Tuesday, 9 April 2013

CGT Consequences of Depreciation

CGT Consequences of Depreciation Building Depreciation:
If you purchased you property after the 13th May, 1997 then any building depreciation that you could have claimed against your income must also reduce your cost base for CGT purposes. 

Generally, choosing not to claim the depreciation will not help you avoid the add back for CGT purposes. The legislation refers to depreciation that you were entitled to claim, not whether you claimed it or not.
There is a small window of opportunity here if you have not claimed building depreciation and do not know the amount that you would qualify to claim. 
It is intended to prevent people having to obtain a quantity surveyors report just to calculate their CGT when they have not had the benefit of the tax deductions over the years.

PLSA 2006/1 states that if you have no other way of obtaining the original building costs than paying for a quantity surveyors report and you have never claimed building depreciation in your tax return then you do not have to reduce your cost base.

TD 2005/47 addresses the situation where you do know the building costs ie you were the original owner, yet you have not claimed depreciation at all. In this case you only have to increase your cost base by the depreciation you could claim if you amended your tax returns. 

This limits your add back to the number of years you would be allowed to amend your tax return to claim the missed depreciation. 
Taxpayers with simple tax returns are only supposed to be able to amend back two years so you would only need to increase the cost base by two years depreciation. 
Note that the two years is from the assessment date. 
In a recent case the ATO was successful in arguing that in most cases a 4 year limit applies because beneficiaries of trusts have a 4 year limit and most trust deeds have such a wide definition of beneficiary that just about anyone could be caught. 

It is not necessary that they receive a distribution from the trust, it is enough that they technically could. As a result of this case the government’s reduction of the amendment period for average tax payers to 2 years has been completely circumvented by the ATO.

Depreciation of Plant and Equipment:
It may surprise some readers to find out that there is no CGT on plant and equipment. It is subject to normal income tax ie no 50% CGT discount. If you have been using the ATO rates for your depreciation the ATO will generally accept that the original purchase price of your plant and equipment is the same as the start figures in your depreciation schedule and that the value of the plant and equipment on sale is the same as the balance of unclaimed depreciation in the schedule, so there are no tax consequences.
But this means that the first element of your cost base on an investment property, for CGT purposes, is the purchase price less the start value of the plant and equipment. Further, the sale price included in the CGT calculation is the sale proceeds less the remaining unclaimed depreciation in the schedule. Note if there was a period where the depreciation was not claimed ie the property was used for private purposes, the balance in the depreciation schedule should still have been reduced.
Draft Legislation on 50% CGT Discount for Non-Residents
While this legislation is only a draft, so may not make it through Parliament in its current form, it is not looking good for Australians working overseas with investment properties in Australia.

From 8th May, 2012 non-residents for tax purposes and temporary residents (ie 457 visa) will not be entitled to the 50% CGT discount. 

This will even apply to Australian citizens who may work overseas for a while. The draft legislation provides for an apportionment of the 50% discount based on the number of days you are a resident of Australia compared with the number of days you are not.
How the Capital Gains Tax Discount is Calculated
You will need a market valuation of the property as at 8th May, 2012. Valuers can work out the value back then by considering sales at that date, so don’t rush but on the other hand don’t leave it too long or at least take photos now so the valuer can consider any deterioration since May 2012.

When you eventually sell the property the formula starts with the gain up to the market value at 8th May, 2012 and checks whether this is less than the gain for the whole period. Initially this will be quite likely because the selling costs will reduce the total gain but not the gain before 8th May 2012. If there is no real gain since 8th May, 2012 then the full 50% CGT discount will apply.

The capital gain that relates to the period after 8th May, 2012 is calculated by deducting from the total capital gain, the capital gain made up until 8th May, 2012. 

The amount of 50% CGT discount you qualify for on the gain applicable to the period after 8th May, 2012 is relative to the number of days you were a resident to the number you are not. 

But it gets more complicated than that because the formula needs to come up with a percentage that applies to the whole gain apportioning between the pre and post gain figures. So it takes into account the pre 8th May, 2012 days at 50% discount and the post days at the ratio of resident to non-resident days and then apportions this over each period’s relative gains. 

So let’s assume the property made a $200,000 capital gain pre 8th May, 2012 and a total capital gain of $300,000. Also assume you owned the property for 1,000 days before 8th May, 2012 and the date you sell the property is 1,000 days after the 8th May, 2012 but for 500 of those days you were a resident. You will be entitled to a 41.667% CGT discount on the total gain over the whole period of ownership:
$200,000 pre gain + ($100,000 post gain x 500 resident days/ 1000 post 8th May 2012 days) -----------------------------------------
$600,000 twice the total gain

Well that is the formula, another way of looking at it is that two thirds of the gain was made pre May 2012 when the 50% discount applied and one third afterwards when the owner was only a resident for half the time. Two lots of 50% and one of 25% equals 125% divided by 3 to average them out is 41.667%.

If you do not have a valuation then you will lose the 50% CGT discount for the pre 8th May, 2012 period. The discount percentage is apportioned by reference to the days you were an Australian resident after 8 May 2012 as a proportion of the total time that the asset was held.
Temporary Residents
Taxpayers on a 457 visa will be treated as a non-resident for capital gains tax purposes though they will be entitled to the main residence exemption.

Changing Residency
Unfortunately it is not a question of your residency status when you sell the property. The whole period of ownership since 9th May, 2012 is examined with the 50% CGT discount only applying on a pro rata basis to the days you were a resident.

Main Residence Exemption
It is only the 50% CGT discount that is affected, not the main residence exemption. This means that temporary residents can still protect their Australian home from CGT. Note temporary residents are not subject to CGT in Australia on any gains they make on their overseas assets.
Section 118-145 (6 year rule) will not change. It contains an example of how a resident of Australia can leave and become a resident of another country for tax purposes but still continue to cover their home with their main residence exemption. As long as the main residence exemption fully covers the property there is no need to look at the 50% CGT discount. This means that an Australian citizen could continue to own their home here, completely protected by their main residence exemption, while they work overseas, providing it only produces income for a period of 6 years or less. If it is not earning income it can continue to be covered indefinitely.

Donations to School Building Funds
To claim a tax deduction for donations to a school building fund the payment must be voluntary. So a “donation” that is part of the school’s fees would not qualify.

Further, it must be to a public fund whose sole purpose is to provide money for the acquisition, construction or maintenance of a building used as a school by a government, public authority or a non profit organisation. TR 2013/2 provides much more detail.

Off The Plan Apartments
Stacks the Law Firm have created a useful check list of 12 pitfalls of buying off the plan. The article is available at

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