Private ruling: Rental property expenses - capital allowance deduction
Date of advice: 13 September 2018
Published: November 2018
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you entitled to a capital allowance deduction for depreciating assets of your property that were installed as part of the original building construction? | A1: Yes | Q2: Are you entitled to a decline in value deduction for other depreciating assets of your property installed in late 20XX (but after DDMMYY)? | A2: No | Q3: Are you entitled to a decline in value deduction for further depreciating assets of your property installed in early 20XX (but after DDMMYY)? | A3: No

Relevant facts and circumstances: You entered into a contract to construct a new residential house before DDMMYY. The building construction was completed and you moved into the property later in the same year. Depreciating assets of the building will include various household items. All the depreciating assets will be in accordance with the schedule completed by the property valuer, which you are waiting to receive. All depreciating assets in the property were installed brand new as part of the building contract, apart from other depreciating assets which were installed brand new after DDMMYY, and some further depreciating assets which were also installed brand new after DDMMYY while the property was your private residence. You moved out of the property after the installation of the new assets. Shortly after you moving out of the property, you made the property available to be rented out to prospective tenants. You do not hold own any other property. You are aware that both the capital works deductions and any depreciating asset deductions will need to be apportioned in accordance with the period the property was available for rent. It is your intention is that all assets will be depreciated individually using ATO guidelines on useful lives. As such no depreciating assets will be allocated to a low value pool. As the property was newly constructed, no capital allowance deductions have previously been claimed.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 40-25 | Income Tax Assessment Act 1997 section 40-27 | The Treasury Laws Amendment (Housing Tax Integrity) Act 2017 (No.126, 2017)

Reasons for decision: Summary: Subsection 40-25(1) of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for the decline in value (depreciation) of a depreciating asset you hold. However, under subsection 40-25(2) of the ITAA 1997, the amount of the deduction is reduced to the extent that the use of the depreciating asset is for a purpose other than a taxable purpose. In your case, you are not able to claim a deduction for decline in value from when you first moved into the property until 20XX, as the property was your personal residence during this time, and you did not make the property available for rent until 20XX. The period from early 20XX to mid 20XX Section 40-27 of the ITAA 1997 was inserted by The Treasury Laws Amendment (Housing Tax Integrity) Act 2017 (No.126, 2017) , and was effective from 1 January 2018. From 1 July 2017, resulting from The Treasury Laws Amendment (Housing Tax Integrity) Act 2017 (No.126, 2017) , which received Royal Assent on 30 November 2017, there are new rules for deductions for decline in value of certain second-hand depreciating assets where you hold a rental property. If you use these assets to produce rental income from your residential rental property, you cannot claim a deduction for the decline in value unless you are using the property in carrying on a business (including a rental property business), or you are an excluded entity. This change generally applies to the depreciating assets that you: ● entered into a contract to acquire, or otherwise acquired, after DDMMYY, or ● used, or had installed ready for use, for any private purpose in the 2016-17 year or earlier, for which you were not entitled to a deduction for a decline in value in the 2016-17 year (for example, depreciating assets in a property that was your home in the 2016-17 financial year that you turned into your residential rental property in the 2017-18 financial year). Second hand depreciating assets are depreciating assets previously installed ready for use or used: ● by another entity (except as trading stock). ● in your private residence, or ● for a non-taxable purpose, unless that use was occasional (for example, staying at the property for one evening while carrying out maintenance activities would be considered an occasional use). There are no changes to the rules about deductions for decline in value of new depreciating assets in your residential rental property. Also, there are no changes to the rules about deductions for decline in value of depreciating assets in your residential rental property that you installed or used for a taxable purpose other than the purpose of deriving rental income. If the new rules are triggered, section 40-27 of the ITAA 1997 can apply, which further reduces of deductions for second hand assets in residential property. Application to your circumstances- the deduction for the depreciating assets installed brand new as part of the building contract You entered into a contract to construct a new residential house before DDMMYY, and depreciating assets were installed as part of the building contract. The building construction was completed and you moved into the property later in the same year. You subsequently moved out and made the property available to be rented out to prospective tenants in early 20XX. Section 40-60 of the ITAA 1997 provides that the decline in value of a depreciating asset commences from the ‘start time’, which is usually the time when the entity first uses the asset or has it installed ready for use, which in your case was in late 20XX, the date you moved into the property. As you entered into a contract to construct a new residential house in early 20XX, the new rules have not been triggered for the depreciating assets that were installed brand new as part of the building contract. Thus, you entitled to a capital allowance deduction for the depreciating assets that were installed as part of the original building contract, for the period that these assets were used for an income producing purpose, which is from when the property was first made available for rent. Application to your circumstances- Capital allowance deduction for the other depreciating assets installed after DDMMYY. You purchased these items after DDMMYY, and these assets were used for private purposes in the 2017-18 financial year whilst you were living in the property. As such, these depreciating assets are second hand depreciating assets, as they were previously installed ready for use in your private residence. Thus, we need to consider the operation of section 40-27 of the ITAA 1997, which may further reduce the amount of a deduction for the decline in value of a depreciating asset. Subsection 40-27(2) of the ITAA 1997 provides that: You must reduce your deduction by any part of the asset’s decline in value that is attributable to your use of it, or your having it installed ready for use, for the purpose of producing assessable income: (a) from the use of residential premises to provide residential accommodation; but (b) not in the course of carrying on a business if: (c) you did not hold the asset when it was first used, or first installed ready for use (other than as trading stock) by any entity; or (d) at any time during the income year or an earlier income year, the asset was used, or installed ready for use, either: (i) in residential premises that were one of your residences at that time; or (ii) for a purpose that was not a taxable purpose, and in a way that was not occasional. The note in subsection 40-27(2) of the ITAA 1997 states that your deduction could be reduced to nil if the purpose to which paragraph’s (a) and (b) relate is your only taxable purpose for using the asset or having the asset installed ready for use. In your case, whilst the property is residential premises used to provide residential accommodation, you only hold the one rental property. As such you are not carrying on a rental property business. In addition, those depreciating assets were all used in your personal residence for a purpose that was not a taxable purpose during the 2017-18 financial year. Therefore, the decline in value deduction for the other depreciating assets installed in late 20XX and early 20XX is reduced to nil, unless one of the exceptions applies. Exceptions listed in under section 40-27 of the ITAA 1997 Exception – kind of entity Subsection 40-27(3) of the ITAA 1997 provides that subsection 40-27 (2) of the ITAA 1997 does not apply to you for the depreciating asset, if at any time during the income year, you are: (a) a corporate tax entity; or (b) a superannuation plan that is not a self-managed-superannuation-fund; or (c) a managed investment trust; or (d) a public unit trust (within the meaning of section 102P of the Income Tax Assessment Act 1936 ); or (e) a unit trust or partnership, if each member of the trust or partnership is covered by a paragraph of this subsection at that time during the income year. As you are not one of the entities listed, this exception does not apply to you. Exception – certain assets in new residential premises Subsections 40-27(4) and (5) of the ITAA 1997 also provide that paragraph 40-27(2)(c) of the ITAA 1997 does not apply to you for the depreciating asset, if the asset is installed in new residential premises, subject to certain conditions. However, these conditions do not apply as paragraph 40-27(2)(c) of the ITAA 1997 was not required to be considered, given that your deduction was already reduced to nil under paragraphs 40-27 (2) (a), (b) and (d) of the ITAA 1997. As such, the exceptions under subsections 40-27(4) and (5) of the ITAA 1997 do not apply to you. Exception – low- value pools Subsection 40-27(6) of the ITAA 1997 provides that subsection (2) does not apply to depreciating assets allocated to a low-value pool. In your case, you have not allocated the other depreciating assets to a low value pool. Therefore, in regards to those depreciating assets, the exception under subsection 40-27(6) of the ITAA 1997 will not apply. As such, you are not able to claim a capital allowance deduction for the other depreciating assets installed when the property was your private residence.