A Life Time of Tax.

[GreatPig]

Unless you are someone like Kerry Packer....we are all doomed to pay some tax

What, you mean dead?

GP

 

[Rixter]

They could, if they wanted to generate losses to accomplish it. Bottom line is, to get a deduction you have to have a loss, which naturally you expect to recoup in the future from capital gains.

Unless the low taxable income is mainly due to depreciation allowances and doesn't represent a real cashflow loss. I think this is what Rixter is getting at... I don't think anyone is advocating large -ve gearing losses by themselves as a good thing?

HiEquity has hit the nail on the head. There are two types of deductions - Cash Deductions & Non Cash Deductions.

But it does. You have to spend money on something to be able to depreciate it. If you don't spend money, you can't depreciate. It's essentially the same as a deduction, but spread over multiple years.

I dont outlay any money and reduce my cash flow in order to claim a non cash depreciation deduction. This is because I am depreciating the buildings & fittings/fixtures component contained within my initial property purchase price which I have funded from 105% borrowed funds.

Also, from what I've seen mentioned on the forums, I believe depreciation comes off the cost base, so you effectively pay CGT on it later when you sell the asset.

You are correct it does come off the cost base later on but only if your exit strategy involves selling.

Hope this helps.

 

[GreatPig]

I dont outlay any money and reduce my cash flow in order to claim a non cash depreciation deduction. This is because I am depreciating the buildings & fittings/fixtures component contained within my initial property purchase price which I have funded from 105% borrowed funds.

So you have outlaid money for those things you are depreciating, albeit borrowed money (which you're paying interest on). And there is an expectation that eventually you will need to outlay money again to replace them when they're worn out (even the buildings if they get bad enough). The depreciation is to compensate you for those items losing value through wear and tear.

So to get the depreciation to reduce your tax, you have had to spend money on items that lose value over time.

Don't get me wrong though, I'm not say this is necessarily a bad thing. Obviously with Sunfish's example of plant and equipment for a business, the equipment's needed to carry out the business. Similiarly, when you buy the property, it normally comes with a building and fittings, otherwise you wouldn't be able to rent it out (or not so easily). But the point is, you're not getting a tax deduction for nothing. It's for money you've spent that you're effectively losing value on as the items purchased wear out. Whether that money was spent as part of the original property purchase or separately later is irrelevant.

So once again it comes back to risk. You are spending money on costs now (property holding costs, including interest) that there is some risk of not recovering in the future. Anyone intending to follow this course of action needs to be aware of those risks, as despite what some people might think, it's not a sure thing (all reward carries some risk).

GP

 

[Rixter]

So you have outlaid money for those things you are depreciating, albeit borrowed money (which you're paying interest on). And there is an expectation that eventually you will need to outlay money again to replace them when they're worn out (even the buildings if they get bad enough). The depreciation is to compensate you for those items losing value through wear and tear.

So to get the depreciation to reduce your tax, you have had to spend money on items that lose value over time.

Don't get me wrong though, I'm not say this is necessarily a bad thing. Obviously with Sunfish's example of plant and equipment for a business, the equipment's needed to carry out the business. Similiarly, when you buy the property, it normally comes with a building and fittings, otherwise you wouldn't be able to rent it out (or not so easily). But the point is, you're not getting a tax deduction for nothing. It's for money you've spent that you're effectively losing value on as the items purchased wear out. Whether that money was spent as part of the original property purchase or separately later is irrelevant.

So once again it comes back to risk. You are spending money on costs now (property holding costs, including interest) that there is some risk of not recovering in the future. Anyone intending to follow this course of action needs to be aware of those risks, as despite what some people might think, it's not a sure thing (all reward carries some risk).

GP

Yes I agree totally, one should always work towards maximising cashflows & minimising risks no matter what they chose to do.

In relation to spending money in order to claim a depreciative item, Yes expenses do need to be outlaid & items do need to be replaced as their expected working life ends. I dont outlay any of my money for these expenses.

The expenditure for the items comes from capital that I fund from other peoples cash (via a lender) and not from my portfolio's cash flow. The interest incurred on my own portfolio's borrowings are paid for again by other peoples money - namely the tenants and the tax man.

My point is that no matter what one decides to do there is always more than one way to skin a cat (so to speak).

Hope this helps