Depreciation & 'double-dipping?'

[Propagate]

Hi all,

A quick question regarding depreciation - as I am still new to it.

Being from the UK, where you cannot claim depreciation, I am not totally clear on the mechanics of it as yet.

In the UK, if the washing machine breaks down in our rental, we buy another one and at the end of the year the cost of the washing machine is deducted from our 'profit' on the rental.

Here in Australia, if we had a rental and the washing machine needed to be replaced, do I assume that it is covered by the depreciation - therefore you don't 'double-dip' and claim both deprecation and replacement cost of the item each year?

If that's the case, what about things that are not on the schedule, for example repairing a fence or unblocking a drain - can we offset those sorts of costs against the profit, as well as claiming a depreciation allowance?

Cheers.

 

[depreciator]

Hi Tony and Emma,

Generally speaking, a 'repair' is restoring something to the condition it was in when you bought it. The cost of repairs is 100% claimable in the year the cost was incurred.

If you replace an entire item, you cannot claim the replacement cost as a 'repair'. You have to depreciate it.

If you have a washing machine in a property and you have been depreciating it, in all likelihood it has been in the Low Value Pool (for items valued between $300 and $1,000).
An item that is in the LVP must stay in the Pool and keep being written down according to the Pool rate even if it is no longer in the property. I have two hot water heaters on a Schedule of mine even though the property in question only has one hot water heater.

Unblocking a drain is a 'repair' and you claim the entire cost. Fixing a fence is a 'repair' and you claim the cost. BUT if you replace the entire fence, you have to depreciate it.

Scott

 

[ianvestor]

Fixing a fence is a 'repair' and you claim the cost. BUT if you replace the entire fence, you have to depreciate it.

Can you 'repair' 99% of it?

Not that I'd ever try that on... not worth messing with.

 

[depreciator]

You'd be pushing it with 99%, but it would be fine to repair it in a couple of stages - split over different tax years.

 

[annunaki]

Hi Depreciator,

Just a quick question about this scenario:

Descretionary trust bought a brand new investment property

Land $320,000

House $510,000

Now the property will be cashflow positive by 6k per year.

Question is ,will the trust qualify for the building allowance of 2.5% per year and Depreciation of the fittings etc. ? How does it work with this scenario..

Thanks

Anu

 

[Rob G.]

An item that is in the LVP must stay in the Pool and keep being written down according to the Pool rate even if it is no longer in the property. I have two hot water heaters on a Schedule of mine even though the property in question only has one hot water heater.


Scott

Hi Scott,

Do you mean that the old one was scrapped (no value) so the pool was left untouched ?

Does the market value deeming rule apply if you still held the old one but never intended to use it again (similar to deemed termination value for a balancing adjustment) ?

Cheers,

Rob

 

[Propagate]

Cheers guys. You lost me a bit toward the end, but my question has been answered.

Many thanks indeed.

Tone.

 

[Pushka]

Just a query on the LVP. If the property is jointly owned 50/50; then any item under $600 can be written off? ($300 each) Think I read that somewhere in the ATO booklet. And the same principle applies for the $1000 principle? ie $2000 - $1000 each can go into the LVP.

 

[depreciator]

Items that go into the Pool must stay in the Pool, and keep being depreciated even if they have been tossed out. It sounds silly, but I guess it's a foil for the fact that the Pool depreciation rate is quite generous?
That place of mine had a HWS that died. It had been in the Pool and still had a value. So it stayed in the Pool. And I put a new HWS in the property and bunged it in the Pool.
Of course, using the Pool is optional. If somebody buys an IP and is intending to do a reno in a year or so, it's probably best to not use the Pool. That way when they toss the Assets out they can claim the residual value of them. Of course, this is sort of accountant territory, so it's best to chat with your accountant in case I'm wrong.

Pushka, yes Assets can be split according to their ownership. So with, say, a $500 stove that is owned 50/50, you will each own a $250 stove. Similarly, items over $1,000 can be split and put into the Low Value Pool.

Scott

 

[RumpledElf]

Generally speaking, a 'repair' is restoring something to the condition it was in when you bought it. The cost of repairs is 100% claimable in the year the cost was incurred.

So if you buy a house in very poor condition and repair all the broken stuff by fixing/replacing to bring it up to rentable condition and then rent it out, then *everything* you've done is on the depreciation schedule?

Edit: when you use the 'value' of something for depreciation, does that include labour? Eg, we'll be getting a kitchen installed for $5000, do we use the $5000 value or the $3000 or whatever that the cabinets cost?

 

[depreciator]

Yep, if you buy a place and do work on it straightaway before renting it out, you are 'improving' it, so you would depreciate the cost of the work.

If it costs you $5,000 to get a kitchen installed, then that's what you claim - at the very slow rate of 2.5% pa.

 

[RumpledElf]

2.5% is better than nothing though. A house with no kitchen* is unrentable ... no rent, nothing to deduct against.

*it had a room with a sink with only hot water connected and a wood stove with a big hole in the side and a floor with a huge hole burnt through it and the fluoro had a broken starter so it was dark as the bowels of hell in there. I'm sure someone would call this a kitchen, but I don't.