Adjusting cost base for Div 40 items

Question

Hello,

I sold an investment property in Nov 2007 that was acquired in 2000

The unit was built in the 50’s but was modified in 2000 prior to being purchased

I arranged for a depreciation schedule to be undertaken at the time of purchase and have applied the Diminishing Value Method for Plant & Equipment and Building Capital Works deductions over the holding period.

Because of the age of the unit the Div 43 deductions were much lower than the annual Div 40 Plant and equipment deductions.

I was advised that the cost base for CGT purposes needs to be reduced by the total Div 40 & 43 deductions claimed over the full holding period

The reasoning for this was held to be:

In the absence of an itemised valuation of each of the plant and equipment assets at the date of sale, the value of all Div 40 depreciated assets are deemed to be valued at their written down value, resulting in a NIL balancing adjustment. For example if the cost base of the total Div 40 assets at acquisition was $30,000 and $15,000 has been claimed in depreciation, the value of the Div 40 assets are held to be worth $15,000.

In the above example, I was advised that the amount of $15,000 for these Div 40 assets needs to be deducted from the cost base, thereby resulting in a higher capital gain.

My understanding was that only Div 43 assets reduce the cost base for CGT purposes, unless the Div 40 assets were sold at a profit, which was certainly not the case in the sale of the unit I sold.

I would be grateful if you could provide clarification on this matter.

Answer

Yes, it is only div 43 depreciation that you have to reduce the cost base by. The assets depreciated under div 40 are not subject to CGT and considered separate from the property. The example you have quoted is correct it is just the interpretation of what it means that is wrong. What it is saying is if you do not know the market value or the portion of the selling price that is attributed to the div 40 assets then you can assume that their value is the same as their written down value in your depreciation schedule if you have used the ATO rates. So if you had $30,000 initially and have claimed $15,000 in depreciation you are deemed to have sold them for the balance left which is $15,000. This means there is no profit on their sale. The $15,000 claimed does not reduce your cost base but your cost base should not have included the $30,000 in the first place! So from where you seem to be coming from ie taking into the cost base the full price you paid for the property you need to reduce this by the $30,000 but then reduce the funds you receive for the sale by $15,000 representing the value of the div 40 assets. The actual dollar effect is the same as adding back the $15,000 claimed in depreciation.

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