Claiming depreciation instead of repairs

Discussion in 'Accounting & Tax' started by smallbuyer, 8th May, 2019.

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  1. smallbuyer

    smallbuyer Well-Known Member

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    So I know most people on this site are trying to claim things as quick as possible, to claim and immediate repair deduction if they can however what about if the reverse is true. What flexibility is there for someone who wants to push as much as possible into depreciation or capital works. Perhaps there income is very low in a year for some reason so they don’t want to claim things.

    What sort of things fall into the grey area that could be claim either way?

    I assume the $300 (or is $1000?) instant write off is optional, could depreciate these over the official life instead if they wanted to?

    What about items that are typically claimed as repairs, could say new painting be put into capital works?

    Is one obliged to scrap something as soon as they replace it or can the depreciation just be run out, eg you buy a replacement heater after 9 years but the original still has a year of deprecation left?


    Cheers
     
  2. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    The issue is more about depreciation rules.

    Div 40 and Div 43 specify the types of assets in each and the Commissioner publishes effective life tables. For items not published the taxpayer may self-assess the effective life (eg rental property solar system) but the system doesnt allow a non-capital item to be depreciated. eg land tax, rates etc.

    Taxpayers often fail to review assets eligible for scrapping BUT more often we see that after some time an asset passes into the depreciation pool and then the asset cannot be scrapped.

    A taxpayer could choose not to claim a tax deduction for painting and then the cost becomes a third element CGT cost or could even be Div 43. The trap with third element costs is that the profit is reduced but with a 50% discount half its value is lost. the trap with Div 43 is its a slow road to recover a deduction and then the CGT impact is also a 50% discount issue. Alternatively a taxpayer with repair costs may elect to treat that as Div 43. But I question why. A 2.5% pa deduction when a full deduction is available makes no sense. There is no certainty that future deductions are even available. In almost every instance a $1 tax refund today is better than a $1 refund issues in one, two or twenty years.

    A few complex ones which I have advised on to defer or not claim include gifts, super deductions. But not property expenses.

    The other one I am asked often is why I prefer using Diminishing value v prime cost. DV and PC both delivery identical deductions long term but PC spreads this uniformly. DV brings it forward. The same view about receiving $1 of benefit today v's deferring the benefit makes sense. I would probably recommend DV in 99.9% of cases. However in some rare instances PC may be better. But only marginally.

    The value of a reduced interest rate makes more sense. We often see clients with interest rates at 4.5% which is a higher value issue than a bit of depreciation fiddling.
     
    BMT Tax Depreciation likes this.
  3. smallbuyer

    smallbuyer Well-Known Member

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    Thanks for your comments. Im thinking perhaps someone has low income for a year or a few years. Maybe they are travelling the world, having a baby or just sleeping in for a year. If they find themselves with a low enough income they pay no tax far better to get 2.5% a year or 50% when they sell, anything is better than 0 which is what they will save if they for example reduce their taxable income from $15k to $5k.
    I agree its sounds pretty clear things like land tax, rates, interest etc are tied to the year they are paid (although i think some can be paid early to fall in the FY before, interest, rates??, insurance??)
    What are the limitations for what you can put in as a Div 43 item? Im assuming work on the property, work on a fence, painting, electrical work etc that most people would put as a repair.

    cheers
     
  4. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    In those cases I'm more likely recommend that they do claim things. They may build a tax loss and carry that forward for a few years and then enjoy some tax free income when they resume work. It defers the tax deduction. Deferred deductions are best short term.

    I have seen people do this for years and sit on a nice $200K carried fwd loss. They come home and start local work and vary the withholding tax to 0%. Tax free for a year or two.

    And in some cases it bites them. ie They earn $15K - Its tax free anyway AND also reduces their tax loss.

    Div 43 concerns eligible structural and construction expenditure. eg new kitchen, walls, floors, structural landscape, walls, painting could be Div 43 but why would you not claim it ? I see no logic in that
     
  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    It depends, if the loss will just bring the income under the $21k limit at which tax is paid but not under $0 it might be better off not claiming.
     
  6. smallbuyer

    smallbuyer Well-Known Member

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    Seems what is best depends if you fall in the 0-21k income or under 0. Also depends on whats happening in the following FY. It would be a shame to have your 20k loss one year reduce your income from 20k to 0 the next year :( I am presuming you have to use a carried over loss asap.
     

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