The ATO has warned tax agents and accountants to be clear about what customers can claim in relation to used asset depreciation for residential rental properties.
He said in most cases these assets were either items that existed in a property when the customer made the purchase or were in a customer’s private residence which was later rented out.
These items could include flooring, window coverings, air conditioners, washing machines, and even hot tubs.
Since July 1, 2017, individuals cannot claim the loss in value of second-hand goods that depreciate, unless the good has been used for the pursuit of a business, such as a hotel.
The ATO has defined second-hand depreciable assets as those previously installed and ready for use or used:
- By another entity
- In your private residence
- For non-taxable purposes
The office said the rules around deductions for the decline in value of depreciating second-hand goods were intended to prevent multiple people from claiming deductions on the same item over its lifetime.
Some caveats existed, as newly built or extensively renovated properties could claim a deduction for a decline in value of a depreciating asset in the property if:
- No one was previously entitled to a deduction for the asset.
- Either no one resided in the property prior to its acquisition, or the asset was installed for use or use on the property and the client acquired the property within six months of its construction or major renovation.
To settle the matter, the ATO said that tax agents and accountants should ask their clients:
- Was it a new or existing construction?
- When did you start renting the property?
- Did you live in the property before renting it out?
- Was the property already in the rental property when you bought it?
To determine the amount of deduction for the decline in value of a depreciating asset, agents and accountants can use either the cost basis method or the diminishing value method.
The diminishing value method assumes that the decline in value each year was a constant amount of remaining value and, therefore, would shrink to a lower value over time.
The cost basis method accepts that the value of a depreciating asset decreases uniformly over its effective life.
The effective life of an asset can be determined either by the client or by the tax commissioner, who makes annual rulings on the matter.