Div 43 vs Div 40 depreciation and cgt

[knightm]

My belief and my reading of p21 of the rental guide from the ATO (thanks again Scott) is that there is diff between capital works or construction depreciation and plan (fixtures and fittings) depreciation. My belief is that the construction depreciation claimed over the yrs needs to be subtracted from the cost base to reduce to to ensure there is no double dip. BUT the flip side of this is that (my belief) fiv 40 items depreciated over the yrs are NOT used to reduce cost base at time of cgt event.

So if I buy a pre 1985 property (no construction write off) the div 40 depreciation does NOT need to be used to reduce the cost base.

Can someone tell me if I am going to need to change my beliefs?

Just arguing with my accountant.

 

[coastymike]

Division 40 arent going to reduce your cost base but you need to allocate the sale price between plant and equipment and land and buildings and determine whether a balancing charge is appropriate.

division 40 will affect cgt.

 

[knightm]

Division 40 arent going to reduce your cost base but you need to allocate the sale price between plant and equipment and land and buildings and determine whether a balancing charge is appropriate.

division 40 will affect cgt.

mmmm. Never even heard of a balancing charge before. Trying to understand the ato descriptions but im a bit slow, or a bit tired tonight. Its alp duez night on the tour too so its going to be a long one.

I know why I chose not to be an accountant.

 

[GaryT]

Even some accountants don't get the effect of Div.40 on CGT.

It is best explained with an simple example. Assume purchase of rental property of $340,00 which includes depreciable assets of $40,000. Cost base for CGT = $300,000.

Assume subsequent sale of $420,000 which includes depreciable assets (written down value (WDV) in depreciation schedule) of $20,000. Sale value for CGT = $400,000.

Capital Gain = $400,000 - $300,000 = $100,000.

The Div 40 assets are sold for their WDV value and therefore the tax effect is neutral.

So effectively the Div 40 depreciation has been written back into the CGT calculation.

 

[Rob G.]

Although generally depreciable assets are not sold for their written down value.

They are sold at market value or deemed so if not dealing at arm's length.

Cheers,

Rob

 

[coastymike]

Agreed Gary. I think if the ato did an audit on CGT calculations they would find that many have been done incorrectly and a potential revenue source for them.