Depreciation of Division 40 assets where owner occupied property becomes a rental property

Discussion in 'Accounting & Tax' started by SimonQld, 8th Nov, 2017.

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  1. SimonQld

    SimonQld Well-Known Member

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    After a second opinion from a tax expert / accountant please.

    In relation to the Budget changes to plant and equipment (Division 40) depreciation:

    Example: Joe buys a house in 2015 and lives there for four years and then rents out on 1 Jan 2018. Can Joe claim depreciation on the existing Division 40 assets (that came with the house) from 1 Jan 2018?
     
  2. Mike A

    Mike A Well-Known Member

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    Explanatory memorandum states

    2.34 An asset will also be previously used for an entity if it has been used or installed ready for use in residential premises that are at that time a residence of the entity.

    2.35 For example, if an individual acquires a new apartment and uses it as their residence in an income year before renting it out, any assets used in the premises would generally have been used wholly for personal use or enjoyment during that income year.

    The individual would not subsequently be able to access any deductions for the decline in value of those assets while it is being rented out.
     
  3. SimonQld

    SimonQld Well-Known Member

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    Thanks Michael
    I had read that but my concern is 2.35 states "new apartment". Could this be interpreted as / referring to new properties acquired post 10 May 2017?
    My question relates to someone owning a PPR which they bought years ago but don't rent out until after 1 Jul 2017.
     
  4. Depreciator

    Depreciator Well-Known Member

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    I'm not a tax expert or an accountant, but Ken Mansell talked about this scenario in the AIQS webinar yesterday.
    He said if somebody moves out of their PPOR and makes it a rental, they would need to have done that before 1/7/17 to be able to claim Div 40.
    Scott
     
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  5. Mike A

    Mike A Well-Known Member

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  6. Mike A

    Mike A Well-Known Member

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    Redline remember 2.35 is an example. 2.34 states assets previously USED in premises arent eligible. That to me is the reason.
     
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  7. Depreciator

    Depreciator Well-Known Member

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    There were two other things yesterday in that webinar that will disappoint people:
    1. If a vendor does a reno immediately before sale and the Assets in the property have not been used, the buyer can still not claim depreciation on them. The logic of the bloke yesterday was that those Assets are not trading stock as is the case with Assets added to a property by a developer.
    2. If somebody owns a holiday house and stays there themselves (personal use) or lets a mate stay there free, as soon as that happens the Assets are no longer eligible for depreciation.

    Simon, #2 will affect a lot of properties in your part of the world. Of course, once you do a Dep Schedule for someone their accountant will take over and will have to monitor the usage and make a determination of whether the Assets can still be claimed.

    Ken Mansell is pretty clever and the AIQS have used him a few times for webinars. He writes a lot of stuff on his site - Tax Rambling.
     
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  8. Paul@PAS

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

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    However.....The tax impact on CGT for assets that you cant claim may have some benefits.

    Mike - Have you read the bill ? It has a strange word used in the law that says "proportion" when referring to non-depreciable plant (incl common property). Have a read and share your thoughts. The way I read it is you buy an apartment that is 1 year old post budget. So the Div 40 cant be claimed. Lets say its $20K of assets in a $1m property. And you sell 10 years later for $2m....Does that mean you can claim a CGT loss of $40K for the $20K of plant you didnt claim Div 40 on...
     
  9. SimonQld

    SimonQld Well-Known Member

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    Thanks Scott, I sat in on the webinar. It could have gone for a few hours longer IMO - was very rushed and I reckon countless attendees left scratching their heads and with unanswered questions.
    This thread was just trying for a second opinion / consensus among professionals. I don't like taking one person's word/interpretation as Gospel and haven't forgotten that Ken's initial thoughts back in May were that division 40 assets in new units would not be depreciable (A sledge hammer to residential tax depreciation)
     
  10. Depreciator

    Depreciator Well-Known Member

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    Yes, he could have gone longer. It was too rushed especially at the end.
     
  11. Paul@PAS

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

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    1. Agree. But this assumes a renovated home is a new asset and its not and comparing this to a new developer apt (trading stock) would be obviously a distinguishing issue anyway. And reno may be acquired by a owner occupier anyway. Key relevant issue is OLD v NEW premises.

    2. Not sure I agree its that simple.
    http://parlinfo.aph.gov.au/parlInfo...pload_pdf/645379.pdf;fileType=application/pdf

    Mate could stay 2 nights to assist finish paint / clean or could stay two months. If a reno was completed and dishwasher never used by former owner and mate stayed over I see no specific concern.

    The balancing adjustment provisions should not be overlooked either. These may give a deduction at the termination date where the same value was otherwise claimed over time



     
  12. SimonQld

    SimonQld Well-Known Member

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    Since you brought it up...
    Wouldn't the CGT loss work like this:
    Buy for $1M sell 10 years later for $2M without taking Div 40 assets into account = $1M capital gain
    Now, with Div 40 assets worth $20k when bought and worth $0k when sold, so $980k vs $2M = $1,020,000 capital gain less capital loss on Div 40 assets of $20k = $1M capital gain
    Hence, same capital gain and same result???
    Assuming above is correct then the only benefit would be if you scrapped a dishwasher, for example, in year 5 which was worth say $1k then you would have a capital loss in year 5 of $1k but this would only be beneficial if there was a capital gain (in other assets, shares, property, etc) that you could offset this loss against otherwise the loss would just sit there until you sold the property for yet again the same result as above. And, even if you could realise the $1k loss in year 5 it doesn't mean you're getting more, you're just getting it sooner (in year 5 instead of year 10).
    In other words, are people getting over-excited about potential capital losses on Div 40 assets under the new rules and perhaps giving potential property investors false hope (of a tax winfall when they sell)?
     
  13. Paul@PAS

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

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    CGT excludes P&E assets so the CGT costbase is $1m-$20K or $980K. The CGT proceeds on sale are $2m (assume wholly written off). Profit is $1020k

    However under the proposed new rules the proportion of P&E item assets when sold is $40K (as its 2% proportion) and a CGT loss of $40K claimed since 2% of $2m is $40K. Note no costbase reduction for the depreciation as none is claimed.

    $980K - $40k = $940K less 50% = $470K taxable.

    Where at present under existing laws the outcome may have been $2m proceeds less reduced cost base $980k = $1020k. (I have ignored Div 43 in all calcs for simplicity)

    Or there is an apparent benefit to a taxpayer since the final CGT is reduced by $80K when there are just $20K of P&E assets. Thats the proportion issue at work....I would argue if that is correct a taxpayer may be well better off under the revised laws than claiming depreciation.

    I have to say I have no idea. They added the words "proportion" the the EM and legislation. I dont see the merits of doing that as it may always assist a taxpayer. Why was that word used ?? Our role as tax advisers is to determine what the law means and what in practice its effects may be. It is still draft and I suspect a public ruling issued by the Commissioner will give their view on what they think. The Commissioner may be bound by the meaning of the EM too and be held to that proportionate view. Until then its speculation.

    I just wish they could draft laws that have meaning. But then both houses are filled with people who dont know how to define citizenship and they need to run to the High Court. We often have to rely on the self determinations of the Commissioner to interpret laws.

    If I was a QS I would be engaging experienced counsel to address this as someone could produce a tax benefit for investor from a QS report that addresses the problem.
     
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