If you purchase a second-hand asset you can generally claim a deduction based on the cost of the asset to you.
Where you purchase a rental property, the most objective means of establishing your cost of depreciating assets acquired with the property is to have their value, as agreed between the contracting parties, specified in the sale agreement. If separate values for depreciating assets are not included in the sale agreement for your rental property when you purchase it, you may be required to demonstrate the basis of your valuation.
Generally, independent valuations that establish reasonable values for depreciating assets satisfy ATO requirements. In the absence of an independent valuation, you may need to demonstrate that your estimate provided a reasonable value. Considerations would include the market value of the asset compared to the total purchase price of the property.
Example
In this example, the Hitchmans bought a property part way through the year -on 20 July 2002. In the purchase contract depreciating assets sold with the property were assigned separate values that represented their arm's length values at the time. The amounts shown in the contract can be used by the Hitchmans as the cost of the assets. They can claim deductions for decline in value for 346 days out of the 365 in the 2002-03 income year. If the Hitchmans use the assets wholly to produce rental income, the deduction for each asset using the diminishing value method is worked out as shown below:
Decline in value calculation using the diminishing value methodDescription |
Cost |
Base value |
No. of days held divided by 365 |
150% divided by effective life (yrs) |
Deduction for decline in value |
Adjustable value at end of 2002-03 income year |
|---|---|---|---|---|---|---|
Furniture |
$2,000 |
$2,000 |
346 ÷ 365 |
150% ÷ 13 ⅓ |
$213 |
$1,787 |
Carpets |
$1,200 |
$1,200 |
346 ÷ 365 |
150% ÷ 10 |
$171 |
$1,029 |
Curtains |
$1,000 |
$1,000 |
346 ÷ 365 |
150% ÷ 6 ⅔ |
$213 |
$787 |
Totals |
$4,200 |
$4,200 |
na |
na |
$597 |
$3,603 |
Note: As the opening adjustable value of the curtains for the 2003-04 income year is less than $1,000, the Hitchmans may choose to transfer this asset to the low-value pool for that year.
End of example
Example
In the 2002-03 income year the Hitchmans' daughter Leonie, who owns a rental property in Adelaide, allocated some depreciating assets she acquired in that year to a low-value pool. The low-value pool already comprised various low-value assets. Leonie expects to use the assets solely to produce rental income.
Asset |
Taxable use percentage of cost or opening adjustable value |
Low-value pool rate |
Deduction for decline in value |
|---|---|---|---|
Various |
$1,679 |
37.5% |
$630 |
Asset |
Taxable use percentage of cost or opening adjustable value |
Low-value pool rate |
Deduction for decline in value |
|---|---|---|---|
Television set |
$747 |
- |
- |
Gas heater |
$303 |
- |
- |
Total low-cost assets |
$1050 |
18.75% |
$197 |
Total deduction for decline in value
Total deduction for decline in value for year ended 30 June 2003 is $827 ($630 plus $197)
Closing pool balance
Low-value assets: $1,679 minus $630 equals $1,049
Low-cost assets $1,050 minus $197 equals $853
Closing pool balance is $1,902 ($1,049 plus $853)
End of example