Improvements directly after purchase - To depreciate or not to depreciate??

Hi all,

Trying to get clarity around renovations / improvements and their tax depreciation potential, I seem to be getting conflicting information.

I've recently purchased a fire damaged property that will need a new roof, kitchen, bathroom etc etc. Once all is completed can I procure a depreciation schedule and claim the carpet and appliances under their Div 40 effective life then the rest of the cost to build the house as it stands as the 2.5%PA div 43?

Or am I out of luck and can claim the sum of all the costs off of the sale value if I ever wanted to sell? If this is the case is there anything I could do to make it the former case instead...I understand these items can not be instantly deducted off of income as the place isn't rented out, but unsure if I can still depreciate it or not.

Your wisdom is much appreciated

 

You should be able to claim both

 

Thanks Terry, that isn't double dipping of sorts?

If that is the case, is this line of thinking correct:

Purchase 500k
Renovation cost 50K
Sold after 5 years for 600k
Capital gains obligation 100k - 50k reno = 50k

+

Cost to build the house after Reno 300k
Thus, 300k depreciated at 2.5%PA and Div 40 items claimed as effective life


Is that depreciation claimed added back on at sale time or something to balance it 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

 

Thanks Terry will have a read

 

Regarding the depreciation side of things, you are correct in that since it is not being rented out, you are not able to claim under Div 40. HOWEVER, if you end up deciding to rent it out and commence these substantial renovations during the period unto which the property is available for rent, you most certainly can claim the reno on Div 40.

As you may or may not be aware, any Div 40 items in a rental property acquired after May 9th 2017 AND before the period to which the property was available for rent, cannot be claimed. Thus regarding the existing carpet/appliances you are referring to, if they come under this category of dates they cannot be claimed. If the carpet/appliances you are referring to are part of the proposed reno however, the reno details I have mentioned apply.

Regarding the Div 43 side of things, date wise, if built after 1988 you can claim the house as it stands at the 2.5% rate, once again however IF you end up renting it out. If so, Div 43 rate can be claimed from this date onwards.

Hope this helps!

 

Incorrect. In 6 years the Div 40 and Div 43 depreciation wont be $50K. The $50K reno may produce several thousand in deductions over that period and the existing state of the building may play a part in that. And what you pay for the building plays not part in that calculation. The QS would assess the building age and determine what it cost to construct back then.

A QS may need to consider the property state prior to reno and all your actual expenses. These will be either Div 40 items for faster write off (eg carpet) or Div 43 for the construction elements. Some elements could also fall outside Div 40 and Div43 eg new "soft" landscape etc. These could add to the costbase and be non-depreciable.

Claiming depreciation does reduce the costbase, however if you access the 50% CGT discount then you are always 50% better off. The claim also brings forward deductions and cashflow (higher tax refund?) associated with these deductions

 

On the basis of what you've said here, I see no impediment to you claiming depreciation on the new Division 40 assets that you install. It does not matter that the property is not available for income yet--that won't invalidate your depreciation claim once the property is available for income.

You would only not be able to claim on the plant and equipment if you were, say, living there and using the items yourself, or if the items were a.) still there from before your purchase, or b.) second-hand items you've installed.

Regarding Division 43, you'll only be able to claim on the eligible post-1987 capital works, whether completed by previous owners or you.

 

Ah Yes, good point Paul. Thank you for your input

 

Thanks for the input Chris. That does make sense to me. I spoke about this with my accountant however and he was under the impression that because all these works are performed after purchase but prior to renting that these become "Initial Repairs" and thus can not be depreciated but instead only can be added to the capital base at sale time. The advice I'm receiving from everyone on this forum seems to contradict this, wondering what part the initial repairs category plays in all of this?

Also wondering at what point a renovation tips into a new build? Existing elements from the burnt house like the concrete slab and some external walls will remain but the works are fairly signifiant requiring a building and occupancy permit. Would I be able to restart the depreciation on the cost to build the whole house in 2020 post Reno and achieving occupancy or can I still just depreciate the total of the amount I spend on it?

 

Thanks Tuan, much appreciated

 

Sorry I missed that you were going to be living there before renting out. This would make the fixtures and fittings second hand and ineligible to claim depreciation on.

I think your accountant misunderstands depreciation on initial repairs. if they were initial repairs - which they might be - you could not claim the item in full. Normally if something is repair it can be claimed in full, but not for damage prior to you renting it. But that doesn't mean that depreciation cannot be claimed once rented out.

 

Ahhhhh yes, I think you hit the nail on the head Terry. That makes much more sense! I may have misworded something earlier, I will be sure to not reside in the property at any point prior to renting it out so the Div 40 remains applicable.

 

Sorry if I missed this too, but I can't see where it is stated if @Green will/won't be living there. And that was pretty much what I was going to say about initial repairs still potentially being depreciable.

 

I have heard a few accountants give advice that initial repairs are non-deductible. That is true. But then they indicate that depreciation isnt available. Thats really not correct and initial costs could be split into four groups

1. Div 40 eligible plant (eg ACon, appliances etc). Depreciable for sure PROVIDED they are newly acquired by the buyer AND unused (excepting a new dwelling acquisition)
2. Div 43 building capital allowances for eligible works eg new kitchen cabinets, fencing, roof work etc can include repaint before tenancy. basically things attached to the dwelling or structures. can include hard landscape (eg retaining wall), pool etc
3. Ineligible expenses eg garden. tree felling and pruning and the obvious costs to acquire such as legals, BA fees, duty etc. waste removal on acquisition..All costbase issues.
4. The one many miss !! ....Div 40 items that were acquired with the property or added after that cant be depreciation (eg used assets). These still can be depreciated but nothing claimed . If that asset is scrapped OR property sold the depreciation not claimed is a CGT loss. If the asset is scrapped its full value could be the loss.

I also see many accountants advise not to bother on a QS report too. I always suggest speaking to a QS and seeking their wisdom. Its surprising what can be still subject to depreciation in a old dwelling.

 

Thanks for taking the time to give all the fantastic advice guys, really clears things up.

I do wonder if there is any case law or something to that effect of where the tipping point lies between something being a Reno vs being essentially a new build?

 

If you construct or perform any works after acquisition and prior to tenancy the cost cannot relate to income production. Only costs which are incurred due to tenancy are deductible. ie a genuine tenancy repair.

Tax Ruling TR 97/23 is aone of many public rulings that covers repairs. This is founded on the tax law premise that expenditure that is capital in nature or is capital is not deductible.

 

This isn't necessarily applicable to your case but here's an article we published on the 2017 rulings, and the kind of works a previous owner would have to complete in order to make it a "substantially renovated" property:

What’s the difference between a cosmetic and substantial renovation?

 

The term "substantial renovation" is a term really largely confined to the new vacant land rules and holding costs and GST "new premises" issues. eg GSTR 2003/3.
But a sale isnt contemplated. I dont think a enterprise is being contemplated. I believe the question is about reno (deductible) v build (non-deductible).

 

Agreed. I was attempting to address the question ...

... by placing it in the context of the 2017 rulings (given that the original question was about eligibility for plant depreciation) but possibly misunderstood it. @Green , perhaps you can clarify? My reading of the situation (unless I've missed something or there's a detail I'm not catching) is that all of the new works will be depreciable (from completion/availability for income) in addition to any eligible prior works (continuing their depreciation from their original completion date). Again, maybe I've missed the point of the question.