Depreciation & CGT

Could someone help as to how depreciation and CGT interact for an IP please?

Say I have an IP bought for $500,000.
I manage to be assessed as having $10,000 depreciation every year for 5 five years, AND I claim that against my personal tax @ 45c.
After those five years, I sell the property for $800,000.
The property has had a CG of $300,000 ($800k-$500k).
Since it's sold after 12months, I claim the 50% CGT rebate (or whatever the correct word is).
Without depreciation my CGT would be:
- $300,000 * 50% = $150,000
- add $150,000 to my personal income for that year, which would continue to be at 45c (no higher level)
- so total tax payable would be: $150,000 * 0.45 = $67,500.

But I claimed the depreciation each year...
Lets pretend that the entire $10,000 claimed is added to the cost base.

So my cost base reduces from $500,000 to $450,000 ($500k - 5 x $10k).
So my CGT is calculated on a notional CG of $350,000 ($800k - $450k).
So CGT payable would then be $350,000 x 50% = $175,000 * 0.45 = $78,750.

Is that right?

So if the properties are fully negatively geared, before depreciation, then the entire $10k generates another $4500 return each year. 10 x $4500 = $45,000 total tax returned over 10 years. Against that I have to pay an extra $11,000 CGT ($78,500 - $67,500).

Ya?! If so, that's a pretty good result .

Also, from Terry's Tax Tip 76 it seems that stamp duty, BA fees, selling fees would be added to the cost base.

 

Firstly you have to distinguish between capital works depreciation (Div 43) and depreciation of fixtures and fittings (Div 40).

When did you acquire the asset? If after May 1997 then Div 43 claims does not form part of the cost case if you deducted it, or could have deducted it.

In your example, you purchased for $500,000 and sold for $800,000.

The cost base is $500,000 plus stamp duty, BA costs, selling costs, conveyancing etc. Say all of this was $50,000 so the cost base would then be $550,000.

If your Div 43 claims were for $30,000 your cost base then the gain would be $520,000 as this $30,000 is deducted.

So the capital gain would be $800k - $320k = $280,000

Then the 50% discount makes it $140,000

This goes on top of your other income - don't forget the medicare tax and that other extra budget repair levy of 2%

 

Thanks Terry - that's clear!

 

Think a few of those should be the other way round. In the above example, if your Div 43 claims (capital works deductions) were $30k this reduces your cost base.

@Terry_w is there no adjustment for Div 43 items?

Reduce cost base by the value of the Div 40 assets acquired and reduce sale proceeds by the written down value of the Div 40 assets (therefore no gain loss on those assets)?

 

Your right BennEznElle I wrote Div40 instead of Div43. I have fixed the post now. thanks.

 

The above example isnt always the case. Sometimes the Div 43 claimed is NOT added back to the cost base.

 

can u give an example Paul?

 

zzz... I woke up

Div 43 fourth element cost base adjustments are not required to be made to a property acquired before 7.30pm (ACT time) on 13 May 1997, (Yes Budget Night!) although it may* apply to expenditure on land or a building acquired before that time, provided the expenditure is incurred after 30 June 1999 and forms part of the fourth element of the cost base of the asset (subsections 110-45(1A) and 110-50(1A)).

* PS/LA 2006/1 says there is a further exception :
We will accept that a taxpayer cannot deduct an amount under Division 43, and so is not required to reduce their cost base and reduced cost base, where the taxpayer:
·
does not (as a question of fact) have sufficient information to determine the amount and nature of the construction expenditure for an asset, and
·
does not seek to deduct any amount in relation to the construction expenditure under Division 43 (or any other provision).
ie a taxpayer who bins the QS report

I have had to amend more than a few tax returns where an accountant has ignored this date exception and lowered the cost base - resulting in more tax then necessary.

 

Hey Paul, that's really interesting. I got most of it except the bit after the zzz ...

 

* PS/LA 2006/1 says there is a further exception :
We will accept that a taxpayer cannot deduct an amount under Division 43, and so is not required to reduce their cost base and reduced cost base, where the taxpayer:
·
does not (as a question of fact) have sufficient information to determine the amount and nature of the construction expenditure for an asset, and
·
does not seek to deduct any amount in relation to the construction expenditure under Division 43 (or any other provision).
ie a taxpayer who bins the QS report

I have had to amend more than a few tax returns where an accountant has ignored this date exception and lowered the cost base - resulting in more tax then necessary.[/QUOTE]

PS LA 2006/1 doesnt require the taxpayer to get construction cost estimates either (i.e. they are not forced to obtain a depreciation schedule).

I would argue a taxpayer who bins the QS report does have sufficient information to determine the nature of the construction expenditure but lost that information or chose to ignore it. They can readily obtain another copy from the depreciation schedule company so I think the binning example is a bad one. I think in an ATO audit they would argue had sufficient information.

Curious as well why an adjustment would need to be made when the data must have been available if they claimed it or made adjustments to the cost base. Seems strange an accountant would just make up the figures.

 

The issue is that many accountants think all taxpayers must adjust the cost base for Div 43 claimed whenever a sale occurs.

I came across the taxpayer issue with someone who was non-resident and chose not to claim the Div43 as they had no need for a tax benefit. Years later they went to sell and yes the cost base adjustment would have affected them as the requirement is based on what "they could have deducted" rather than what they did deduct. Their position was quite clear - They were given the QS report by the former owner and had never used it and argued that they could treat it as if they had never seen or received it. But generally speaking u r correct - You cant claim Div 43 then argue you didnt have a report.