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Plant & Equipment Question
I have purchased your Capital Gains Calculator which is helpful – thank you.
Is the written down value of plant and equipment items purchased to prepare a rental property for sale included in the Div 40 balancing for the CGT calculation in the following scenario:
- Rental property (new house/land) purchased 2005.
- Sold on 5 May 2024 (contract date). Settled 24 June 2024.
- Property always rented to 19 January 2024.
- Property prepared for sale 20 January to 31 March 2024.
Cleaning items to prepare the property for sale are purchased – for simplicity:
- Indoor broom $20
- Dustpan and brush $6
- Sundry products $15– sprays, wipes, sponges etc. The residual sprays, wipes sponges are disposed of after use.
- (Itemised receipts held for all P&E).
- The broom, dustpan and brush are included in the sale of the property (left on the premises with agreement)..
Financial Year Reporting
- Sundry products $15:
Question 21 Rent
- Added to (eligible) Repairs & Maintenance items for the property between 1 July 2023 to 19 January 2024?
Question 18 Capital gains tax calculation
- Indoor broom $20
- Dustpan and brush $6
Is the written down value of these items – (zero because there is no opportunity to deduct a pro-rate amount) – included in the Div.40 balancing?
Thank you.
Answer
Well my first point is I consider these expenses to be items used to repair tenant damage in a financial year that the property earned income. They are under $300 each so entitled to be immediately written off. Even though it was not being rented at the time you undertook the cleaning and repairs, the work became necessary as a result of the tenants occupancy. Here is the ATO ruling on the matter IT 180 https://www.ato.gov.au/law/view/print?DocID=ITR%2FIT180%2FNAT%2FATO%2F00001&PiT=20180510000001
So this means all these times will go in the rental property schedule which doubles there value because they will not be subject to the 50% CGT discount when the CGT calculation is completed.
Those rows in the spreadsheet regarding plant and equipment are for plant and equipment that has been depreciated. If a piece of plant and equipment has been depreciated it is a separate asset from the house and subject to a balancing adjustment, not a CGT event. Technically you also have to include any profit or loss on the sale of the P&E in your tax return but as the ATO depreciation rates result in a pretty fair measurement of the current value of the asset and the ATO are unlikely to argue with an estimate value based on their recommended effective life of the asset all you really need to do is just remove the P&E from the CGT calculation. So by deducting the P&E depreciation you started with back in 2005 from the purchase price and then deducting the closing written down value in your P&E depreciation schedule at the date of sale from the sale price you are just saying the balancing adjustment is nil. The remaining P&E balance that had not been written off was all that the buyer paid for the P&E so no profit or loss but removed from the CGT calculation as required. When it comes to P&E that did not qualify for depreciation such as second hand P&E purchased after 2017 they are simply included in the cost base calculation. But when it comes to any new stuff that you may have purchased during the period of ownership that you have been depreciating you, don’t put the purchase into the CGT cost base just deduct the remaining unclaimed balance off the selling price. Regarding the broom etc that you left at the house so technically transferred with the property, they did not reflect in anyway in the price you received for the property so it would be quite reasonable to say their value on sale was nit so no adjustment to the sale price for them.
Its crazy isn’t it, I have tried to explain but maybe it is better by example:
Broom and dustpan – Under $300 so immediate write off against rent income as cleaning up after tenants, no value in sale price so no adjustment to sale price
Wipes etc – just a cleaning cost deductible against the rent as nothing durable about them.
Plant and equipment that was in the house at time of purchase – deduct their starting value from the purchase price as they are treated like a separate asset then deduct any amount left in the depreciation schedule from the selling price as that is a fair value of what you received for them and results in no balancing adjustment in the depreciation schedule.
Replacement plant and equipment you purchased during ownership – Let’s say you spend $1,000 on a new stove 2020 and have claimed $400 in depreciation over the years so there is $600 left that you have not claimed. As you have been using the ATO effective life for depreciation it would be reasonable to assume the stove is now only worth $600. You reduce the sale proceeds by this amount which means you claim $600 less sale proceeds. The $1,000 you spend is covered by a deduction for depreciation of $400 and a reduction in the capital gain (before discount) of $600. As for the depreciation schedule you have $600 sitting there as unclaimed but you received $600 on sale so no profit or loss needed to be reported. As you can see if you included the $1,000 for buying the new stove in the CGT calculation it would be double counting. Note the cost of the old stove would have been dealt with ie any remaining unclaimed depreciation would have been written off when it was replaced.
Good on you for putting so much thought and detail into your CGT calculation.
