How to treat Special Building Write-off on sale of property

We have recently sold an investment property which we bought in 2004 and I am trying to calculate the cost base for CGT purposes.

More specifically, I am trying to get a handle on the Special Building Write-Off component. Within the first 12 months of ownership we had a quantity surveyor prepare a depreciation report for the property, which included included an estimated renovation cost of $34375 that was depreciable at 2.5% over 40 years ($859.38 per year).

My question is, as we have sold the property after 15 years, is the remaining 25 years of depreciation (25 x 859.38 = $21485) added to our cost base?

Would appreciate members thoughts.

 

No, only the building write off up until settlement date is relevant

 

No.

The reduced costbase (hint it self explains) of your property is its historical cost incl of acquisition costs (or s118-192 if that applies) LESS the value of all Div 43 claimed up to the date of disposal

Costbase say $600,000
+ Improvements $34375
- Div 43 claimed ($859 x 15) = $12,855 = $621,520

I assume no Div 40 assets have a QS value at the date of sale. If there are further adjustment is required.

 

Hi Paul,

Could you give an example of what adjustments would be needed if Div 40 assets (where decline in value had been claimed) did have a value at date of sale?

 

The value of these at the time of sale would reduce the CGT proceeds on sale. Think of it as the sale price incorporates the payout for the end of effective life for assets and the balance is the CGT proceeds.

eg A split system AC with a WDV of $1,000 would reduce the CGT proceeds by $1K.


Taxpayers often get confused by Div 40 and Div 43 on sale thinking they are different. The very nature of the costbase adjustment means BOTH Div 40 and 43 have identical effect on sale if they were acquired on or after 7:30pm on 13th May 1997.

 

Thanks Paul, as an example say the original AC had an opening value of $5,000, would that $5,000 reduce the cost base? The net effect being, the $4,000 the AC had declined during the ownership period, results in overall more CGT being payable as it flows through the CGT calculation?

 

Thanks for that, so any renovation work we undertook ourselves (as the QS report was on renovation values before purchase) simply gets added to the cost base .... correct?

Plus any years that my accountant didnt claim the SBW/O of 2.5% ..... because I notice it was claimed in the first few years but not the past 12 years.

 

No. The WDV at the date of sale would generally be the value impacted. The cost of Div40 assets acquired wont be a factor in the calculations. Just the value on the date of sale.

 

Yes except if the works occurred prior to the s118-192 date if this is affected.

Div43 that wasnt claimed is still an add-back. The legislation refers to "could have been claimed". However the amount that wasnt claimed may be a third element CGT cost so you wouldnt be disadvantaged as one will add to the costbase and the other reduces it.

 

Thanks Paul. That clears up that mystery before I head to the accountant.
Your advice is greatly appreciated.

 

Hi Paul,

Thanks for that. When I spoke to a tax agent about this, he mentioned the way to deal with Div 40 on property sale is as follows:

- the original value of the div 40 items are deducted from the original property purchase price before it's included in the CGT calculation
- the market value of the div 40 items as at date of sale are deducted from the property sale price

However, he mentioned in practice it's far easier to just treat Div40 the same way as Div 43- ie, just reduce the cost base by the amount of Div 40 depreciation you claimed over the life of the investment.

Is this incorrect?

 

Check these out

Tax Tip 251: CGT and Building Depreciation Tax Tip 251: CGT and Building Depreciation

Tax Tip 252: CGT and Depreciation of Plant and Equipment Tax Tip 252: CGT and Depreciation of Plant and Equipment

 

I agree you can use either approach as long as the net result is the same. The maths works the same way but is more onerous that other way and would also mean an adjustment for all assets added after acquisition that are also being sold. Can then become a mess and costly. Have seen mistakes too. Some people read the ATO website and argue about it but the approach is easier to work backwards. And tell me that Div 43 is different to Div 40 but its not. That was the precise reason for the law change in 1997 for the reduced costbase. It makes them the same.

The danger with using the "what was claimed" basis is you must add all new assets acquired and then reduce for the $$$ claimed. Div43 is easier but Div40 can produce mistakes. You need to consider the records available. Its often far easier to not add what was acquired and what was claimed and just deduct whats on hand.

As accountants we cannot determine what the "value" at the date of sale is. Nobody likely can without a valuation. The ATO will generally accept that the residual value in the QS reflects a suitable value where the contract doesnt specify a separate value for plant items. In some instances it may even pay to write off eligible obsolete plant prior to that date if there are old assets no longer available. Adjusting assets for their agreed value is more common to commercial contracts eg a factory where some plant (ie a press, hoist etc) may be included.