Can you depreciate Division 40 items when...

I assume this client cannot depreciate Division 40 items in this instance but would like to hear what others think in light of the Legislative changes.

Client buys rental property in 2005 and rents for 10 years. They move into the property in 2015 and live there for two years before making the property available to rent again in Oct 2017. Whilst living there in 2015/2016 they renovate the property replacing most of the Division 40 items. Is the client able to depreciate the Division 40 items that were replaced in 2015/2016 from Oct 2017?

 

No.

1. The items are not new. They are used.
2. The items would also be ineligible under the grandfathering provisions as no rent was earned in the 2017 tax year.

However there may be CGT benefits of determining what they cannot claim. While Div40 may not be deductible the amount/s of items scrapped and non-deductible Div40 may produce a CGT adjustment or a CGT loss under the new provisions

These aspects are critical to taxpayers accessing the best tax outcomes. Just ignoring the issue is one option but likely of more detriment. It why we strongly recommend all investors use and maintain services with competent QS firms. They provide our clients with that specific property by property advice. This enhances the value of the QS fee IMO.

Just because you have a QS report no longer means you are entitled to deductions

 

Thanks Paul for reaffirming what I had thought.

 

There are several problem areas where taxpayers may think they have eligible Div40 on a existing QS report and they no longer have a entitlement to deduct

1. A property purchased long ago. They have a QS report. But in the 2016/17 tax year the property didnt produce rental income. All future Div 40 is lost. This test excludes all non-income producing property and harshly some may argue. There are some taxpayers who bought a property in the 2017 tax year who didnt actually produce rent prior to 30 June.

2. A holiday home with mixed use. You stay a week a year when its vacant and you genuinely even adjust deductions for the private use %. Sorry to say but the use taints Div 40 and 100% is no longer deductible.

3. After 1 July 2017 you occupy the property during renovations

4. Personal residence with a shared use. eg Airbnb etc. If the asset is solely and exclusively used by the Airbnb occupants then I see no issue. I question what occurs with mixed use assets. I suspect it is no longer eligible. There is no clarity in the legislation. I see a ruling coming.

The three rules which terminate existing Div 40 entitlements are :
1. The taxpayer was not the first entity to use the asset/s (exceptions apply to trading stock of a developer ie a OTP purchase)
2. The assets are used in the residence of the taxpayer (ie the taxpayer occupies the IP). This applies to assets when the main residence occupancy OR absence rule is utilised.
3. The asset is used for a purpose that is not a taxable purpose other than incidental or occasional use.

The ATO guidance on incidental and occasional use ...A weekend or perhaps one night. No mention of week or many occasional nights....No rulings yet.

Edited : I have added a issue with mixed use assets eg Airbnb for you home etc.