From 1 July 2017, second-hand assets in residential properties are under new depreciation rules. In the past, when an SMSF purchased a used residential property, the fund could claim Div 40 deductions for existing furniture and fittings; under the new rules, Div 40 deductions are most likely denied for these assets. However the new rules will only affect new purchases and the existing depreciation already in place will continue.
The new rules will capture second-hand assets in the following two categories:
- You did not hold the asset when it was first used, or first installed ready for use by any entity, and you purchased the asset after 9 May 2018.
- The asset was ever used, or installed ready for use in your residences or for a non-taxable purpose that was not occasional.
In the first category, an asset could still be second-hand even if it’s not used by the previous owner.
The ATO example:
Sue purchased her house in 2009. In October 2017, she listed her house for sale. While it was advertised, she moved out and then replaced the carpet. No one lived in the house while it was advertised. The house was then sold to Tim. After purchasing the property, Tim rented it out immediately.
Tim can’t claim depreciation deductions for any of the depreciating assets in the property because they are all previously used. Also, he cannot claim depreciation deductions for the carpets because he did not own the asset when it was first installed ready for use.
The second category is not relevant for SMSFs, because s66 does not allow purchase from related parties. However, for the completeness of the topic, the transitional arrangement is that assets in properties which turned into rental properties during 2016-2017 are carved out from the second category. If the depreciation was already triggered for a privately used asset in 2016-2017, then it continues.
The ATO Example:
At the start of 2016, Marty purchased a home as his main place of residence. In June 2017, Marty moved out and rented out the property fully furnished, which included the furniture and fittings he had been using while living there.
As Marty rented out his home before 1 July 2017, and he purchased it before 7.30pm on 9 May 2017, he can claim depreciation deductions for any remaining effective life of the used depreciating assets in it.
However, from the 2018 year, Marty cannot claim depreciation deductions for any second-hand depreciating asset that he purchases for this property on or after 7.30pm on 9 May 2017.
If Marty’s home was made available for rent on or after 1 July 2017, he would not have been able to claim depreciation deductions for any remaining effective life of the used depreciating assets in it.
Marty can claim depreciation deductions for the new depreciating assets that he purchases for his rental property.
The new rules will not affect deductions that arise in the course of carrying on a business.
The new rules will generally not affect new residential properties. In addition, a new residential property can be tenanted for 6 months from the time it was newly built, if no claim for depreciations is made, then the purchaser can still claim deprecation deductions.
Secton 40.27 ITAA 1997: Depreciation for second-hand assets
ATO link: Examples of depreciation for second-hand assets