Depreciation & CG

[Brenda Irwin]

I am a little confused. There are 4 lots of depreciation?

Special building write off depreciaton at 2.5% is one.
Low value pool for items under $1000 at 18.75% 1yr then 37.5%
Diminishing depreciation for items over $1000 at variable %'s
F & F under $300 at 100% depreciation.

Question: If the first 3 which have been claimed in various amounts have to be added back to the sale price to calculate capital gains, does the 4th one have to be added back too or is it only seen as a straight out expense and forgotten about?

Cheers Brenda:)

[jahn]

Hi Brenda
I think the last line of your post sums up our hopes and expectations, not the ATO's :mad:
jahn

[DaleGG]

Hi

Technically, it is only the building depreciation added back, I am afraid, if the property was acquired after 13 May 1997.

Dale

Originally posted by Brenda Irwin
I am a little confused. There are 4 lots of depreciation?

Special building write off depreciaton at 2.5% is one.
Low value pool for items under $1000 at 18.75% 1yr then 37.5%
Diminishing depreciation for items over $1000 at variable %'s
F & F under $300 at 100% depreciation.

Question: If the first 3 which have been claimed in various amounts have to be added back to the sale price to calculate capital gains, does the 4th one have to be added back too or is it only seen as a straight out expense and forgotten about?

Cheers Brenda:)

[jahn]

Hi Dale
When you say;
"Technically, it is only the building depreciation added back, I am afraid, if the property was acquired after 13 May 1997."
Isn't that good. Doesn't that mean the other depreciation already claimed (and Spent) does not have to be referred back into the equation to increase your taxable amount ?
jahn

[DaleGG]

Hi Jahn

Yes, it is good news. Sorry, I did not mean it to sound like bad news . . .

Dale

Originally posted by jahn
Hi Dale
When you say;
"Technically, it is only the building depreciation added back, I am afraid, if the property was acquired after 13 May 1997."
Isn't that good. Doesn't that mean the other depreciation already claimed (and Spent) does not have to be referred back into the equation to increase your taxable amount ?
jahn

[Les]

G'day Dale,

Technically, it is only the building depreciation added back, I am afraid, if the property was acquired after 13 May 1997
Are you saying, then that ONLY Capital Allowances claimed on properties purchased AFTER 13 May 1997 are subject to being "added back" on to costs when calculating CG Taxes???

Or, conversely, as stated by Brenda IrwinSpecial building write off depreciaton at 2.5% is one - but what about her 2, 3 and 4? Are other "Depreciations" or "Borrowing costs" NOT added back to affect CG Tax owing?????

(This is HUGE!!!! :D)

Regards,

[alpina]

i thought all of it was added back

this sounds like good news indeed :)

julie

[Brenda Irwin]

Yep, I contacted the ATO and they confirmed that only the 2.5% claims are added back.

The explanation if I heard correctly is that since the Special Building or Capital write off forms part of the property, those claims are added back since that is part of what the purchaser is paying for when purchasing.

Depreciation items, although any unclaimed depreciation forms part of the purchase price, the already written off claims for ordinary depreciation are for wear and tear whilst owning the property.

I'm starting to like the ATO.:D

[abcdiamond]

Originally posted by Brenda Irwin
I'm starting to like the ATO.:D

Brenda,

I can recommend a good Doctor :D

[Apocalypse]

So depreciation legally and properly claimed on fittings/fixtures etc is NOT deducted from the original cost base when calculating a capital gain? Only the building depreciation 'counts'?

Wow. I can envisage situations where this is would be very significant. Items in a low value pool could be depreciated by half in 2 years, yet still remain effectively 'new' in appearance to a prospective purchaser...

[hwd007]

I understand its only capital depreciation that's added back. I guess on a brand new property this could partly cancel itself out over the first few years due to the claim on fixture and fittings that is not added back.

[geoffw]

This had also surprised me. But it's in the ATO 2002-2003 Guide on rental properties- http://www.ato.gov.au/content/downloads/NAT1729-03.pdf - page 9 of 24- "if you have disposed of a rental property and you have claimed capital works deductions for construction expenditure ... those deductions may be excluded from the cost base or reduced cost base of the property"

Hey, that's saved me at least $5K tax on my recent sale. Thanks Brenda!

