as any valuations or purchase prices you have
  • Information about how the capital work generated an income for you during the last financial year

You may not have kept all of the records related to your construction costs, or the work may have been done before you bought the property. That’s okay, as it just means you need to get an estimate. You can hire a quantity surveyor to create a cost estimate for you, which you can use to create your depreciation schedule.

The estimate your quantity surveyor produces will consist of a schedule for all the capital works undertaken. It also creates a forecast for the tax deductions in Australia that you can claim on the work. Take this schedule and use it to complete your tax returns. Also, bear in mind that the estimate cannot come from a real estate agent or accountant. The Australian Taxation Office (ATO) will refuse your claims if your estimate comes from the wrong source.

How Does Capital Gains Tax Relate to Capital Works?

Your capital works also come into play if you decide that you want to sell your property. You will have to take away the cost of any work you did from the value of your home. This may affect the amount of Capital Gains Tax (CGT) you pay. If the deductions result in you making a loss on the property, you may not have to pay any CGT.