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The office outlines strict rules over which depreciating assets can be claimed.
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Quiz clients on second-hand rental write-downs, ATO warns
24 August 2022
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The ATO has warned tax agents and accountants to be clear about what clients can claim when it comes to second-hand depreciating assets for residential rental properties.
It said in most cases these assets were either items existing in a property when the client made the purchase or were in a client’s private residence that was later rented out.
These items could include flooring, window coverings, air conditioners, washing machines and even spas.
Since 1 July 2017 individuals have not been able to claim the decline in value of second-hand depreciating assets unless the property was used for continuing a business, such as a hotel.
The ATO defined second-hand depreciating assets as those previously installed and ready for use or used:
- By another entity
- In your private residence
- For a non-taxable purpose
The office said that the rules regarding deductions for the decline of value for second-hand depreciating assets were to prevent multiple individuals from claiming deductions on the same item over its life.
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Some caveats did exist, with newly built or substantially renovated properties able to 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 before it was acquired or the asset was installed for use or used at the property and the client acquired the property within six months of it being built or substantially renovated.
To decide on the issue, the ATO said tax agents and accountants should ask their clients:
- Was it a new or existing build?
- When did you start renting the property out?
- Did you live in the property before renting it out?
- Was the asset already in the rental property when you bought it?
To determine the amount of the deduction for the decline in value of a depreciating asset, agents and accountants could either use the prime cost or diminishing value method.
The diminishing value method assumes the decline in value each year was a constant amount of the remaining value and therefore would reduce to a smaller value over time.
The prime cost method accepts that the value of a depreciating asset decreases uniformly over its effective life.
The effective life of an asset could either be determined by the client or the Commissioner of Taxation, which issues yearly rulings on the issue.
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