[see_change]

Geoff

re
This had also surprised me. But it's in the ATO 2002-2003 Guide on rental properties- http://www.ato.gov.au/content/downloads/NAT1729-03.pdf - page 9 of 24- "if you have disposed of a rental property and you have claimed capital works deductions for construction expenditure ... those deductions may be excluded from the cost base or reduced cost base of the property"

Hey, that's saved me at least $5K tax on my recent sale. Thanks Brenda!

What you are referring to here in Capital works deduction , and that is not the same as "depreciating assets" which is what Brenda refers to in her original post as

Low value pool for items under $1000 at 18.75% 1yr then 37.5%
Diminishing depreciation for items over $1000 at variable %'s
F & F under $300 at 100% depreciation

Further on in the guide they do note that you need to deducted capital works deductions that you have claims or where entitiled to claim (!!) from you cost base. No specific mention is made on having to deduct amounts claimed for "Depreciating assets". ( Though they aren't specifically excluded )

See Change

[see_change]

I've found the ATO's answer to this question in a private ruling.

The link is

http://law.ato.gov.au/atolaw/view.htm?find=%22cost%20base,%20fourth%20element%22&docid=AID/AID2001665/00001

They are referring to the Fourth element of the cost base which is " that capital expenditure incurred to increase the asset's value, provided the expenditure is reflected in the state or nature of the asset at the time of the CGT event"

They go on to say

"Expenditure must be reflected in the state or nature of the asset, not necessarily in its value, at the time of the disposal. For example, even though the improvement may have deteriorated to a worthless condition before the time of the disposal, the expenditure on the improvement would nevertheless qualify providing the improvement was still in place."

See Change

[twodogs]

[QUOTE=Brenda Irwin]Yep, I contacted the ATO and they confirmed that only the 2.5% claims are added back.

When I read the ATO info, I'm confused...maybe this is their intention ;)

So, what's the concensus ? For example (just imaginary numbers)

Purchase Price $150,000
Sale price, 300,000
Purhase and sale costs, 15,000
Total capital works claimed (2.5% stuff), 5,000
All other decpeciation claimed 10,000 (out of 15,000 so still 5,000 to claim)

Is CGT based on $140,000 (300,000 -150,000 - 15,000 + 5,000) ?

Does the other depeciation figure into the CGT calculations?

[see_change]

Hi Maniyak

[QUOTE=Brenda Irwin]
So, what's the concensus ? For example (just imaginary numbers)

Purchase Price $150,000
Sale price, 300,000
Purhase and sale costs, 15,000
Total capital works claimed (2.5% stuff), 5,000
All other decpeciation claimed 10,000 (out of 15,000 so still 5,000 to claim)

Is CGT based on $140,000 (300,000 -150,000 - 15,000 + 5,000) ?

Does the other depeciation figure into the CGT calculations?

My current understanding is that you are correct . You CGT is 140 K .

I must admit the ATO seem to have two standards of explanation.

When the explanation involves them getting more money off you , they explain things very clearly..

When it involves you getting money off them , things never seem to be as obvious or stated plainly :rolleyes:

See Change

[Brenda Irwin]

My accountant sets it out in a slightly different way. I am trying to figure it out myself too. Using Maniyak's figures:

(A) Sale price $300,000 less the sale of depreciable items $5000 plus capital costs claimed $5000 = Total Capital Proceeds of $300,000

(B) Purchase price $150,000 plus purchase and sale costs $15,000 = Total Cost Base of $165,000.

Then (A) $300,000 minus (B) $165,000 to get (C) Capital Gain $135,000.

Please correct me if I am wrong.

Another variance to consider is if you have added capital value to the property since you purchased it say an amount of $4,800. You may have been claiming that at 2.5% for two years equalling $240.

In that case you add the $240 back to (A) and add the unclaimed improvements of $4560 to (B).

Using Maniyaks model again: (A) $300,000 plus $240 = $299,760.
(B) $165,000 plus $4560 = $169,560.

(A) $299,760 minus (B) $169,560 equals (C) Capital Gain $130,200.

IS this correct too?

