In 2017, the Government brought in legislation that meant depreciation can no longer be claimed for existing plant and equipment assets within a second-hand residential investment property.
Capital works deductions which usually make up 85-90 per cent of the claim is still claimable in all scenarios.
So, what happens if a second-hand property contains assets that are no longer eligible for depreciation deductions but still hold value?
This is where a capital loss schedule can come into play.
In this article we explore what a capital loss schedule is and in which scenarios they are used.
What is a capital loss schedule?
While investors purchasing second-hand investment properties can no longer claim depreciation on existing plant and equipment assets annually, the closing value of these assets can be used to either:
- reduce a capital gain in the event of selling or
- create a capital loss when scrapping.
A capital loss schedule outlines the items in an investment property that are no longer eligible to be claimed as a depreciation deduction, but which still hold value. A capital loss schedule assists accountants to calculate the potential capital gain event.
Every depreciation schedule prepared by BMT Tax Depreciation including previously used depreciable assets includes a capital loss schedule.
Depreciation schedules for brand new rental properties don’t contain capital loss schedules as all assets in new properties are eligible for full depreciation entitlement.
How is capital gains tax calculated?
Under the new legislation a capital loss, or capital gains tax Event K7 as explained under section 104-235 of the Income Tax Assessment Act of 1997, can be claimed when an asset is disposed of for less than its original cost and depreciation claims for the asset were denied because of the amended depreciation legislation.
Whilst the method of calculating capital gains tax has not changed, it has become imperative for investors to be aware of the implications of CGT from the outset of their purchase, particularly when they are investing in a second-hand property.
For properties affected by the legislation changes, a specialist Quantity Surveyor should include a capital loss schedule of previously used plant and equipment assets which can’t be claimed as depreciation during ownership.
Accountants can use this information to help determine the asset’s opening and termination value.
The scenarios where the capital loss schedule becomes crucial include:
- when an asset is scrapped during ownership, CGT Event K7 can be used to establish a capital loss in that year, even if the property was not sold
- where there is a partial or full CGT main residence exemption. Even though the property was a main residence they may still be eligible for a CGT Event K7
- when the contract date and settlement date for the sale of the property occur in separate financial years. The normal capital gain or loss from the property (CGT Event A1) is calculated in the financial year of contract exchange, where as the CGT Event K7 is calculated in the year of settlement
Although the capital loss schedule is needed for capital gains tax calculations, some scenarios result in a nil effect because the value of plant and equipment is separated out of the purchase price to show an amount attributed to the property.
Any difference identified due to a reduced termination value of plant and equipment increases the portion of purchase price attributed to the property when the property is sold.
Investors can rest assured their property depreciation needs are taken care of as a BMT Tax Depreciation schedule maximises deductions while remaining fully compliant with current Australian Taxation Office rulings.
To learn more about the depreciation deductions within an investment property call BMT on 1300 728 726 or Request a Quote.
We recommend consulting your accountant for advice on how to navigate capital losses.