What's in a date?

Question from Ces updated on 12th October 2011:

We sold a rental property in March. Our accountant insisted the settlement date should be 1 April, 2011, saying there was a significant tax advantage for us if we did that. What exactly is this ‘significant tax advantage’? You’ve mentioned in the past that: “The recovery is triggered in the year where the settlement occurs, so remember that a sale after April , 2011, will be the first full tax year where the new lower tax rates apply”. Is this what he is referring to? Do you know the new tax rate applying for us? And what is the amount of depreciation recapture that we need to add as income considering the following details: Cost $160,000; sale price $155,000; book value $147,292; purchase date is October 7, 2008; depreciation claimed 2008 $2,625, 2009 $5,144, 2010 $4,939, a total of $12,708.

Our expert Mark Withers responded:

The tax advantage is probably a combination of two things. Settlement date dictates the year where the recovery must be accounted for, so if you trigger this in the 2012 year, as opposed to the 2011 year, the tax payment date is a year later, giving you the use of the tax money for the extra year. The reduced tax rates from National’s first term also apply for the full 2012 year, resulting in a lower effective rate applied to the income generated by the recovery.

Your circumstances highlight the ‘windfall’ of the lower tax rates for investors sitting on large accumulated depreciations that were claimed when tax rates were 38%, who now face repayment at a maximum 33%. It’s yet another example of how the tax rates’ fall has mitigated the loss of the depreciation deduction on buildings.

The personal tax rates are now 0-$14,000 10.5%; $14,000-$48,000 17.5%; $48,000-$70,000 30%; $70,000+ 33%. Your numbers show the property sold above book value but below cost. If the building had sold above cost, all the depreciation would be recovered. In this case some, but not all, will likely be subject to recovery.

The actual calculation will depend on the split applied to the land and the buildings, both at time of purchase and disposal because it is the movement in the building alone that will determine the actual recovery, since the land will not have been depreciated. If your numbers are building only, the recovery is the sale price minus the book value, in other words $155,000 - $147,292 = $7,708.

Tax is payable on this income at your marginal tax rate. Remember also to net the sale costs such as agents fees out of the sale price before you calculate the net disposal price of the building. It might be wise to let your accountant make the final calculations; a small mistake can cost you big money!

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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