Depreciation and CGT

[alexlee]

Just wanted to highlight a common misconception about depreciation and CGT. I've noticed the anti-negative gearing people generally say that depreciation isn't actually useful because it reduces your cost base and so you have to cough it back up as CGT eventually. The pro-negative gearing people tend to say 'save tax' and don't mention the eventual CGT hit.

As an aside, I go for positive cashflow. Currently my properties are negatively geared for tax but cashflow neutral.

However, the reality is halfway between this. Yes, you get tax deductions at your marginal tax rate for depreciation, and yes, you have to pay CGT on that reduced cost base, but remember CGT is only (for individuals) at HALF your marginal tax rate.

So on depreciation of $10,000 and marginal tax rate of 47%:

Tax saved $4,700

and when you sell the property, your CGT on this is: $2,350


$4,700 saved now is also much better than $2,350 in 5 or 10 years time when you sell the property due to inflation, opportunity cost, etc.

So the reality is that depreciation is better than the anti-negative-gearers say, but not as good as the pro-negative-gears say.
Alex

[depreciator]

Just to add to your understanding Alexee, it's only depreciation claimed on the building itself that is deducted from the cost base. And in many cases this is less than that claimed on the Fixtures and Fittings, especially in the first 3-4 years.

So on your indicative $10,000 figure, only half of it may be building depreciation.

The other thing to consider is that any property purchased after May 13, 1997 must have the eligible building depreciation deducted from the cost base upon sale whether it has been claimed or not during ownership. So if you don't claim it, you'll be slugged for it anyway.

Regards,

Scott

[Merovingian]

Just wanted to highlight a common misconception about depreciation and CGT. I've noticed the anti-negative gearing people generally say that depreciation isn't actually useful because it reduces your cost base and so you have to cough it back up as CGT eventually. The pro-negative gearing people tend to say 'save tax' and don't mention the eventual CGT hit.

As an aside, I go for positive cashflow. Currently my properties are negatively geared for tax but cashflow neutral.

However, the reality is halfway between this. Yes, you get tax deductions at your marginal tax rate for depreciation, and yes, you have to pay CGT on that reduced cost base, but remember CGT is only (for individuals) at HALF your marginal tax rate.

So on depreciation of $10,000 and marginal tax rate of 47%:

Tax saved $4,700

and when you sell the property, your CGT on this is: $2,350


$4,700 saved now is also much better than $2,350 in 5 or 10 years time when you sell the property due to inflation, opportunity cost, etc.

So the reality is that depreciation is better than the anti-negative-gearers say, but not as good as the pro-negative-gears say.
Alex

I personally like depreciation. It enhances one's cash-flow. But for those who mostly buy and hold, the CGT argument won't really be an issue, as they'd probably never sell. So for them, it's even better.

Just thought I would throw my hat in the ring... :)

[Mry]

Just wanted to highlight a common misconception about depreciation and CGT. I've noticed the anti-negative gearing people generally say that depreciation isn't actually useful because it reduces your cost base and so you have to cough it back up as CGT eventually. The pro-negative gearing people tend to say 'save tax' and don't mention the eventual CGT hit.


Just to point out something, another misconception about depreciation, depreciation does not reduce your cost base for rental properties. Buying a house that you can claim special building write off on after 13 May 1997 does however but depreciation on, for example the stove, does not.

Depreciation is a revenue item claimed under Division 43, and as such does not reduce your capital base. I'm sure the ATO would like to eliminate this nice non cash deduction.

And CGT is reduced on properties owned for more than 1 year for individuals by 50% (33% for Super Funds!).

[julia]

Here is another little depreciation advantage that tips the scales in favour of looking for a property with maximum depreciation advantages:
Salary sacrifice the cost of plant and equipment under $300 per owner and still claim the equipment under the depreciation provisions in the owner's personal tax return.
An employer is entitled to claim a tax deduction for any expenses it reimburses an employee for. If the expenses are not relevant to the employer's business then a FBT liability normally arises. But if the expense is otherwise deductible to the employee or an associate the otherwise deductible rule exempts the payment from FBT. Yet it is still tax deductible to the employer just as wages to the employee would have been. An employee is still entitled to claim depreciation on the equipment and as the equipment is under $300 per owner the depreciation rate is 100%. So in the same year both the employer and the employee get to claim a tax deduction for the same piece of equipment. From the employee's point of view they get the purchase price of the equipment tax free from their employer and then get a refund of the price of the equipment multiplied by their marginal tax rate. Nice little double dip.
When you first purchase a rental property there are usually quiet a few items that are under $300 per owner. But be careful if they are part of a set it is the cost of the set that must be under $300. If they are identical items such as curtains all curtains purchased that year must be under $300 per owner ie $600 if owned in name of husband and wife.
Don't despair if you purchased the property several years ago you can still take the original paper work to your employer and ask for reimbursement in the current year. The only difference is you will not be able to claim the depreciation at 100% in your personal return for the current year because you have already done so when the property was purchased.
If you can get your hands on a tax invoice for the equipment your employer would also be entitled to a input credit even though it is for a domestic rental property. As your employer has 1/11th of the price reimbursed to him or her by the ATO they should only reduce your pay by 10/11ths of the price. And yes you still get to claim the full 11/11ths in your personal tax return.
If you can't bantacs at least minimise it legally. I love my job!
Julia Hartman
julia@bantacs.com.au
www.bantacs.com.au