Capital Gains and Hot Water Service

[argentina]

Hi,
We sold IP in Nov 2012. A Hot Water Service had been installed by us in 2007 and depreciated since that time. The closing written down value (as per depreciation schedule) on the hot water service was $424 at the time the property was sold. Should I be deducting that value from the sale price of the house and calculating capital gains/loss on the hot water service separately?
Thanks

 

[GaryT]

Yes - assuming the WDV roughly equates to the market value which is usual practice.

You are effectively selling the HWS at its WDV and therefore the tax effect is neutral.

 

[Paul@PFI]

Cgt

Spot on.

There is an income tax and a CGT issues that applies on sale. Its best explained using a basic example. Assumptions :
1. Hot water written down value at 30June year before sale is $1200
2. Contracted sale price is $100K

Steps:
1. Pro-rata HWS depreciation up to date of sale. This gives WDV at date of sale. Lets assume Depeciation of $200 is deductable. WDV = $1,000 at sale.
2. From proceeds reduce proceeds for WDV of HWS. Lets say its $1,000 as above. Thus for CGT the proceed are now $99,000.

You dont want a profit on depreciable assets just a clearance of its book value. This is also why when assets form part of contact you DO NOT specify a high value to keep the buyer happy. Have seen clients do this and it has a massive sting. It will mean higher taxable income v's position if a cap gain occurs - Subject to discount.