DEPRECIATION & COST BASE

Discussion in 'Accounting & Tax' started by henry999, 27th May, 2020.

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  1. henry999

    henry999 Member

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    Hi All,

    Hope you guys well,

    Just asking about tax deduction and depreciation query.

    I bought my investment property before 9/5/2017 (in July 2016) but never claim depreciation for it and we just sold the property in May 2020.

    1. Can we add the division 40 (plant and equipment) and division 43 capital works since 7/2016 to 5/2020 into cost base (for capital gain deduction)?

    2. In case, if we claim depreciation for the division 40 (plant and equipment) and division 43 (capital works) this year (7/2019 – 5/2020) against yearly income. Then, can we add the division 40 (plant and equipment) and division 43 capital works from 7/2016 – 6/2019 into cost base for capital gain deduction?

    Thank you in advance.

    Henry.
     
  2. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    1. If you acquired any additional items after the initial purchase. You never ADD depreciation to the costbase. Any claimed reduces the costbase if a deduction was obtained OR was available. As you acquired prior to 9/5/17 the deferred deduction provision doesnt apply. Do you even have a QS report ?
    2. You could possibly. And even amend the prior years (up to 2-4 years). But each $1 claimed will reduce the costbase by $1...But a 50% CGT benefit could arise. eg $100 deduction but a higher CGT profit of $50

    You should discuss with tax adviser and QS to determine how far back to fix the issue. The golden rule for QS deductions is to access this when acquired. Not after sale.
     
  3. henry999

    henry999 Member

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    Thanks Paul for a prompt and clear reply,

    so, to make it easy, i will add all division 40 and 43 which haven't been claimed depreciation in previous year into cost base.

    "And even amend the prior years (up to 2-4 years)" what should i amend?
     
  4. Terry_w

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

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    no
     
  5. Curious2019

    Curious2019 Well-Known Member

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    I think you might misunderstand. If you make a depreciation claim, it will increase your capital gain not decrease it. If you have sold the property there isn’t really much benefit to claim the depreciation now as it will result in a larger capital gain and more tax payable. You would probably amend if you still held the property as depreciation could save you some money on your annual tax bill but no real benefit to do that now.
     
  6. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    I have no idea.
     
  7. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Incorrect if the asset has been owned +12 mths. I would happily take a deduction today which inflates my discounted gain as it halves a tax effect
     
  8. BMT Tax Depreciation

    BMT Tax Depreciation Chris Business Member

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    What Paul said. The 50% discount on CGT could easily still mean that the benefit from amending for a depreciation claim could far exceed the drawback of additional CGT payable
     
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  9. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    I just did one such return. QS report cost $550 which the client had thought would be a waste but the deduction value for 4 years of late lodgements was $15K and a sure a slight CGT increase (they had some losses) with $5K value of QS deductions and a few hubndred extra dollars in CGT cost.

    Another example of having tax advice "on hand". Many people who DIY miss these things when a simple call to their tax adviser could find a benefit. Client thought I was a legend by suggesting they spend $550 to get $5K. Terrific ROI

    I also find clients with QS reports have a invaluable partner as they can always put in a quick call to the QS in a future year and access benefits or basic guidance. Or have the report updated or used for scrapping etc
     
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  10. henry999

    henry999 Member

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    Thanks Paul, i just got a QS reports from Koste. I was advised the every $ depreciation claimed from capital works (division 43) will be deducted from cost base but not sure about plant and equipment depreciation (division 40). They advise a balancing adjustment amount will be claimed for capital gain deduction.

    My property details as below:

    purchase price: $500,000
    capital cost (buy & sell): $25,000
    selling price: $700,000
    capital works deduction: $10,000
    so, my capital gain = $700,000 - ($500,000 - $10,000 + $25,000) = $185,000

    The total plant and equipment is $80,000
    plant & equipment deduction: $15,000
    The balancing adjustment = $80,000 - $15,000 = $65,000

    then, the capital gain = $185,000 - $65,000 = $120,000

    Is it correct?

    Thanks for your time again Paul,
     
  11. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Yes the balancing adjustment will reduce the CGT proceeds on sale by the $65K as part of the proceeds on sale is considered to be proceeds to acquire those assets. However the balancing adjustment isnt necessarily based upon the written down value. Guide to depreciating assets 2019 and refer page 34 of the rental guide.

    Others who are impacted by the 9May 2017 changes may also have a CGT loss to recognise for the portion of deduction for Div 40 they couldnt deduct after the 2017 tax years

    I dont assist or read and consider actual examples as I am not your tax adviser.
     
    Last edited: 28th May, 2020
  12. Curious2019

    Curious2019 Well-Known Member

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    Apologies you make an excellent point!