There have been a lot of pub tests recently – it’s always the way in an election campaign.
You know how it goes, a politician will do or say something possibly a bit out there and a journalist will ponder whether it ‘passes the pub test’, whether if it was said in the bar at a pub people would think it sounded reasonable.
Often it doesn’t.
Or in the parlance of the pub, ‘Yeah, nah, mate.’
The pub test can be applied to property related tax deductions. We hear a few ambitious ideas from clients that we know would not pass, though they would get points from their mates for trying.
But what if the people at the pub were not mates. What if it was the ATO sitting on a stool at the bar. They would be easy to spot. Wearing a tie and perhaps a cardigan. Probably drinking a shandy. With no friends.
Imagine sidling up to them and saying, ‘I’ve had an idea…’’ and running it past them.
Over the last 20 years, lots of clients have run ideas past us and sometimes we say, ‘Yeah, nah’. Feel free to call us for a chat if there is something you are confused about – after you read the rest of this email.
And if you want to order a Depreciation Schedule, just click here.
Key Points:
- 1. Trying to claim work to your new rental property as repairs won’t pass the pub test.
- 2. Expensing a Special Levy might also be a ‘yeah, nah’ from the ATO.
- 3. Old furniture – who’s going to know? The ATO! Purchase brand new furniture items for your IP and keep those receipts.
- 4. Everyone likes a bargain. ‘Happy hour’ on a Depreciation Schedule might save you a couple hundred bucks up front – but it could cost you more in the long run.
‘I
’m settling on a property and going to claim lots of stuff as repairs.’
Yeah, nah.
It’s tempting, though. And sometimes an innocent plan.
The ATO refers to this as ‘Initial Repairs’. If you settle on a property and do work to it before renting it out, you can’t expense that work as repairs. In other words, you can’t claim an immediate deduction for it.
Even if it was work like painting, or plaster repairs, or fixing doors and windows etc.
The same applies if you decide to rent out the property you live in i.e. you can’t expense work you do to make that property ‘tenant ready’.
The reason for this is that you are ‘improving’ the property. The ATO’s definition of repairs is for you to rectify wear and tear or damage that occurred while YOU were renting out the property. We wrote about this most recently here.
Now, this might seem a bit harsh until you ponder what some people might get up to if it was possible to expense work before renting out a property.
It’s easy to imagine people looking specifically for properties with significant damage, floods and fires etc, and claiming the cost to fix that damage as an expense i.e. immediate deduction for perhaps tens of thousands of dollars worth of work.
That’s why the ATO had to draw a very logical and definite line in the sand.
‘I got hit with a Special Levy and I’m going to expense it.’
This is another one people perhaps wilfully misunderstand.
People claim their regular contributions to strata admin or sinking funds as deductions and see no reason why a Special Levy needs to be treated any differently.
The ATO does, though.
When people talk to us about how to treat Special Levies, we ask two questions: What was the Levy for? And how long have you been renting out the property?
If the purpose of the Levy was to add, say, a fancy new BBQ area to the common areas or upgrade the foyer, then the building has been improved. That means the Special Levy contribution needs to be depreciated at 2.5% per year..
Most Special Levies, though, tend to deal with building problems.
And as with repairs, that brings us back to the question of how long the person has been renting out the property and whether the building problem existed before that person started to rent out their property.
If the problem existed before they started to rent out the property, it’s not a repair for them and needs to be claimed at 2.5% per year.
A client talked to us recently about a Special Levy she had just been sent for some long running roof problems and she ran through her plan to move out of the property and claim the $13,450 Special Levy a repair because the purpose of it was to repair the roof.
She thought it was a brilliant plan.
Do you think it passes the pub test?
Yeah, nah.
‘I’m going to furnish my Airbnb from Facebook Marketplace and claim it.’
Furniture depreciates quickly.
But it needs to be brand new furniture. And you need to have the receipts tucked away just in case you’re ever asked for them.
Prior to the rule changes way back in 2017 second hand furniture could also be depreciated – those were heady days when beers at the pub were less than $10.
Back then people would buy furniture on Gumtree or take it from their home and move it into their rental property and depreciate it.
It was too good to be true and people took advantage of it. Perhaps a bit too enthusiastically, hence the rule change.
Luckily brand new furniture can still be depreciated – quickly. Items costing under $300 can be claimed in full immediately. And items costing $300-$1,000 can go into the Low Value Pool. Items in the Pool depreciate at 18.75% in the first part year and 37.5% per year after that on the diminishing total.
So now is the time to go furniture shopping for your Airbnb.
‘Pssttt. Want a really cheap Depreciation Schedule?’
Everyone likes a bargain – that’s why pubs have ‘happy hours’.
And this is the time of year when budget Depreciation Schedule providers pop up promising the world. July is sometimes when they disappear.
Sure, you might save a few dollars going with a cheapie, but will you be able to speak to anybody sensible when you order it? Unlikely.
And if you have any tricky questions about your Depreciation Schedule after receiving it, will there be anyone who can talk you through it? Not a chance.
And what if you ever lose your Depreciation Schedule and need it resent? We had a client last week who had lost the two Depreciation Schedules she had commissioned some years ago and was calling around forlornly trying to find them.
One was done by a company we’ve never heard of. They’d be long gone. The second one was done by us – in 2003. She had a copy in her inbox while she was still on the phone.
Then she asked whether it’s possible to add stuff to a Depreciation Schedule – she had just installed a new kitchen. She gave us the costs and we sent her an updated Depreciation Schedule the next day. Free of charge.
Free updates is just one of the reasons more accountants recommend us than any other provider. Find out how to update your Schedule here.
Do you have a residential or commercial property you would like us to help you claim depreciation for? Or a question about depreciation?
Order online now or call us on 1300 660 033 and rely on our 20-plus years of experience in estimating depreciation returns.
