Tax Treatment re: Initial Repairs/Cap Works etc

[Mel73]

I purchased an Investment Property in April 2011 from my brother. It was rented at the time of purchase, however the tenants vacated a few months later. I decided to repaint, replace a damaged bathroom vanity unit, re screw the roof etc while to property was vacant.

It was my understanding after reading an ATO fact sheet "Rental Properties - Avoiding Common Mistakes that the above renovations would be classed as Initial Repairs and should be claimed as Capital Works Deductions over 40 Years. This is how I claimed in 2012 and 2013.

This year, after watching the ATO videos regarding investment properties, I am left wondering if this was correct. The videos state that the cost of initial repairs etc should be added to the property cost base for CGT purposes.

The property was constructed in 1978, so I assume not eligible for capital works deductions on the value of the existing building and I have never had a QS Report completed.

In addition, I purchased a security screen this year for one of the windows. It was under $300 and from reading Rental Properties 2014 I see it is listed as a Capital Works Deduction. Am I correct in assuming I deduct this over 40 years as well?

I would appreciate any advice.

Regards

Mel

 

[depreciator]

Mel, the most important thing is to not claim initial repairs as immediate deductions. You didn't do that, so that's good.
You bought the property, made improvements to it, and are claiming them at 2.5%. That will be fine.
Regarding the security screen, the 'under $300' thing applies to Assets e.g. appliances, blinds, fans etc etc. A security screen is 'building' or 'Cap Works', so yes, it's 40 years.
Scott

 

[Mel73]

Thanks Depreciator!

Thanks for your reply Scott, glad to know I don't have it all wrong!

Am I correct in assuming that I also add the depreciated amounts claimed back onto my cost base for CGT purposes?

Regards

Mel

 

[Paul@PFI]

Cost base adjustments include
- Expenses for which no deduction was claimed;
- Capital works allowances claimed

Depreciation itself doesn't add back but without making it complicated.... YES it also adds back to the cost base. The area of disposal of depreciable plant is a complex little area in itself. Most taxpayers seem to think they MUST follow the QS report. I do but I also try to maximise depreciation deductions too. Often items are scrapped (ie oven etc) and can be written off if they are replaced etc. That's where I like BMT who give me the QS report in an excel format. I can remove scrapped items and bring fwd the deductions for the write-off where a printed report creates a headache.

I'm often asked about this - Is it worth claiming if its gets added back ? The answer is yes. Assuming $1,000 in extra deductions are claimed then the cap gain would be $1,000 more. But after 50% CGT discount the taxable value is $500. So a 50% benefit. Also bringing fwd deductions. Also some taxpayers don't have to do the add back. 13 May 1997 is the key date.

 

[Mel73]

Thanks Paul

Thanks for the reply Paul. Not sure I understood everything you wrote but I'm trying to get my head around it. Unfortunately everything I read just brings up more questions.

Hypothetically, if I were to sell the property today could you clarify what adjustment I would make to my cost base given the following simplified scenario...

1. Property was build before 1985 therefore I can't claim cap works deductions on the construction costs and I have not had a QS Report done.

2. Purchase Price $300 000 in 2011

3. Initial repairs completed total $5000 (amount already claimed in 2012/2013/2014 tax returns at 2.5% pa = $375

Regards

Mel

 

[Paul@PFI]

Mel - CGT isn't that easy.
- Was it ever a main residence ?
- Do you have a CGT election available ?
- Have you been a non-resident ?

Based on your simple numbers:

First element of cost base is $300,000

Second element - Add costs incurred to acquire. eg stamp duty, legals ??. Also any costs you incur to SELL the property ie legals and agent fees etc.

Third element : Add costs of owning for which you haven't claimed a deduction. ie $5K less the CA claimed as a deduction.

Capital Gain is calculated based on selling price less total cost base.
Less C/Fwd or current year CGT losses
Less : 50% discount

https://www.ato.gov.au/General/Capi...-cost-base-/?page=2#Elements_of_the_cost_base

 

[Mel73]

Thanks Again Paul

Thanks for your reply Paul. I understand there are other elements that need to be added to the cost base as per your post. I was just interested in how the capital works deductions specifically affected the cost base. Thanks for clarifying.

In answer to your other questions, the property has been rented from purchase, i have never lived overseas and I don't believe I have a CGT election available.

I really just wanted to make sure I am on the right track with info entered in my yearly tax returns. Not planning on selling any time soon and will no doubt require the services of an accountant when that happens.

Regards

Melissa

 

[MelbGal]

OP, you said that the property was rented for several months after you purchased it. If this si the case then some of the cost of repairs may still be deductible.

If you no longer rent the property, the cost of repairs may still be deductible provided:
- the need for the repairs is related to the period in which the property was used by you to produce income, and
- the property was income-producing during the income year in which you incurred the cost of repairs.
reference: Example 12 https://www.ato.gov.au/uploadedFiles/Content/MEI/downloads/ind00342353n17290613.pdf

Obviously if you had never rented it out and had done the repairs before your first tenant moved in then this would be similar to example 11.

 

[Mel73]

Thanks Melbgal

Thanks for your reply Melbgal. I still own the property and it is still rented. The original tenants vacated and i carried out the renovations while looking for new tenant who moved in shortly after. The work done related to damage or deterioration that was evident when I purchased therefore I am claiming the costs as capital works deductions over 40 years at 2.5%pa.

Regards

Mel