AIQS Nov Tax Depreciation Update
This is a paper I wrote to help people work out when they can claim Division 40 depreciation deductions on a rental property.
Given that the opposition has agreed to pass the Bill in the Senate I have written it as if it is law so I don’t need to update in a couple of weeks time.
The Government announced back in the 2017-18 Budget that from 1 July 2018, purchasers of new residential premises or new residential subdivisions would pay the GST on the purchase price directly to the ATO as part of the settlement.
This was to stop developers using the GST to fund the next development, rather than paying it the Commissioner, or winding up the entity before remitting the GST to the Commissioner and leaving the Commissioner to fight with the other creditors.
Well we now have the draft legislation for this change and it is bad new for developers. In a very quick summary, from 1 July 2018…
- Suppliers of residential premises or potential residential land must provide an entity that receives the supply with a notification 14 days before making the supply. Developer must tell purchasers they must remit a specific amount from the purchase price and send it to the Commissioner rather than to the developer and they must do this at least 14 days before the supply. There are penalties if they do not. But how much do they have to send to the Commissioner, rather than the developer?
- Purchasers of new residential premises or new subdivisions of potential residential land must make a payment to the ATO of 1/11th of the price. Irrespective that the sale is almost free of GST under the margin scheme, the purchaser still must remit 1/11th of the price to the Commissioner. But thats not fair as it will mean to much GST has been paid!!!
- An entity that makes a taxable supply of new residential premises or new subdivisions of potential residential land will be entitled to a credit for the amount of the payment made to the ATO when they lodge their BAS or where a supply of new residential premises is made under the margin scheme, the supplier may apply to the ATO for a refund of a portion of the amount withheld by the purchaser. So they can get the overpaid GST back, but that will involve lodging their BAS as soon as possible.
GST used to fund the next development. Now the developer will be without the GST and probably even more if the margin scheme applies until they lodge their BAS. 1 July 2018 could get messy!
I know the ATO is famous for wasting others time but what about when they waste their own time…
Today (18 October) the ATO released a draft Taxation Ruling (TR 2017/D7) titled “Income tax: when does a company carry on a business within the meaning of section 23AA of the Income Tax Rates Act 1986?” It is 78 paragraphs and 25 pages long, with 8 very detailed examples… Remember its purpose is to help us understand what the word “business” means in section 23AA… And then…
Today (18 October) the Government released a Bill into Parliament titled “Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017“. This Bill repeals section 23AA of the Income Tax Rates Act 1986 and replaces it with the following:
23AA Meaning of base rate entity
An entity is a base rate entity for a year of income if:
(a) no more than 80% of its assessable income for the year of income is base rate entity passive income; and
(b) its aggregated turnover (within the meaning of the Income Tax Assessment Act 1997) for the year of income, worked out as at the end of that year, is less than $25 million.
Did you notice that a certain word will no longer exists in section 23AA once this Bill receives Royal Assent? That is correct, there is no “business” word anywhere in the section.
So on the same day the Commissioner asks for feedback on his 25 page ruling on what the word “business” means in section 23AA, the Government introduces a Bill that will remove the word “business” from section 23AA.
Sorry but I keep getting asked about the grandfathering provisions in the Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 that relate to claiming Division 40 depreciation on assets in rental properties. So this is the link I can just send to those asking me this question.
The Bill states this…
13 Application of amendments
(1) The amendments made by this Schedule apply to an entity, for income years commencing on or after 1 July 2017, for assets:
(a) acquired by the entity under contracts entered into; or
(b) otherwise acquired by the entity;
at or after 7.30 pm, by legal time in the Australian Capital Territory, on 9 May 2017.
(2) The amendments made by this Schedule also apply to the entity, for income years commencing on or after 1 July 2017, for any other asset acquired by the entity, if:
(a) the asset’s start time is during the income year that includes 9 May 2017 or during an earlier income year; and
(b) no amount can be deducted under Division 40, or Subdivision 328-D, of the Income Tax Assessment Act 1997 by the entity for the asset for the income year that includes 9 May 2017.
Therefore, from this application section we know that:
- Generally, if you purchased the asset or the rental property with the assets in it before 10 May 2017 you can claim Division 40 depreciation.
- The reason there is the word “Generally” in the first point is that there is a situation where you bought the assets before 10 May 2017 but you won’t be able to claim Division 40 depreciation. This is where you bought the property or the assets before 10 May 2017 BUT in the 2016/17 year (normally 1 July 2016 to 20 June 2017) you did not use the property or the asset as or in a rental property.
