BALDWINS • FoodLegal

Australian Lawyers and Consultants

Loss of Depreciation Concessions

September 2001 -- revised January 2003

Capital gains made on the disposal of any plant or equipment or any other “depreciating assets” that are used for business purposes will generally be treated as being on revenue account and therefore not qualify for capital gains tax concessions, such as the CGT discount, even applying to part of the capital gain that exceeds the recouped depreciation.

Those who invest in buildings may also wish to claim a deduction for the capital allowance (formerly the Building Allowance) under Div 43 of the Income Tax Assessment Act 1997 amounting to either 2.5% p.a. or 4% p.a. of the completed construction expenditure. However, for property acquired after 13 May 1997, deductible expenditure for capital work is excluded from the asset’s cost-base unless the deduction has been reversed by being included in one’s assessable income. Either way, more tax becomes payable on disposal, and any such inclusion of assessable income will reduce the potential availability of CGT concessions upon the sale of Australia real estate at a capital gain. Cost-base adjustment for unit holders in fixed trusts (such as unit trusts) may also be applicable where the trustee has claimed a tax deduction (of say, 2.5% per annum) for capital works.

Property investors need to consider whether it is worthwhile claiming a tax deduction that will result in additional ordinary assessable income (instead of a capital gain treatment for that same amount) upon the sale of the property. The taxpayer will not be eligible on that income for the tax breaks that would be available on the amount as a capital gain if a tax deduction had not been previously claimed for the depreciation or capital allowance.

For further information, contact Joe Lederman at BALDWINS, Australian Lawyers & Consultants.

Return to the Corporations Law Archive or Australian Tax Law Archive.