Depreciation on common property

Whether depreciation on common property is an allowable deduction under section 42-15 of the Income Tax Assessment Act 1997 (ITAA 1997) for a taxpayer who is a lessee of a rental apartment in a block of apartments.

No. Depreciation is not allowable to the taxpayer in respect of common property under section 42-15 of the ITAA 1997.

The taxpayer leases an apartment within a block of apartments. The apartment has been available for the purpose of generating income from holiday rental. The landlord passes recurring charges, including common area charges and building improvement and maintenance expenses to apartment lessees on a basis of unit of liability.

Under their lease for the apartment the taxpayer is granted the right in common with others to use common areas and in turn they must indemnify the landlord against a proportionate part of the costs and expenses of these common areas.

Under section 42-15 of the ITAA 1997, the owner or quasi-owner of a unit of plant may deduct an amount for depreciation of that plant in an income year if the plant is used for the purpose of producing assessable income, or is installed ready for use for that purpose and is held in reserve.

The term 'owner' is not defined in the ITAA 1997 and bears its ordinary meaning. A taxpayer is the owner of property if the taxpayer is the person who has the ultimate right of use and enjoyment of the property and to generally do anything with it as the taxpayer pleases, including the rights of destruction and disposal.

The taxpayer has the right in common with others to use common areas, but does not have any ownership rights over these areas. Section 42-310 of the ITAA 1997 provides the meaning of a quasi-owner of plant attached to land held under a quasi-ownership right. It requires that the relevant plant must be attached to land that the taxpayer holds under a quasi-ownership right granted by an exempt Australian government agency. Section 995 of the ITAA 1997 defines a quasi-ownership right over land as meaning a lease of the land; or an easement in connection with the land; or any other right, power or privilege over the land, or in connection with the land.

The taxpayer has been granted a lease over the apartment but such a right has not been granted by an exempt Australian government agency. Consequently, the taxpayer fails the test in paragraph 42-310(1)(a) of the ITAA 1997, which requires that the plant must be attached to land that the taxpayer holds under a quasi-ownership right granted by an exempt Australian government agency.

Therefore, depreciation on common property is not available to the taxpayer as a deduction under section 42-15 of the ITAA 1997.