Private ruling: Rental Property - Depreciating assets
Date of advice: 5 February 2016
Published: March 2016
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you entitled to claim depreciation for your share of the cost of the replacement depreciating assets? | A1: Yes

Relevant facts and circumstances: You own a rental property with another person. The property has been and continues to be rented to tenants. The property was flooded and damaged in a storm. The whole internal building was renovated which was paid through insurance. The building structure itself was not affected. Repairs to the home included the kitchen, laundry, bedrooms, living rooms and external works. A number of depreciating items were also replaced. The total cost of the repairs and renovations was in excess of $100,000.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 40 | Income Tax Assessment Act 1997 section 40-25 | Income Tax Assessment Act 1997 subsection 40-30(1) | Income Tax Assessment Act 1997 subsection 40-80(2) | Income Tax Assessment Act 1997 section 40-285 | Income Tax Assessment Act 1997 section 40-295

Reasons for decision: Summary: Section 40-25 of the ITAA 1997 states that you can deduct an amount for the decline in value of a depreciating asset you hold to the extent that you use it for a taxable purpose. The term 'depreciating asset' is defined in subsection 40-30(1) of the ITAA 1997 as an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used. However, subsection 40-45(2) of the ITAA 1997 provides that Division 40 of the ITAA 1997 does not apply to capital works to the extent that an amount is or could have been deductible under Division 43 of the ITAA 1997. Subsection 40-80(2) of the ITAA 1997 provides that the decline in value of a depreciating asset will be the cost of the asset if the cost of the asset does not exceed $300 and the asset is used predominately for the production of assessable income. When a depreciating asset is destroyed, a balancing adjustment event occurs (section 40-295 of the ITAA 1997).You need to calculate a balancing adjustment amount to include in your assessable income if you receive insurance proceeds for a depreciating asset that has been fully depreciated. However, you may choose to offset the assessable balancing adjustment amount arising from the destruction of the asset against the cost of one or more replacement assets. Example - Shearing shed destroyed by fire Your shearing shed (which has been fully depreciated) is destroyed by fire. You receive insurance proceeds of $40,000 for the destroyed shed. As the shed has been fully depreciated this means that you would have an assessable balancing adjustment amount of ($40,000 - $0) $40,000. However, if you buy/build a replacement shed for $40,000 you can choose to offset the assessable balancing adjustment amount ($40,000) against the cost of the replacement shed ($40,000). This means that you will not need to include any of the insurance proceeds received for the destroyed shed in your income tax return; however, it should be noted that the opening balance of the replacement shed for depreciation purposes will also be reduced by $40,000 to $0 and you will not be entitled to claim depreciation on the shed. By making the choice to not include a balancing adjustment amount in your assessable income (and reducing the cost of the replacement shed for depreciation purposes) the taxation consequences of receiving the insurance proceeds for the destroyed shed are income tax neutral so that you are put in the same position for tax purposes as before the fire. In your case, a balancing adjustment may be required for the assets that were destroyed in the flood in relation to your existing depreciation report. These include the internal blinds, floor coverings, pool chlorinator and bathroom accessories. For details on how to calculate the allowable depreciation deduction, please refer to the Australian Tax Office's Guide to depreciating assets which is available on the website www.ato.gov.au.