Non-resident : Whether to claim depreciation?

Hi. I am an Australian non-resident who bought a (newly built, off the plan construction) flat in Melbourne last year as an investment property.
Since this is the first year I will be filing my taxes, I had a question on depreciation.

I understand that since my settlement was before May 2017, I can claim depreciation to reduce my tax bill. However, whatever depreciation I claim - will it go towards reducing the cost base of the property? So basically whatever depreciation I claim over the years, will keep reducing the cost base, and hence when I sell the property, I will have to pay it all back in tax (applicable on the difference between sale price and cost base)?
Since I am a non-resident, I do not benefit from the 50% capital gains relief.

I am in two minds whether it makes sense for me to claim depreciation now and pay a higher capital gains tax later by reducing my cost base?

Another thing that I need to keep in mind is that I am currently in the UK, where I can't claim depreciation relief, and the marginal rate of tax is higher. So whatever depreciation benefit I will currently get from Australia will be moot as I will have to pay it to the UK authorities here. However, I do intend to move back to my home country in the next few years where the marginal rate of tax is lower than that of Australia's, and it is there that the depreciation will benefit me.

Would anyone have any advice?
Thanks a lot.

 

I definitely think you should get an accountant in Oz. Even if it's only for a year or two until you can see how they do your taxes and what they claim for you.

 

You might have to include amounts where your ability to amend an assessment period hasnt expired.

TD 2005/47 - Income tax: what do the words 'can deduct' mean in the context of those provisions in Division 110 of the Income Tax Assessment Act 1997 which reduce the cost base or reduced cost base of a CGT asset by amounts you 'have deducted or can deduct', and is there a fixed point in time when this must be determined? (Published on 23 November 2005)

Do you have any debt on the property ? Do the interest deductions make it negatively geared ?

 

I did have a tax accountant in Australia for when I filed the tax return for 2016-17. I didn't know about depreciation and my tax accountant didn't suggest it then. Recently when I asked him why he didn't suggest depreciation deductions, he said that "when you separate assets from the initial purchase of the property, this reduces the cost base of your property and will give rise to a higher capital gain if and when you sell your property in the future."

But this would mean it would never make sense for a non-resident to claim depreciation deductions on a newly built property?

 

No it can make sense. Thats why i asked if you had interest deductions.

Think time value of money.

 

Yes, I do have interest rate deductions, though the property is not really negatively geared.

I do agree with your time value of money argument.

What I have to keep in mind though is that I have to pay residual tax in the UK, so even if I claim depreciation in Australia, it won't really matter as I can't claim depreciation deductions under UK tax law. So by claiming depreciation, not only will I not be getting any benefit of it after all, but I will also reduce the cost basis of the property and make myself subject to higher CGT when I sell it in the future. If I am thinking correctly, I should probably start using depreciation deductions only when I move back to my home country, where the marginal rate of tax will be lower than Australia's.

 

The interesting question and to be honest dont know what the ATO would think but they could run an argument that the sole or dominant purpose of not claiming the Division 43 or Division 40 capital allowances was to obtain a tax benefit and therefore Part IVA would apply.

Interesting question @Paul@PFI

 

You cant always just ignore depreciation deductions. The tax on the final gain may still assume you did claim these costs. Surely they told you this. Plant & Equipment items lose value. The disposal adjustment for these does not occur at cost.

The deductions will provide a carried fwd tax loss for many non-residents. I have many clients with 100K - $300K or far more and its still building. Or offsets other property income ?

I dont believe that the taxpayer choice of not claim a deduction is a scheme that has a dominant purpose of a tax benefit. Thats almost an election by a taxpayer and it could easily be argued there is not actually any benefit but a detriment.