Pre-1985 PPOR and reno - depreciatrion

In the early 1980s I bought a PPOR and lived there until early 2019. I renovated the property for $32,000, which is nearly as much in dollar terms that I paid for it. I'm thinking about getting a depreciation report. This may cost $4-500, with no inspection. The reno took much longer than anticipated (surprise!), and was not finished until mid-June 2019, when the property was rented.

Based on my last full reno it seems that for FY19 the depreciation will be around $1000. As the property was bought before CGT started I'm unsure if the depreciation will affect CGT. Advice is sought on this point. TIA.

 

Early 1980s or pre-CGT. What was the contract date.

Renovations to a pre-CGT asset can still result in CGT and only a partial exemption could be involved . If the annual depreciation was $1k now I cant see how that cost $32,000. I think you should seek some personal tax advice as there are many inconsistencies in what you have said. It doesnt make any sense.

Technically it is impossible to claim depreciation and capital allowance on a pre-CGT asset since its too old and not eligible. More recent renovation costs or new depreciable assets could be OK and may or may not reduce the costbase

 

Paul, thanks. My words were unclear, sorry. I moved out in late 2018, with the renovation being done in nearly six months, to mid-June 2019, cost $32,000. The property was then rented. So while the property was bought before CGT started, unless the rules have changed the renovation may be considered for depreciation.

My understanding is that assets acquired before CGT started do not attract CGT. That includes renovations. For example:
Bought PPOR in 1982 for $40,000.
In 2018-19 moved out, renovated for $32,000 and then rented it.
Depreciation for five years total $5000.
Cost base now $35,000
Sell the property for $600,000, but CGT does not apply as the property was bought in1982.

Is this reasoning correct?

 

The renovations could be a different asset to the land.

 

Other than the reno works (at cost) no other element of the premises would be eligible for depreciation as it was constructed prior to 1985. Any deduction reduces the reno or plant costbase as a separate asset or assets. But its not a additional asset for CGT purposes as it doesnt come close to being a seperate asset under the cost rule. And as its depreciable the reduced costbase of the items would just affect the exempt gain. However the use of the residual book value for depreciable assets is not necessarly the adjustment amount for the renovation cost. The value of the assets at the time of disposal needs to be apportioned to the new / old asset elements at value at the time of disposal. If you were a tradie and did $32K of works that has a value of $160K there could be a CGT issue for the post CGT reno if the separate asset threhold is met. Otherwise the reno is just an adjustmnet event to the CGT proceeds that are then exempt.

 

Paul, thanks again. Apportionment could be hard as the reno is now very much part of the property, and I cannot see how these can be distinguished from each other. Your last words are:
"the reno is just an adjustment event to the CGT proceeds that are then exempt."
This seems to agree with
Can You Avoid Capital Gains Tax When Selling a House? | Canstar
"You will also be exempt from paying CGT on the sale of your house if you bought it before September 20, 1985, when CGT was introduced."

I cannot find an ATO reference to renovations to a property bought before September 1985. This has more information:
Yellow Brick Road - Can You Avoid Capital Gains Tax When You Sell?
"Capital gains tax was introduced on 20 September 1985, so if your property was acquired before this time, then no CGT is payable. However, if you make major capital improvements to your property after this date, part of any capital gain you make could be taxable.'

A distinction needs to be made between renovations and improvements. The property needed a lot of work done to bring it to the standard it was in when I bought it, such as carpets (worn out), paint (scruffy), and kitchen (stove broken, very worn). The switch box had fuse wire and needed to be replaced with a new one. There were two new items. One was to replace the hinged BIR doors, and the other was an air conditioning unit.

My managing agent said that EPR had not moved six months after the reno was completed, and the rent we got was just under that in another unit in the same block. I can get $1-2000 per annum depreciation, acceptable.

 

Hmm what I said had zip to do with Canstar (who arent tax advisers) which is an over simplified view. Tax law is different to a traditional concept of a single asset. A CGT asset can comprise multiple elements or it can be a single title with two different tax elements such as a pre-CGT asset which then has a new dwelling built on the old tennis court (post CGT). I once had a cliet with a pre-CGT property on the harbour who added a pool. This triggers a post CGT asset and a future CGT issue. A single land title isnt always exempt and isnt always 100% taxable either. The link below explains more about the eparture from the normal legal understanding about an asset.

eg A 1890's Terrace house. May be a pre-CGT asset. Renovations could be a separate CGT asset under tax law yet be the same property as the pre-CGT and post-CGT bits. You dont have to apportion each bit just apportion the sale into two elements IF required to do so. Then an asset can also include non-cgt elements such as Div 40 and Div 43 depreciable elements BUT these cant occur prior to the relevant start dates etc. A pre-CGT asset can never have a Div 40 or Div 43 element as these assets didnt exist then. Only more recent additions could.

A renovation is an improvement project but isnt necessarily a improvement. Like for like replacement doesnt improve. It just renews. All these trms are iven guidance in the ATO tax ruling 97/23. Firstly out of the $32K you should reduce for deductible repairs if able, then identify Div40 items for depreciation and then a balancing amount of Div 43 should occur. The true test for any enhancements to the pre-CGT asset are based on cost. There is a threshold. Unless a reno costs $150K plus isnt likely not a concern requiring apportionment of the sale.

And for $32K spent as described I would not agree $2K of depreciation is correct. Electricals and doors eg are part of the building. 2.5% pa and from the date the works were completed. Oven and AC depreciable from their installed first use date and at the ATO effective life tables. The good news is that if there is no separate asset rule there is no clawback of the depreciation claimed as a deduction.

 

Paul, thank you again. Canstar was a source, not definitive. I read TR97/23 with interest and increasing confusion. I can see the distinction between repairs and improvements, but the subtle aspects are elusive. The property was worn out and unfit for renting in the demographic I was seeking. I agree that some of the renovations are part of the building.

I will give the depreciation company an itemised list of reno expenditure, background, a plan and pictures. They can work out the details. If I sell - and I hope not to - then my tax accountant can decide how to address CGT. It does not matter much as the property cost $34,000, the reno was $34,000, and the EPR is $550-600,000. I'd still walk away with a lot of non-CGT proceeds. Prior to then, if I can reduce taxable income due to depreciation then I'm happy.

As I updated the reno spreadsheet and checked details I found a few items that should not be there and a few I missed, with the total now $34,000.