Plant & Equipment depreciation changes after 9th May 2017

Discussion in 'Accounting & Tax' started by property_geek, 5th Jul, 2017.

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  1. property_geek

    property_geek Well-Known Member

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    Scenario 1
    Joe exchanged contract for an 5 years old residential property before 9th May 2017.

    Scenario 2
    Joe exchanged contract for a OTP apartment before 9th May 2017. Construction completion due before (or after) 9th May 2017.

    Scenario 3
    Joe purchased land and exchanged contract before 9th May 2017. Joe signs up with a builder to build a house on that land. The contract with builder was signed before (or after) 9th May 2017. The contract included P&E to be supplied and installed by builder.

    Scenario 4
    Joe exchanged contract for a brand new apartment after 9th May 2017. Joe persuaded builder to exclude P&E and reduce the price on contract. Joe plans to buy & install P&E on his own once flat is handed over.

    In all above scenario (1-4) the result is as follows:
    Result - Not affected. Joe can claim P&E depreciation as before.

    --------------------------------
    Scenario 5
    Joe purchased land and exchanged contract after 9th May 2017. Later Joe signs up with builder to build house which includes P&E by builder.

    Scenario 6
    Joe purchased OTP apartment and exchanged contract after 9th May 2017. Contract includes P&E by builder.

    In above two scenario (5 & 6) Joe cannot claim P&E depreciation.

    Is my understanding correct?
     
  2. Paul@PAS

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

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    All the above may be incorrect as the precise law changes are yet t be seen and determined. May be rejected by Shorten and his buddies. The announced changes appear to allow P&E deductions when the contarct is prior to 9th May or is a new construction (no date requirement) or the owner acquires or constructs a new dwelling or improvement. Or when a owner personally acquires a new asset. The intended change seems to exclude buying used assets.

    5 - Yes P&E is available. The property is newly constructed and paid for by Joe. Joe needs to get a QS to appraise the property after completion.

    6 - yes P&E is available. The property is new and first owned by Joe. He should get a QS report. If Joe bought from another vendor (ie owner) then no deduction for P&E for existing assets. They arent new.
     
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  3. Paul@PAS

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

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    I can see many DIY taxpayers under-claiming due to this issue
     
  4. Befuddled

    Befuddled Well-Known Member

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    Another scenario, say 2 people are joint owners on a property with a 50/50 split.

    Person A buys Person B's share of the property, ending up with 100% ownership. This occurred after the 9th May 2017

    Will person A, now the sole owner, be able to claim depreciation on the P&E, or be limited to 50%?
     
  5. Paul@PAS

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

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    Havent seen the law but I suspect = no the other 50% is lost. I do believe however that it may be possible in that situation to avoid loss of the deduction by a properly drafted contract but we will have to wait and see.
     
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  6. SimonQld

    SimonQld Well-Known Member

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    Re: Scenaio 6
    Don't be caught up in other people's agendas.
    New is still new!
    If you bought a unit in January from a developer in a brand new unit building were you buying a new unit or a secondhand unit? Answer: New.
    Likewise, if you buy a unit now from a developer in a brand new unit building are you buying a new unit or a secondhand unit? Answer: Shock...It's still New.
    The concept of what is new did not change overnight on 9 May 2017.
    What happened was a handful of people decided to cloud everyone's judgement by introducing the concept that the developer is the first owner.
    If you go to the "Guide to depreciating assets" (ATO Publication) the very first para states "you may be able to claim a deduction (depreciation) for the decline in value of the cost of capital assets used in gaining assessable income" A DEVELOPER DOES NOT GAIN ASSESSABLE INCOME FROM THE ASSET NOR DOES HE USE THE ASSET! Therefore the developer does not depreciate the asset and presents the asset as new (unused) to the end purchaser of the unit.
    If the Government is going to regard developers, retailers, suppliers, sub-contractors, builders, etc as the first owners then they may as well introduce a policy that eliminates plant and equipment (Division 40) depreciation for property investors altogether because that would be the end result. For, even if you have a contract with a builder to construct a house, you're still not the one physically walking into Harvey Norman Commercial and handing over the cash to buy the appliances (for example) i.e. the sub-contractor/builder is doing that and retains ownership of those goods until you make the final payment.
    NOTE, until these proposed changes are passed and we see the final Legislation, I could be proven wrong, this is all in my opinion and this is not investment advice. Until then, do your own research and, where in doubt, apply the common sense approach.
     
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  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    "new" will probably mean something like never have been sold before or never been lived in before or it may be similar to the definition in the GST act ,s 40-75:
    A NEW TAX SYSTEM (GOODS AND SERVICES TAX) ACT 1999 - SECT 40.75 Meaning of new residential premises

    (1) * Residential premises are new residential premises if they:

    (a) have not previously been sold as residential premises (other than * commercial residential premises) and have not previously been the subject of a * long-term lease; or

    (b) have been created through * substantial renovations of a building; or

    (c) have been built, or contain a building that has been built, to replace demolished premises on the same land.

