Edited version of private advice

Authorisation Number: 1051636702698

Date of advice: 20 February 2020

Ruling

Subject: Rental property deductions for second-hand furniture

Question

Is my share of the expenditure on second hand furniture deductible either in full or in part in the 2019 and 2020 financial years?

Answer

No

This ruling applies for the following periods:

Year ending 30 June 2019

Year ending 30 June 2020

The scheme commences on:

1 July 2018

Relevant facts and circumstances

You own a property located at location 1 as Tenants in Common with owner 2 (the Owners). You own X% share and owner 2 owns X% share.

The location 1 Property was leased on XX/XX/XXXX to the Tenant who on-leased the property to its customers on a short term basis.

You provided an email from the Tenant dated XX/XX/XXXX indicating the lease will run out on XX/XX/XXXX and the Tenant will not be renewing the lease after this date.

The Tenant furnished the apartment with new furniture in XXXX. At the conclusion of the rental period, the Tenant offered to sell all the furniture.

You provided a copy of an email dated XX/XX/XXXX from the Tenant offering the furniture for sale.

You provided a copy of an email dated XX/XX/XXXX from the Tenant itemising and quantifying the individual furniture items for sale. The amount for all the furniture totals $X. The Tenant states "All in good order - beds hardly used, especially over the last 18 mths". "Probably happy to accept half price as second hand, for the package"

On XX/XX/XXXX the owners purchased the furniture for $X. The Owners used the furniture to produce rental income in the location 1 Property until the existing lease ran its term on XX/XX/XXXX.

Many of the items cost less than $X per item per owner. You provided a document showing the cost of each furniture item and the amount allocated to the Owners based on the ownership interest as follows:

The Owners then used the furniture for display in the location 1 Property while looking for new tenants. You advised you showed at least 2 perspective tenants through the location 1 Property.

On XX/XX/XXXX you moved into the location 1 Property as your prime residence, X days after the lease expired.

Your previous prime residence was location 2 Property. You owned the property as Tenants in Common with Owner 3.

You advised location 2 Property was for sale for the period from the end of XX/XX/XXXX to XX/XX/XXXX.

On XX/XX/XXXX location 2 Property was advertised for rent fully furnished. On XX/XX/XXXX a tenant was secured for location 2 Property.

Some of the furniture was moved into location 2 Property for display while it was for sale.

More of the furniture was moved into location 2 Property for the tenants to use as the property was leased fully furnished.

The rest of the furniture is still in the location 1 Property in spare bedrooms. You may sell some of the furniture if the occasion arises.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 40-25

Income Tax Assessment Act 1997 section 40-27

The Treasury Laws Amendment (Housing Tax Integrity) Act 2017 (No.126, 2017)

Reasons for decision

Summary

From 1 July 2017, new rules were introduced limiting decline in value deductions of certain second-hand depreciating assets in residential rental properties. If you use these assets to produce rental income from your residential rental property, you cannot claim a deduction for their decline in value unless you are using the property in carrying on a business or you are an excluded entity. This change applies to the depreciating assets that you entered into a contract to acquire, or otherwise acquired at or after 7.30 pm on 9 May 2017. In your circumstance you purchased second-hand depreciating assets used in your residential rental property after 9 May 2017. Therefore you cannot claim deductions for your share of the decline in value of the second-hand furniture in full or in part for the 2019 and 2020 financial years.

Detailed reasoning

Section 40-25 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for the decline in value of a depreciating asset that you hold. A depreciating asset is an asset that can reasonably be expected to decline in value over time it is used (section 40-30 of ITAA 1997)

Depreciating assets are those items that can be described as plant, which do not form part of the premises. These items are usually: separately identifiable; not likely to be permanent and expected to be replaced within a relatively short period and not part of the structure. Examples of assets that deductions for decline in value can be applied to include: timber flooring, carpets, curtains, appliances like a washing machine or fridge and furniture.

In your case the furniture items listed in the table under the previous section, relevant facts and circumstances, are regarded as depreciating assets for Division 40 of the ITAA purposes.

However, there are limits on a deduction for the decline in value of second-hand depreciating assets for residential premises. From 1 July 2017, resulting from The Treasury Laws Amendment (Housing Tax Integrity) Act 2017 (No. 126, 2017), which received Royal Assent on 30 November 2017, there are new rules under section 40-27 of the ITAA 1997 for deductions for decline in value of certain second-hand depreciating assets where you hold a rental property. If you use these assets to produce rental income from your residential rental property, you cannot claim a deduction for the decline in value unless you are using the property in carrying on a business (including a rental property business), or you are an excluded entity.

An entity is an excluded entity if, the entity is:

·        a corporate tax entity

·        a superannuation plan that is not a self-managed superannuation fund

·        a public unit trust

·        a managed investment trust, or

·        a unit trust or a partnership, if each of its members are entities of a type listed above at that time during the income year.

This change generally applies to the depreciating assets that you:

·        entered into a contract to acquire, or otherwise acquired, after 7:30 pm on 9 May 2017, or

·        used, or had installed ready for use, for any private purpose in the 2016-17 year or earlier, for which you were not entitled to a deduction for a decline in value in the 2016-17 year (for example, depreciating assets in a property that was your home in the 2016-17 financial year that you turned into your residential rental property in the 2017-18 financial year).

Second hand depreciating assets are depreciating assets previously installed ready for use or used:

·        by another entity (except as trading stock).

·        in your private residence, or

·        for a non-taxable purpose, unless that use was occasional (for example, staying at the property for one evening while carrying out maintenance activities would be considered an occasional use).

In your case the new rules found in section 40-27 of the ITAA 1997 apply. This is because:

·        You acquired furniture items previously used by another entity, being the Tenant

·        The second-hand furniture items were acquired after 7:30 pm on 9 May 2017

·        You used the second-hand furniture items to derive residential rental income from the location 1 and location 2 Property

·        You are not carrying on a rental property business and you are not an excluded entity

Therefore owing to the changes which limit deductions for decline in value of certain second-hand depreciating assets in residential rental properties you cannot claim a decline in value deduction for your share of the cost of the second-hand furniture.

In addition, as the rules in section 40-27 of the ITAA 1997 apply, you cannot claim an immediate deduction for the second-hand furniture items costing $300 or less.