Plant depreciation for dummies

Discussion in 'Accounting & Tax' started by VDK, 19th Jun, 2020.

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  1. VDK

    VDK Active Member

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    Hi all, having not dealt with QS for a few years, I spoke to one today to be unpleasantly surprised by the new (to me) depreciation laws for plant. She advised me that due to change of laws in 2017 you can only claim depreciation on plant that is new and is used immediately for taxable purpose.

    Looking at relevant legislation,
    Legal Database

    it might be more nuanced than that (or not) - so I want to confirm I am understanding it correctly for my case:
    Property used as PPOR from April 2017 to Mar 2020. In that time, few items of plant replaced - pool chlorinator, ducted aircon, hot water system etc. Obviously, no depreciation was claimed as all items were used to provide residential accommodation. From Mar 2020, property was converted to rental property.

    So am I correct in understanding that even though these items were never used for taxable purposes and I am able to reduce the deduction by any part of the asset ' s decline in value that is attributable to PPOR use of it, I am still unable to claim any depreciation?

    Also, I am a bit unclear on what happens with renovations that were done while property was still used as PPOR - can they be claimed under capital works or not at all?
     
  2. Mike A

    Mike A Well-Known Member

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    VDK

    correct.

    From 9 May 2017 the depreciation landscape changed dramatically. These changes are effective from 1 July 2017.

    You can no longer claim Division 40 depreciation deductions for second-hand or used depreciating assets whether they are purchased with the property or bought separately.

    For properties that were purchased prior to 9 May 2017 AND were available for rent during the 2017 financial year (i.e. prior to 1 July 2017) then you will continue to be eligible for Division 40 depreciation deductions.

    The changes have not impacted the ability to claim Division 43 Capital Works Deductions and, as this is usually a much more significant deduction over the longer term, it is still worth looking into whether it is worth obtaining a Depreciation Schedule at least for those deductions.
     
  3. Paul@PAS

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

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    If the property did not produce rental income between 9 May 27 and 30 June 17 the legislation bars any future deductions under Div 40.
    Div43 remains eligible from the date first used to produce rent.
    Non deductible div 40 can assist a future deferred cgt benefit.
    Seek tax advice
     
  4. Mike A

    Mike A Well-Known Member

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    The property does not need to produce rental income between 9 May 17 and 30 June 17.

    The explanatory memorandum states

    "The amendments also apply to assets acquired before this time if the assets were first used or installed ready for use by an entity during or prior to the income year in which this measure was publicly announced (generally the 2016-17 income year), but the asset was not used at all for a taxable purpose in that income year." nothing about specific dates. just needed to be used for a taxable purpose during the 2016-17 income year.
     
    Last edited: 20th Jun, 2020
  5. Paul@PAS

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

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    Correction agreed, but not quite that simple.....for a newly acquired property that date test is relevant if acquired after May 2017.
    For an existing owned property prior to that date any income producing activity during that year is relevant BUT....for the private use on or aftre 9 May 2017 which could act to stop future deductions recommencing.

    No income producing purpose is fatal. As is any future cessation of income producing use which is then followed by use by the owner. On re-use of the income producing use the deduction ceases too.

    A property rented prior to May 2017 and then not rented aftre the 9 May must be further explored to determine if the Div 40 can be used at the time of income producing use recommencing
     
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  6. Baker

    Baker Well-Known Member

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    Please could someone elaborate on this point, for us dummies?
     
  7. Depreciator

    Depreciator Well-Known Member

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    Roughly speaking, what it means is that the depreciation that was previously able to be claimed on previously used Div 40 i.e. appliances, carpet, hot water etc, is recorded and can be used when you sell the property to reduce the CGT. So it's not lost forever.
    When these unexpected and disappointing changes came through, people like us who do Depreciation Schedules had to accommodate them. Most companies introduced a new version of their Depreciation Schedule for these scenarios. We called ours a Deferred Depreciation Schedule, which I modestly think is the best of the names floating around.
     
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  8. Mike A

    Mike A Well-Known Member

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    Two aspects to the K7 capital loss are less appealing than an outright revenue deduction at the time of the outlay (or each year as in the case of depreciation):

    ▪️ a deduction is more valuable (tax-wise) each year than a capital loss at the time of the sale; and
    ▪️ a deduction is not reduced by the 50% discount, whereas a capital loss is applied against a capital gain before the CGT discount is applied, so the benefit of the capital loss is halved.

    A K7 capital loss is better than nothing, but not as generous as the position prior to 1 July 2017 when the law changed.
     
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