New Depreciation Laws and 6 year absence rule

I have always thought the 6 year absence rule made a nice way to have your cake and eat it too. You get to claim deductions each year, and then avoid CGT when you sell.

Now I'm having a hard time understanding Treasury Laws Amendment (Housing Tax Integrity) Act 2017.

Under what situation can I deduct plant and equipment, and also claim the 6 year absence rule?

I was considering doing a new build, living in it, then renting it out. However it is unclear to me if I could still deduct plant and equipment.

 

If you buy the new plant and equipment once the property was rented you will be able to do both.

Alternatively Section 40-27(4) and (5) contains an exception to allow the deduction for decline in value (and not treat assets as second-hand assets).

To qualify for this exception:

• (1) the depreciating asset must not have been previously used or installed in any residential premises where someone was residing, or
• (2) if someone was residing in the new residential premises at an earlier time, it was within six months of the premises becoming a new residential premises and the investor also acquired the new residential premises within six months of it becoming a new residential premises, and
• (3) no amount can be deducted under Div 40 or Subdiv 328-D for any income year by any previously holder of the asset.

 

Its a tax trap for those that own properties purchased before May 9 last year.

 

If you build, then live in it, then rent it out, you cannot claim depreciation on the plant and equipment.
But you can tally up that 'lost' depreciation and use it to reduce your CGT bill when you sell. So the depreciation gets deferred.
Scott

 

You mean you CANNOT claim Div40...

 

ALL property qs reports are affected. If the property use changes the qs report may be cancelled for div 40. Does not matter when purchased.

 

6 year rule relates to cgt. Not depreciation. But depn may affect cgt cost base. If cgt exempt then who cares what the cgt gain and cost base is

 

Boy, that was a silly typo. Changed.

 

If someone lived in a new build for say 4 months and then rented it out, would the 6 month exemption rule kick in then, as well as the main resident rule?

 

what 6 month exemption rule? The 6 year rule could apply depending on the circumstances, the 6 month rule could also apply if they sold their previous property.

 

The main residence exemption may apply. There are conditions. eg If the owner has built it then yes. But if the owner is a builder or has built it as a profit making venture then perhaps no. It may be trading stock and not a CGT asset. Many think the main residence exemption is a automatic right when it does have qualifying conditions

6 months ???? Hmmmm - If you had it constructed and reside 4 months then move out and move to another property you own then its possible that BOTH properties fall under the 6 month overlap concession if the original new build has sold within that 6 months (essential). That just means property 2 is also exempt for that same overlap period... However. I have a concern its a profit making venture and so no main residence exemption, GST on sale could apply and no CGT basis of tax on profits.

Definite need for advice if a sale is being considered.

 

From above.

The wording in the act is with [my interpretation]
(5) However, disregard paragraph (4)(d) for an earlier time if:

(a) the asset was used, or installed ready for use, in the current premises at that time; and

(b) both that time [an entity resided in the residence], and the current supply [the day the residence is supplied to you], happen during the 6‑month period starting on the day the current premises became new residential premises.

I read the exception 40-27 (4) as if you own the property within 6 months of it being built you are exempt from 40-27 (2) (c). But then 40-27 (2) (d) would still apply. And by just reading the amendment I cannot even tell that it means you cannot deduct plant and equipment, as it just says "Reduce your deduction by any part of the assets decline in value", which sounds like a proportion is not claimable.

 

Thanks for the reply. Not a builder, and no short term plans to sell, and would rent elsewhere after living there.

 

40-27(2) is fairly clear.

(d) at any time during the income year or an earlier income year, the asset was used, or installed ready for use, either:


(i) in residential premises that were one of your residences at that time; or
(ii) for a purpose that was not a *taxable purpose, and in a way that was not occasional.

I would consider that you meet (i) if you reside for 4-6 months. And (ii) that period of time is not occasional based on ATO opinions seen so far.

Hence, no Div 40 after it commences to be a IP. I like the selective use of "were" as it broadly applies to every property (incl one acquired years ago) which has since been used as a residence after budget night or used for anything other than occasional use. eg unrented property or used by parents for no rent etc.

 

Yes that it is clear (i) would apply. The part that is not clear to me is how that rules out any future deductions, as I read "Reduce your deduction by any part of the asset’s decline in value that is attributable to your use of it", as meaning if used privately for 4 months out of 12, reduce it by 4/12 = 25%. I know I'm missing something, I'm just not sure what.