    Paragraphs (b) and (c) have effect subject to paragraph (a).

    Note 1: For example, residential premises will be new residential premises if they are created as described in paragraph (b) or (c) to replace earlier premises that had ceased to be new residential premises because of paragraph (a).

    Note 2: However, premises that are new residential premises because of paragraph (b) or (c) will cease to be new residential premises once they are sold, or supplied by way of long-term lease, as residential premises (see paragraph (a)).

    Note 3: Premises created because of the registration of, for example, a strata title plan, or a plan to subdivide land, may not become new residential premises (see subsection (2AA)).

    (2) However, the * residential premises are not new residential premises if, for the period of at least 5 years since:

    (a) if paragraph (1)(a) applies (and neither paragraph (1)(b) nor paragraph (1)(c) applies)--the premises first became residential premises; or

    (b) if paragraph (1)(b) applies--the premises were last * substantially renovated; or

    (c) if paragraph (1)(c) applies--the premises were last built;

    the premises have only been used for making supplies that are * input taxed because of paragraph 40-35(1)(a).

    Subdivisions etc. may not result in new residential premises

    subsection (1), the * residential premises are not new residential premises if:

    (a) they are created from residential premises that became the subject of a * property subdivision plan; and

    (b) the residential premises referred to in paragraph (a) were not new residential premises immediately before they became the subject of that plan.

    subsection has effect subject to paragraphs (1)(b) and (c).

    Disregard certain supplies of the premises

    (2A) A supply of the * residential premises is disregarded as a sale or supply for the purposes of applying paragraph (1)(a):

    (a) if it is a supply by a member of a * GST group to another member of the GST group; or

    (b) if:

    (i) it is a supply by the * joint venture operator of a * GST joint venture to another entity that is a * participant in the joint venture; and

    (ii) the other entity acquired the interest, unit or lease for consumption, use or supply in the course of activities for which the joint venture was entered into.

    (2B) A supply (the wholesale supply ) of the * residential premises is disregarded as a sale or supply for the purposes of applying paragraph (1)(a) if:

    (a) the premises from which the residential premises were created had earlier been supplied to the * recipient of the wholesale supply or one or more of its * associates; and

    (b) an arrangement (including an agreement) was made by:

    (i) the supplier of the earlier supply, or one or more associates of the supplier; and

    (ii) the recipient of the earlier supply, or one or more associates of the recipient; and

    (c) under the arrangement, the wholesale supply was conditional on:

    (i) specified building or renovation work being undertaken by the recipient of the earlier supply, or by one or more associates of the recipient; or

    (ii) circumstances existing as specified in regulations made for the purposes of this subparagraph.

    Note 1: The premises referred to in paragraph (a) could be vacant land.

    Note 2: For subparagraph (c)(ii), circumstances may be specified by class (see subsection 13(3) of the Legislation Act 2003 ).

    subsection does not apply to a supply if certain commercial commitments were in place before 27 January 2011 (see item 12 of Schedule 4 to the Tax Laws Amendment (2011 Measures No. 9) Act 2012 ).

    (2C) A supply of the * residential premises is disregarded as a sale or supply for the purposes of applying paragraph (1)(a) if it is made because a * property subdivision plan relating to the premises was lodged for registration (however described) by the * recipient of the supply or the recipient's * associate.

    subsection does not apply to a supply if the plan was lodged for registration before 27 January 2011 (see item 13 of Schedule 4 to the Tax Laws Amendment (2011 Measures No. 9) Act 2012 ).

    New residential premises include associated land

    (3) To avoid doubt, if the * residential premises are new residential premises because of paragraph (1)(b) or (c), the new residential premises include land of which the new residential premises are a part.
     
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  8. Paul@PAS

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

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    Yes the material issued so far does not seek to define new as meaning it must be actually acquired directly by the first occupant or the first owner etc. Its not unlike the ATO view on "new residential property" for GST. While Terry has quoted the law that law still fails to define many instances. Hence GSTR 2003/3 expands on the law and gives greater meaning and is in itself part of tax law...Just not statute.

    I can expect the law will be quite simple and the ATO will issue a tax ruling defining it further.

    This is why tax advice isnt always black and white. The law may say one thing and a ruling delves deeper. A good example is the so called 5 year rule for "new resi premises" to avoid paying GST on the first sale.... The 5 year rule has very strict conditions and if you try to sell the property unsuccessfully during the period of rent it means the 5 year period does not even commence. So if you rely on a strict 5 years you can actually not achieve the concession and GST may still apply. A recent tax case determined that same issue and the DIY taxpayers were liable for GST.
     
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