Off-setting costs not so simple

Question from Carol updated on 13th July 2011:

Our home is in a family trust. We are considering renting it out for all or part of next year. Since we shifted in six months ago we have replaced the old very dated kitchen and replaced the cooker. There is also rewiring that has been done. For taxation purposes will we be able to off set the cost of this against the rental received, and claim it back into our personal finances?

Our expert Mark Withers responded:

There are a few aspects to your question. Firstly, because the property is owned by the trust it is the trust that must return the net rental income or loss. Any losses will not be able to be offset against your personal returns but profits may be able to be distributed subject to the trust deed. Secondly, only costs incurred once the property is actually rented will be deductible.

Having said that, any chattels that are rented with the property may still be depreciated, the question then becomes " was the expenditure on seperate chattel assets or is it part of the building." The government has set out a three step test to determine if expenditure is on seperate assets to the building, this involves determining whether the asset is "attached" to the building, then determining whether the building would be considered complete without the asset and thirdly, determining whether the asset has become integral to the building such that it's removal would cause damage.

Your wiring and kitchen will both be considered to be part of the building and therefore non depreciable, the cooker, provided it is freestanding, is probably an asset that can be depreciated once the property is rented. Your question is yet another example of how complex the tax world can be when faced with such a seemingly simple question.

Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.

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