Private ruling: Rental property depreciation
Published: November 2012
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Is the original purchase price of the contents, furniture, plant and equipment in your rental property the value used for depreciation purposes from when it was first rented out? | A1: No. | Q2: Are you entitled to your share of a deduction for the remaining written down value of the contents, furniture, plant and equipment in a rental property from the time the property was first available for rent? | A2: Yes. | Q3: Does the decline in value of contents, plant, equipment and other items in a property commence when the items are first made available for use, regardless of whether the property is rented at their time of acquisition? | A3: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Division 40.

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. | Detailed Reasoning - Deduction for 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. Your deduction is reduced to the extent that your use of the asset is for other than a taxable purpose. If you own a rental property, the taxable purpose will generally be for the purpose of producing assessable income. To work out the decline in value of a depreciating asset, you need to know its effective life. Generally, the effective life of a depreciating asset is how long (in whole years) you can use it for a taxable purpose. For most depreciating assets you can choose to work out the effective life yourself or use an effective life determined by us. | Detailed Reasoning - Decline in value of a depreciating asset used for a non-taxable purpose: You calculate the decline in value and adjustable value of a depreciating asset from the start time, that is, when you first use it, regardless of whether or not the property was rented out. However, you reduce your deduction for the decline in value to the extent that your use of the asset is for a non-taxable purpose. If you initially use an asset for a non-taxable purpose, such as for a private purpose, and in later years use it for a taxable purpose, you need to work out the asset's decline in value from its start time including the years you used it for a private purpose. You can then work out your deductions for the decline in value of the asset for the years you used it for a taxable purpose. EXAMPLE: Depreciating asset initially used for a non-taxable purpose. Paul purchased a stove on 1 July 2005 and immediately used it wholly for private purposes. He started a new business on 1 July 2012 and then used the stove wholly in his business. Paul's stove started to decline in value from 1 July 2005 as that was the day he first used it. He needs to work out the stove's decline in value from that date. However, Paul can only claim a deduction for the decline in value for the period commencing 1 July 2012 when he used the stove for a taxable purpose. For example, if the stove was purchased for $1,000 in July 2005 and the prime cost method is used to calculate the annual decline in value amount, the stove decline in value amount is $50 each year. This is based on the effective life of the stove as being 20 years. The adjustable value of the stove on 1 July 2012 would be $700 ($1000 less (6years X $50)). For further information refer to the Australian Taxation Office Guide to depreciating assets 2012, available on the website www.ato.gov.au.

Relevant facts: You and your spouse are joint owners of a property which you lived in as your principle residence for over six years and later used as a holiday home. Later you decided to rent the property with the contents on a permanent basis. Most of the contents were purchased when you first built and occupied the home.