Does claiming for capital allowance affect Capital Gains Tax (CGT)?
We regularly still hear from some investors that they have chosen not to claim depreciation because “they will have to pay it back anyway” if/when they sell their property at some time in the future.
It is true that claiming for depreciation whilst owning an investment property does affect the future CGT calculations. However, it is important to understand how this happens, especially following changes to depreciation in the 2017 budget.
The key points to highlight are as follows:
Not all depreciation claimed is deducted from the cost base
Only Division 43 (capital allowance) claims are deducted from the base cost when calculating CGT
This fact is often overlooked by investors and accountants. The depreciation of plant and equipment items (Division 40 deductions) are not subtracted from the cost base. Ensuring that only Division 43 claims are deducted guarantees that profit is not over-stated and tax is not over-paid.
When it comes to second-hand properties, Division 40 (plant and equipment depreciation) is now offset against CGT at sale
In May 2017 the government announced that individual investors could no longer claim depreciation of second-hand residential property assets (Division 40 assets) as an annual tax deduction.
The deductions are not forever lost though. These accumulated deductions can be claimed in total as a CGT offset.
First owners of brand new investment properties can still claim their Division 40 deductions annually, and as mentioned above, those deductions do not come in to play when calculating CGT in the future.
Further considerations when assessing the impact of depreciation on CGT calculations
CGT discounts and exemptions
In many circumstances investors are eligible for certain CGT discounts and exemptions, the most common one being a 50% discount for properties owned by individuals for more than 12 months. In these circumstances the impact of deducting previously claimed capital allowance deductions from the cost base is reduced.
Purchasing power of money over time
Cash in the hand today is always worth more than the same amount of money saved in the future. Investors are typically better off accessing the depreciation benefits and boosting cash flow today, saving that money on a profitable sales transaction at some time in the future.
Opportunity cost
The additional cash flow created by claiming for depreciation can be used to pay down debt or reinvest. This gives the cash today even greater value that money saved at sale.
Get specialist advice
For anyone still unsure about the impact of claiming capital allowance and depreciation on CGT we recommend speaking with our team on 1300 922 220, or with an accountant who specialises in property and wealth creation.
FAQ’s
What are Capital Gains Tax Exemptions or Discounts?
Navigating capital gains tax requires strategic planning. Consider these exemptions or discounts:
Primary Residence Exemption: If the property is your principal residence, you may qualify for an exemption from capital gains tax, as per the Australian Taxation Office’s guidelines.
Leverage Long-Term Ownership for Tax Advantages: Holding onto your property for over a year makes you eligible for a 50% discount on capital gains tax. This serves as a reward for long-term investment commitment.
What is the CGT Six-Year Rule?
If your property is rented out but was previously your primary residence, you can leverage the six-year rule, treating it as your main home for up to six years, potentially minimising capital gains tax implications.
Example:
Andy, a homeowner, lived in her property in Melbourne for three years before relocating for work. Rather than selling, Andy decided to rent out her property for the next four years.
Now, after a total of seven years of ownership, Andy is ready to sell. By utilising the CGT Six-Year Rule:
- Primary Residence Period: Andy lived in the property for three years.
- Rental Period: The property was rented out for the next four years.
Since Andy’s rental period is within the six-year limit, she can treat the property as her main residence during this time.
If you should have any questions about investment property depreciation reach out to our friendly team on 1300 922 220. Or, to receive a free quote for a depreciation schedule, simply complete our online form “Get a Free Quote.”