[see_change]

Brenda

Where we differ is that you are deducting the $5,000 residual value of the depreciable assets off the Selling price. ( I'm assuming that none of the work was done on the house after purchase )

I'm only just starting to come to terms with this area ( up to now I've only had the time to worry about buying the correct places :) ) but to me it appears you're double dipping on the residual value of the depreciable assets. First you're getting paid for these as part of the selling price , then you're deducting them. I would have thought that the costs of the depreciable assets shouldn't be included in any calculations of the cost base or selling price.

The way I look at is

Cost base = Purchase price + Aquisition / sale costs - capital costs claimed

So Cost base = 150,000 +15,000 - 5,000 = 160,000

Capital gains = Selling price - cost base = 300,000 - 160,000 = 140,000

Where are Dale or Nick when you need them ...

See Change

[DaleGG]

Hi

We would work this out by using:

Sale Price = 300,000
Less Purchase price = 150,000
Less Costs = 15,000

Profit = 135,000
Plus, add back Division 43 amounts claimed = 5,000

Capital Gain = $140,000

Cheers

Dale

[see_change]

I've found the ATO's answer to this question in a private ruling.

The link is

http://law.ato.gov.au/atolaw/view.htm?find=%22cost%20base,%20fourth%20element%22&docid=AID/AID2001665/00001

They are referring to the Fourth element of the cost base which is " that capital expenditure incurred to increase the asset's value, provided the expenditure is reflected in the state or nature of the asset at the time of the CGT event"

They go on to say

"Expenditure must be reflected in the state or nature of the asset, not necessarily in its value, at the time of the disposal. For example, even though the improvement may have deteriorated to a worthless condition before the time of the disposal, the expenditure on the improvement would nevertheless qualify providing the improvement was still in place."

See Change

This is the first time I've quoted myself, but the edit button isn't appearing for me on this post so I can't go back and correct myself

The info I've quoted here is doesn't actually apply to depreciating assets , which are the things you claim depreciation on. This applies to some other improvements which aren't classified as depreciating assets.

See Change

[see_change]

Brenda

Where you have added capital works into the equation , you should be adding the total cost of the capital works to your cost base , and then deducting the amount you've claimed for depreciation from the cost base.

So you should be adding the $4800 to you cost base and then deducting the $240 from this.

My current understanding is that , from the CGT point of view the depreciating assets need to be considered as seperate to the actual property and any capital works .

So if you had bought depreciating assets during the time you held the property , say to the value of $7000.00 and you had claimed $4000.00, these would have a residual value of $3000.00 . On selling some of the sale price has to be allocated to represent the value of the depreciating assets so you would deduct this $3000.00 from the sale price when calculating the selling price of the property.

Something to think about. In your example you're allocating some of the sale price to represent the residual value of the depreciating assets on selling , but you're not allocating part of the purchase price to represent the value of the depreciating assets on purchase. :confused: :confused: :confused: :confused:
See Change

BTW please don't rely on what I'm saying , I'm not an expert on this at all, I'm just thinking out aloud

[NickM]

There is a difference between the Capital assets - ie Structural, building improvements etc (2.5% deprec in most cases) and standard depreciable items.

the capital improvement component that is depreciated is added back when the property is sold.

ie if you claimed $5000 being 2.5% of say $200K then that $5000 is added back as profit when you sell.

If you spent say $30K on improvements then this amount is added to your original purchase price of the property. If you purchased a recently built property and obtained a QS report then you only add back what you have claimed.

The other items such as depreciation on a HWS are not added back unless of course the fixtures/ furniture are itemised separately on the contract.These items are usually addressed separately when a business is sold.

NIckM

[jrc]

The cover in this week's Business Review Weekly is "Property tax cheats how investors are rorting the boom"
The issues raised seem to be some people are trying to convert income into capital gain to get the benefit of the 50% discount and there is a scheme to try and convert new units to second-hand so that GST does not apply.
The 8 areas that are alleged to be involved are:
1. Backyard subdivisions
2. GST on new home units
3. Double CGT exempotions
4. Land tax evasion
5. Related-party transactions
6. Income v capital gains
7. Serial home buyers
8. Deposit bonds