Investment Property Depreciation
On 15 November 2017, the Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 was passed by both Houses of Federal Parliament, with the Bill now legislation. This amendment implements the changes to depreciation legislation announced in the May 2017 Federal Budget.
The Australian Taxation Office (ATO) defines two types of depreciation allowances available for property investors:
- Division 43 Capital Works Allowance; &
- Division 40 Plant and Equipment Depreciation
The capital works allowance – refers to what an investor can claim for the wear and tear that occurs to the structure of the property. This also includes any structural improvements that may have been made during a renovation. These deductions are calculated at a rate of 2.5 percent of the structural costs of a building and can be claimed per year for forty years.
Plant and equipment depreciation – refers to the deductions an investor can claim for the wear and tear that occur to the easily removable fixtures found within the property, such as; air conditioning units, dishwashers, blinds &/or carpet.
Changes to the Depreciation Rules for Residential Investment Properties
The amendment to depreciation rules as detailed in the bill, means that investors can no longer claim depreciation for ‘previously used’ plant and equipment assets in second-hand residential properties (where contracts were exchanged after 7.30pm on 9 May 2017).
These changes apply from 1 July 2017 to:
- Previously used plant and equipment acquired at or after 7.30pm on 9 May 2017 unless it was acquired under a contract entered into before this time,
- Plant and equipment acquired before 1 July 2017 but not used to earn income in either the current or previous year
Previous depreciation rules have been grandfathered for all residential investment properties which were eligible to claim deductions during the 2016/17 financial year. This means that investors who already owned an eligible property prior to the 9 May 2017 budget can continue to claim depreciation deductions according to the previous rules.
The new rules do not affect capital works allowance deductions for the structural component of a property or any fixed items that can be claimed such as doors, basins or retaining walls.
Brand New Investment Properties – Purchasers of brand new residential properties will carry on claiming depreciation exactly the same way they have done so to date.
The new legislation also allows investors to claim plant and equipment depreciation deductions in situations where a developer/renovator tenants a property prior to selling it to an investor, providing the property is:
- Purchased by an investor within six months of the property being completed by a developer/renovator; and
- The developer/renovator has not claimed depreciation deductions
Second-Hand Investment Properties – Purchasers of second-hand residential properties (where contracts exchanged after 7:30pm on the 9 May 2017) are no longer eligible to claim depreciation on existing plant and equipment assets. However, owners of affected properties can still claim depreciation on the plant and equipment assets that they directly purchase and incur an expense on.
If an owner engages a builder to renovate a residential investment property, they can claim the plant and equipment items provided that they were purchased & installed brand new.
Properties Initially Used as the Principal Place of Residence – Properties that were purchased initially as the owner’s principal place of residence are also affected by the legislation changes. Properties which have been lived in and rented out by the owners prior to 1 July 2017 are not affected, meaning that they can continue to claim plant and equipment depreciation and capital works deductions for the property.
However, properties that were initially used as the principal place and later rented out (after 1 July 2017) are affected by the changes, meaning that owners will no longer be able to claim plant and equipment depreciation deductions for these properties.
Exclusions to Depreciation Changes
The amendment only relates to residential property. Non-residential property such as commercial, industrial, retail and other non-residential property have not been affected by the new legislation changes. The changes also do not affect deductions for residential investment property held via the following entities:
- Corporate tax entities (including a company, but not in its capacity as trustee of a trust)
- Superannuation funds other than SMSFs,
- Public unit trusts,
- Managed investment trusts, &/or
- Unit trusts or partnerships whose members are the above listed entities
Source: Written by Felicia Jamieson, Director of Cambridge & Kent Chartered Accountants, Sydney, October 2018