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EOFY and new depreciation rules for property

In one of the most dramatic changes to property depreciation legislation in more than 15 years, Parliament passed the Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 in 2017.

The legislation means owners of ‘second-hand’ residential properties (where contracts were exchanged after 7:30pm AEST on 9 May 2017) will be ineligible to claim depreciation on plant and equipment assets, such as air conditioning units, solar panels or carpet. It is an integrity measure which addresses concerns that some plant and equipment assets were being depreciated by successive property investors in excess of their actual value.

What’s unaffected by the new legislation?

The good news is that there are still thousands of dollars to be claimed by Australian property investors, as there has been no change to capital works deductions, a claim available for the structure of a building and fixed assets such as doors, basins, windows, or retaining walls.

The capital works deduction is available on residential investment properties that commenced construction after 15 September 1987. These deductions typically make up between 85-90% of an investor’s total claimable amount. This includes any capital works carried out by the current or a previous owner.

Existing depreciation legislation will be grandfathered. Investors can claim depreciation for plant and equipment assets that form part of a residential investment property purchased prior to 7:30pm on the 9 May 2017 (including contracts already entered into at that time). Investors who fall into this category can claim depreciation deductions until they either no longer own the asset, or until the asset reaches the end of its effective life.

Investors who purchase new residential properties and commercial property owners or tenants who use their property for the purposes of carrying on a business are also unaffected.

Superannuation funds that hold residential property (other than SMSFs) will not be affected, nor will public trusts and managed investment trusts or corporate tax entities.

Owners of second-hand properties who exchanged after 7:30pm on 9 May 2017 will still be able to claim depreciation for plant and equipment assets they purchase and directly incur an expense on.

Impact on new owners of second-hand residential property

A property owner will not be able to claim depreciation on pre-existing plant and equipment assets within properties which have been lived in as a primary place of residence where the owner decides to rent the property out after 1 July 2017. Plant and equipment assets within this scenario are considered previously used. Any additional work to such a property completed by the current owner is classified as capital improvements and claimed as normal. This includes both capital works and plant and equipment.

If a property is considered to have been substantially renovated by the previous owner for selling purposes, then an investor can claim depreciation on the new plant and equipment assets along with any new or old qualifying capital works deductions available. If an entity has previously been entitled to any depreciation deductions for these assets, or if someone lived in the property before it was held by the current owner, then they will not be able to claim any ongoing plant and equipment depreciation on the assets. These assets will be included in a capital loss depreciation schedule for the purposes of claiming a capital loss, allowing the owner to adjust their CGT liabilities where applicable.

It’s important to work with a specialist Quantity Surveyor to ensure that all deductions are identified and claimed correctly under the new legislation. For investors who are planning on selling a property affected by the new rules, a depreciation schedule can be provided to assist them and their accountant to perform a calculation adjustment for CGT liabilities.

More about the new depreciation legislation and how this applies to a range of property investment scenarios, is available in this document: Essential facts: 2017 Budget changes and property depreciation.

 

Bradley Beer is the Chief Executive Officer of BMT Tax Depreciation. This article is general information and does not consider the circumstances of any investor.

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