No Depreciation Schedule on Insurance Repairs - What? Why?

Discussion in 'Accounting & Tax' started by Hard_Earned_Thirst, 1st May, 2022.

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  1. Hard_Earned_Thirst

    Hard_Earned_Thirst New Member

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    Hi All,

    Hoping someone can point me in the right direction. I recently contacted BMT to arrange a depreciation schedule for a PPOR property that has now been converted to an IP. The property was damaged by a stolen car and part of the house rebuilt by the insurance company. BMT have advised "we don’t include works covered by insurance in our reports. You may be able to claim this directly with an accountant"

    Can someone please shed light on why this isnt included in a depreciation report and what an account may be able to offer?

    My expectation would be that since the property has been rebuilt. The cost of that rebuild would be depreciated like any other part of the property with the date of depreciation commencing from date work was completed. Why does it matter if I did the work myself or by the insurance provider?
     
  2. Paul@PAS

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

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    Because insurance reinstates the asset and no qualifying capital expenditure is incurred.

    Ironically another taxpayer could seek a new QS report and not mention this and the QS may ask...so when was the kitchen replaced and how much did it cost and they wont be able to answer. QS would assess its cost.
     
  3. BMT Tax Depreciation

    BMT Tax Depreciation Chris Business Member

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    Normally, when someone speaks to me about this issue, I at least try to send them away armed with a bit of information. Make no mistake: it's complicated, and getting your head around it can tie your brain up in knots. These articles might shed a bit more light on things, ignoring the "natural" in front of "disaster" (we published these in response to a spike in enquiries after the bushfires in 2020).

    Claiming Depreciation Following A Disaster| BMT Insider

    How Natural Disasters Affect Depreciation Claims | BMT Tax Depreciation
     
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  4. Simon Barker

    Simon Barker Well-Known Member

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    I just recently listened to the latest property couch podcast with Julia Hartman and as usual, she was able to explain it very concisely, so I'd recommend you listen to it.

    Pretty much: if you rebuild under Div 43 (cap. works) then you can start to claim using the rebuild costs but any Div 40 (P&E) you continue to use the existing written down values as if the assets were never destroyed. Makes sense, as although you have brand new assets which will last longer than the originals would have, you aren't actually out of pocket for the rebuild.

    Also if this is the case and the destroyed P&E assets were originally in the property prior to May 2017 (so not new) then I would assume you won't be able to claim depreciation on the replacement ones now.
     
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  5. Paul@PAS

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

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    If used Div 40 assets are destroyed and of no further effective life they may be eligible for CGT loss claim which will carry forward. However any replacement Div 40 / 43 assets wont be eligible for depreciation unless the insurer paid out the claim specifically for those lost assets. In which case an assessable adjustment could occur.

    There are two forms of insurance. Replacement cover insures for present cost where loss insurance may only pay out the depeciated value. Most people seek replacement cover. Of course this comes with a tax issue for the betterment that advantages the owner. This is either an assessable adjustment or lost depreciation for the benefit.
     
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  6. Will Callaghan

    Will Callaghan Well-Known Member

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    Even though you can’t claim the insurance items in your depreciation report - you should have the value of the insurance works noted somewhere with your accountant.

    that’s because you’ve made an improvement to your property - and in theory will sell the property for a higher price than had you not done the works.
    Therefore, you may be up for more CGT. So just make sure the improvements are noted and hopefully your accountant can mark it off against any capital gains at time of sale.

    will
     

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