Depreciation deduction may not be lost

I have earlier posted my views that the ATO should really issue a ruling on what it means by incidental or occasional use. And I have to say I have been confused by why they havent done this.

I believe I know why. The legislation doesnt allow them to and they want to avoid starting an avalanche of excessive deduction claims

Our esteemed QS colleague Tyron Hyde of Washington Brown has helped piece it all together. He sought ATO views on this issue and kindly shared some of it with me. And it just didnt make sense....Read on and I will break it down and then reach a conclusion below.

The ATO referred to example 9 used in the Rental Property Guide 2017 (Page 10) which doesnt directly deal with the issue BUT they made mention of it...In the response Tyrone shared with me the ATO said :

Occasional use can be defined as using the residential premises in a minor, infrequent and irregular way. For a rental property, deductions will not be allowed where the property has been used privately, or has been held for private use, to an extent that is greater than occasional. ​

These examples would not represent occasional use-
examples 6 to 8,10 and 13 on pages 9 to 12 of the Rental property guide 2017
​

I was intrigued by the omission of example 9. It describes a property (a holiday let property) used by the owners for 4 weeks . So I spoke to the ATO officer who was very guarded in their views. The guidance I was given was all taxpayers who have incidental / occasional may need a private binding ruling. That was even more intriguing. Surely that isnt how bad tax law has become? Why would they say that ? Well, its because the examples in the EM refers to periods of 1 and 2 days and nothing else.

Then it dawned on me. I rechecked and rechecked the law and sure enough I now had a reason. And it explains why the ATO wont likely ever issue a ruling. They dont issue rulings about legislation.

The issue is this.
The limits for depreciation deductions applicable to incidental / occasional use is based on the words used in the EM which do not repeat in the legislation. Its says "incidental AND occasional use".

But this seemed at odds whith what they describe in bold above. It says occasional use is infrequent. A bit circular ? Ahhh. They when it clicked. The legislation says AND infrequent.....

So unless both limbs are met the depreciation deduction may remain. A 4 week rental is occasional. So the effect of incidental use can be ignored.

Its the ATO role to enforce tax law. Not write it. That the role of Parliament. I'm a little surprised. The ATO cant adopt a different view to what laws prescribe. And it also doesnt want to shout out the problem.

So where does this leave us ?

1. Many people will be unaffected by the incidental / occasional use issue. It is definately not simple. And nothing I would recommend for self diagnosis. It affects :

• Owners who may briefly occupy the property to undertake reno's, repairs etc. If its occasional (eg once off) the incidental view in the EM about one or two nights may not apply.
• Holidays lets in SOME cases. Care should be taken to consider a range of factors.
• People who may briefly allow family etc to use their IP between tenancies in some cases whether or not rent is paid

2. Those who feel they are affected will need tax advice by a property savvy tax adviser. Given that this issue has taken months and hasnt been picked up I dont think it leaves a huge range of advisers. The tax advice may also safeguard from some penalties if things are later reviewed adversely.

3. Use a really competent QS. eg Tyrone seems to have asked just the right questions. And is author to a very current book on the topic. You dont want a QS report that doesnt include the deductions if they are available do you ?

4. A private ruling may be recommended in many cases and a waste of time and effort in others. I dont think its necessary for all taxpayers to get one if tax advice happens. I'm even thinking of a private ruling advice kit for affected taxpayers...(It wont be free but could be cost effective)