Private ruling: Depreciating rental property assets
Date of advice: 20 December 2018
Published: April 2019
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will you be eligible to deduct your share of a decline in value of any of the depreciating assets in your property after it changes from being your residence to being used to provide residential accommodation via granting exclusive rights to occupancy? | A1: No.


Relevant legislative provisions: Income Tax Assessment Act 1997 Division 40 | Income Tax Assessment Act 1997 section 40-25 | Income Tax Assessment Act 1997 subsection 40-25(2) | Income Tax Assessment Act 1997 subsection 40-25(7) | Income Tax Assessment Act 1997 subsection 40-27 | Income Tax Assessment Act 1997 subsection 40-27(2) | Income Tax Assessment Act 1997 subsection 40-27(2)(d) | Income Tax Assessment Act 1997 subsection 40-30(1) | Income Tax Assessment Act 1997 Division 43

Reasons for decision: Summary: Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997) contains provisions which allow you to claim a deduction for the decline in value (depreciation) of depreciating assets which are used in the production of assessable income. You can deduct an amount equal to the decline in value for an income year of a depreciating asset to the extent that it is used for a taxable purpose (section 40-25 of the ITAA 1997). From 1 July 2017, there are new rules for deductions for decline in value of certain second-hand depreciating assets in your residential rental property. If you use these assets to produce rental income from your residential rental property, you cannot claim a deduction for their 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. If you acquire a newly built residential property from a developer, or buy a residential property that has been substantially renovated, you can claim a deduction for a decline in value of a depreciating asset in the property (or its common area) if: ● no one was previously entitled to a deduction for the asset, and: ● either: ● no one resided in the property before you acquired it, or ● the asset was installed for use or used at this property and you acquired the property within six months of it being built or substantially renovated. The application of section 40-27 of the ITAA 1997 primarily applies to residential properties, such as tenanted properties conveying exclusive use of the property – as opposed to premises such as homes which may be partly providing residential accommodation for a part of the premises. A home that becomes a rental property conveying exclusive use of the property will be subject to section 40-27 of the ITAA 1997 from that time and 40-27 of the ITAA 1997 will not apply to it beforehand. Deductions under section 40-25 of the ITAA 1997 will not be denied for depreciating assets in homes that are a taxpayer’s residence with rooms being rented out. Paragraph 40-27(2)(d) of the ITAA 1997 concerns whether the assets were used, or installed ready for use, for any other purpose prior to the assets being used in residential premises to provide residential accommodation. When a home is turned into a rental property that criterion is then met. However, how any of those assets have been used for a particular purpose while the premises were used as a residence is not relevant (ie privately or for a taxable purpose). Any depreciating assets that were during the first year used or installed ready for use ‘in residential premises that were …your residence…’ [During that income year] come within the scope of paragraph 40-27(2)(d) of the ITAA 1997. In your case, deductions for depreciating assets used for producing assessable income when the property was in part your residence will not be denied to the extent that they apply to the part of the year prior to it being turned into a rental property and you no longer live there. However, deductions will be denied under section 40-27 of the ITAA 1997 to the extent that they relate to the period when the house changed from being your residence to being used to provide residential accommodation via granting exclusive rights to occupancy.

Relevant facts: You will be part owner of a new property which you are having constructed. | Once the home is completed, you will be occupying it for a minimum of six months. | While you are living in the house, you will be renting out part of the house at a commercial rate as determined by a local real estate agent. | At the end of the six month period you intend to rent out the whole dwelling. | For the time that you share the home, you intend to claim a share of the decline in value of depreciating assets and a share of capital works allowance, based on floor space and area usage. | Values will be determined by a qualified Quantity Surveyor.