An example of item 2 would be where a taxpayer owns one home which they live in for years. In 2018 they decide to move to a bigger house but keep their old house as a rental property. They cannot claim Division 40 depreciation on the old property as in the 2016/17 year, the property was not a rental property.
So in summary, these new rules apply to properties that were both purchased before 10 May 2017 AND where used as a rental property for some time in the 2016/17 tax year.
Checklist to ask if someone asks you if they can claim Division 40 tax depreciation on a residential rental property:
- Is the entity that owns the property a company, a large super fund (not an SMSF) or a large investment vehicle? If so, they can claim Division 40 depreciation deductions.
- Are they carrying on a business which involved 30+ of properties taking up most of their week in managing? If so, they can claim Division 40 depreciation deductions.
Neither of these two will happen…
- Was the property purchased before 10 May 2017 AND if I look at your tax return I can see you claimed deductions on the property as a rental property for some time in the 2016/17 tax year? If so, you can claim Division 40 depreciation deductions.
- Is the property “new residential premises” when you purchased it and you have not used it as your residence or stayed in it for more than a couple of nights? If so, you can claim Division 40 depreciation deductions.
- Is there any depreciable assets that have never been used by others before (you bought them from a retailer) that you have never used privately (including if you stayed in the property for more that one or two nights)? If so, they can claim Division 40 depreciation deductions on just those depreciable assets.
Remember, if you are claiming Division 40 deductions under item 2 or 3 above, and you stay in the property, or let your family stay in the property for free, for a week, there will be no future depreciation deductions.
Lets start with a definition… According to dictionary.com…
a combination of statements, ideas, or features which are opposed to one another.
When considering the exemption from FBT for certain taxi travel under section 58Z of the FBTAA86, the Commissioner states:
The exemption is limited to travel in a vehicle licensed by the relevant State or Territory to operate as a taxi. It does not extend to ride-sourcing services provided in a vehicle that is not licensed to operate as a taxi.
When considering whether Uber drivers should be treated as taxis for GST, the Commissioner said they should and won a Federal Court Case saying all Uber drivers are taxis, forcing all Uber drivers to register for GST from their first dollar, rather than $75,000 turnover (Uber BV v. Federal Commissioner of Taxation  FCA 110)
So when being a taxi is good for taxpayers (FBT exemptions) the Commissioner says Uber is not a taxi, but when being a taxi is bad for taxpayers (having the remit GST from the first dollar earned) the Commissioner says Uber is a taxi.
The worst part is that, when he is made aware of this contradiction he puts out a discussion paper asking what he can do. The answer is easy… avoid contradictions.
You would think this is an easy question to ask… But it is not.
The rules seem pretty easy. They are:
- A corporate tax entity carries on a business in the income year;
- The aggregated turnover of the corporate tax entity for the income year is less than:
- for the 2016-17 income year — $10 million;
- for the 2017-18 income year — $25 million;
- for the 2018-19 income year and following — $50 million.
But we now have arguments as to what is a “business” and what if the turnover is under the threshold but 99% of the income does not come from the business but from passive income?
Well the Government will make this clear by adding another condition to the above conditions. It is…
the corporate tax entity does not have base rate entity passive income for that income year of 80 per cent or more of its assessable income for that income year.
So if you are a company running a business this year with a turnover of $50,000 as long as $10,001 was from a business (20+%) the company will get the 27.5% rate, even though the remainder of the turnover comes from rent, interest…
But as that passive income could be dividends from listed companies with 30% imputation credits attached, we may not want the 27.5% rate, but prefer the 30% rate so we can pay out 30% dividends.
Albert Einstien used a tax agent called Leo Mattersdorf. He told the following story a few years after Einstein’s death in 1955…
One year while I was at his Princeton home preparing his return, Mrs Einstein, who was then still living, asked me to stay for lunch. During the course of the meal, the professor turned to me and with his inimitable chuckle said: “The hardest thing in the world to understand is income taxes.” I replied: “There is one thing more difficult, and that is your theory of relativity.” “Oh, no,” he replied, “that is easy.” To which Mrs Einstein commented, “Yes, for you.”
I claim to know a bit about tax, have a Science degree and am working my way through a Masters of Astronomy and I agree with Einstein. Tax is substantially harder.
My ten year old son understands the basics of relativity but still does not know all 51 CGT events (useless public school system).