Private ruling: Rental property - depreciation schedule
Ruling period: Year ending 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Are you able to use a depreciation schedule prepared by an Australian quantity surveyor to claim deductions for capital works and decline in value on your foreign rental property? | A1: 

Relevant facts and circumstances: You own a rental property in Country X. Your accountant has advised you to obtain a depreciation schedule for the property. A registered quantity surveyor is not available in Country X. You have employed an Australian firm of registered quantity surveyors to prepare a depreciation schedule for a property you own in Australia. You would like the firm to prepare a depreciation schedule for your property in Country X.

Relevant legislative provisions: Section 40-25 of the Income Tax Assessment Act 1997 | Subsection 40-30(1) of the Income Tax Assessment Act 1997 | Section 43-10 of the Income Tax Assessment Act 1997

Reasons for decision: Summary: Section 40-25 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for the decline in value of a depreciating asset to the extent that it is used for the purpose of producing assessable income. A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used (subsection 40-30(1) of the ITAA 1997). Section 43-10 of the ITAA 1997 allows a deduction for construction expenditure on capital works. A capital works deduction is generally claimed at a rate of 2.5% over 40 years and is for expenditure in relation to the construction of: (a) a building; (b) an extension, alteration or improvement to a building; or (c) a structural improvement not included in (a) or (b) such as a retaining wall. | Detailed Reasoning - Capital works deduction - estimating construction costs: Where a new owner is unable to determine precisely the construction expenditure associated with a building, an estimate provided by an appropriately qualified person may be used. Appropriately qualified people include: · a clerk of works, such as a project organiser for major building projects · a supervising architect who approves payments at stages of projects · a builder who is experienced in estimating construction costs of similar building projects · a quantity surveyor. Unless they are otherwise qualified, valuers, real estate agents, accountants and solicitors generally have neither the relevant qualifications nor the experience to make such an estimate. In your case, you own a rental property in Country X, and intend to obtain a depreciation schedule for the property. A registered quantity surveyor is not available in Country X. You have employed an Australian firm of registered quantity surveyors to prepare a depreciation schedule for a property you own in Australia, and you want them to prepare a schedule for your property in Country X. As they are registered quantity surveyors, they are appropriately qualified to provide an estimate of the construction expenditure associated with your property for the purposes of claiming a deduction for capital works under section 43-10 of the ITAA 1997. | Detailed Reasoning - Deduction for the decline in value of depreciating assets: You can deduct an amount equal to the decline in value for an income year of a depreciating asset that you held for any time during the year. The deduction for the decline in value of a depreciating asset is calculated using either the prime cost or diminishing value method. Both methods are based on the effective life of the asset. For most depreciating assets, you can either make your own estimate of the effective life or adopt the effective life determined by the Commissioner. In relation to the purchase and valuation of second-hand assets, generally independent valuations that establish reasonable values for depreciating assets satisfy Tax Office requirements. In the absence of an independent valuation, taxpayers may need to demonstrate that their estimate is a reasonable value. Considerations would include the market value of the asset compared to the total purchase price of the property. Therefore, in determining the deduction for the decline in value of a depreciating asset, you have the option to determine the valuation of the second-hand assets yourself or obtain an independent valuation. In your case, you own a rental property in Country X, and intend to obtain a depreciation schedule for the property. A registered quantity surveyor is not available in Country X. You have employed an Australian firm of registered quantity surveyors to prepare a depreciation schedule for a property you own in Australia, and you want them to prepare a schedule for your property in Country X. As they are registered quantity surveyors, they are able to provide independent valuations for depreciating assets associated with your property in Country X for the purposes claiming a deduction for decline in value under section 40-25 of the ITAA 1997.

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