Understanding a ruling application for depreciation purposes is crucial for accountants advising clients on property investments. A ruling application is essentially a request made to the Australian Taxation Office (ATO) for a private ruling, which provides clarity on how specific tax laws apply to an individual taxpayer’s circumstances, particularly when it comes to depreciation under Division 40 and Division 43 of the Income Tax Assessment Act 1997 (ITAA 1997).
Under Division 40 of the ITAA 1997, plant and equipment (depreciating assets) are covered, while Division 43 deals with capital works (building structure). When the application of these divisions is ambiguous, a ruling application can provide definitive guidance from the ATO, ensuring that tax obligations are met correctly and potential benefits are maximised. A common misconception is that rulings are only necessary for complex scenarios, but even seemingly straightforward cases can benefit from ATO confirmation.
To see how this plays out, consider a property investor who owns a mixed-use commercial and residential building. They are uncertain whether certain fit-out costs qualify as plant and equipment or capital works. By submitting a ruling application, they can receive a clear directive from the ATO, ensuring their depreciation claims are accurate and compliant. For instance, if the ruling confirms that $50,000 of fit-out costs qualify under Division 40, this could lead to a substantial deduction, potentially reducing the investor's tax liability by $18,500 at a 37% marginal tax rate.
In our experience reviewing thousands of properties across Australia, we find that investors often overlook the benefits of seeking a ruling, especially when dealing with mixed-use properties or unique asset classifications. Many assume that their accountant or QS will automatically apply the correct rules, but without a ruling, there's room for error. Additionally, investors frequently miss re-evaluating their depreciation strategy post-renovation, where a ruling can clarify new asset classifications.
The answer can differ depending on your situation. For instance, the need for a ruling application might change if the property was acquired after the 2017 budget changes, affecting second-hand residential properties. Similarly, properties owned by self-managed super funds (SMSFs) or those involving joint ownership can complicate depreciation claims, making a ruling application particularly beneficial. Commercial properties, with their unique asset classes, also often require specific ATO guidance.
Given the complexities involved, obtaining professional advice is crucial. A Chartered Quantity Surveyor can accurately assess which assets qualify for depreciation, while an accountant can ensure that the tax implications align with the client’s overall financial strategy. Together, they can determine when a ruling application is necessary and handle the submission process efficiently.
If you're advising clients on depreciation, consider these steps: