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¿ FACTORING DEPRECIATION INTO YOUR
QI understand my depreciation benefits
have to be paid back – or taken off my
cost base – when I sell my properties. Is this
true and does that mean all of the deductions
have to be paid back or is it just a portion?
I’m not clear on how it works exactly.
AGreat question, there will be a detailed
article on this subject in next month’s
edition of API.
If you purchase a property after May 13,
1997, then yes, the building depreciation
reduces your cost base. Your capital gain is
the difference between your selling price and
your cost base so a reduction in your cost
base will increase the capital gain.
You don’t really have a choice; the law
requires the depreciation to reduce your
cost base whether you’ve claimed it as a tax
deduction over the years, or not.
There are some concessions given by the
Australian Taxation Office (ATO) where
depreciation hasn’t been claimed (mores
detail next month), but they aren’t law so
could change at any time. In most cases
you’re better off to claim the depreciation
while you can anyway. You’ll get a full tax
deduction now which will help your cash
flow. When you sell you’ll probably qualify
for the 50 per cent capital gains tax (CGT)
discount which means that effectively
only half the amount you claimed a tax
deduction for increases the taxable portion
of the capital gain.
The above is all about building depreciation.
Depreciation on plant and equipment
isn’t included in the CGT calculation so
the purchase price and selling price for
CGT purposes have to be reduced by the
value of the plant and equipment. So, for
example, if you purchase a property for
$350,000 and the value of the plant and
equipment is $50,000 then the purchase
price for CGT purposes is $300,000. When
you sell you then reduce the selling price
by the remaining value of the plant and
equipment that hasn’t been claimed, if
this is a fair representation of the market
value of the plant and equipment. So if
you haven’t bought any new equipment
and claimed $20,000 in depreciation,
then there’s $30,000 remaining. Say you
sell for $430,000, then only $400,000 is
included as income in the CGT calculation.
The cost base was reduced by $50,000, the
sale proceeds by $30,000, increasing the
capital gain by $20,000 – the amount of
depreciation you claimed on the plant and
equipment during ownership.
Julia Hartman is a CPA, registered tax agent
and founder of BAN TACS Accountants Pty
Ltd. She’s also co-author of Winning Property
This information is of a general nature only and does
not constitute professional advice. You must seek
professional advice in relation to your particular
circumstances before acting. This information is also to
be read subject to the disclaimer on page 6.
Tax Straight Up
with Julia Hartman
API’s resident tax expert
Julia Hartman has accepted
the challenge of every month
presenting a little known tax
trick in 60 seconds. Her time
So your home has been exposed to
capital gains tax by, for example, being
an income-producing asset during your
period of ownership. Section 110-25 (4) of
the Income Tax Assessment Act 1997 can
save you. It allows you to increase your
cost base (reduce your capital gains tax)
by any costs associated with ownership of
the property that haven’t otherwise been
claimed as a tax deduction. This includes,
but isn’t limited to, interest, rates,
insurance, repairs and maintenance – the
latter being a goldmine for deductions.
Maintenance can include cleaning
materials, lawn mower fuel, light globes,
etc. Keep those shopping dockets and
reduce your capital gains tax!
The way the capital gains tax formula
works is that first the capital gain is
calculated over the whole period and
then apportioned on the basis of the
number of days covered by your main
residence capital gains tax exemption
and the number of days it isn’t. This
means expenses incurred during the time
it was covered by your main residence
exemption proportionally reduce the
capital gain for the period it wasn’t.
Do not act on this information without
getting advice from your accountant.
Reverse GST charges have been on the
drawing board since 2008 and the Federal
Government recently announced that
legislation was likely to be introduced this
year, writes accountant Julia Hartman.
Technically it won’t apply retrospectively,
but as the old law is likely to be removed it
does create concern for contracts entered
into but not settled by the time the new
legislation receives Royal Assent.
When a business or tenanted commercial
premise is sold under a ‘going concern’
clause no GST needs to change hands if
the parties agree, both are registered for
GST and all things necessary to carry on the
business are supplied. This lowers the value
of the sale for stamp duty and reduces the
cash flow drain for the buyer of having to
fund the GST until the refund is received
from the Australian Taxation Office (ATO).
For a farm, if the buyer plans to continue
farming, the sale isn’t subject to GST.
A reverse charge means the seller doesn’t
have to pay any GST. It’s the buyer’s
responsibility, but at the same time the
buyer claims the GST back so it should have
a nil net result. There’s also talk of
widening the times when a going
concern concession would apply.
It’s intended that the
new legislation will
allow the margin
scheme to be used
in a reverse charge
contract. This means the amount of GST
notionally applied to the contract will be
only 10 per cent of the margin between the
seller’s purchase price and the selling price.
Very important if the ATO later decides the
contract didn’t qualify for a reverse charge.
Developers entering into options or
long-term contracts on farmland should be
concerned. The only solution I can suggest
is to choose not to use the GST concessions
at all, but you need to consider the stamp
duty costs. Everything else will then come
out in the wash.
At least make sure your
solicitor considers the
consequences of a change in
the law before settlement.
Buying farmland or commercial property
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