On Tuesday the 9th of May 2017 the government proposed changes to the depreciation of plant and equipment assets in the federal budget.
These proposed changes were passed by the Senate on the 15th of November 2017.
Shortly after these changes were proposed and following their legislation, a number of property investors contacted BMT Tax Depreciation to discuss how they might be affected.
Understandably so, as the last major changes to depreciation legislation were made by the government in the mid 1980’s.
The main concerns investors had were about the impact the changes would have on their existing arrangements, future purchases and more widely on the property market.
The good news for investors is that properties purchased prior to 7:30pm on the 9th of May 2017 are unaffected, as the previously existing depreciation legislation has been grandfathered.
This means that any investor who exchanged contracts prior to this date can continue to claim depreciation deductions as per before.
The changes outlined in legislation section two of Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 remove a subsequent owner’s ability to claim a depreciation deduction for previously used plant and equipment assets (the easily removable or mechanical fixtures and fittings) in properties which exchanged contracts after the 9th of May 2017.
The legislation also confirms that the proposed changes will only apply to second-hand residential properties.
Any investor who purchases a brand new property can continue to claim depreciation for plant and equipment as normal.
The changes won’t affect an investor’s ability to claim the capital works component (deductions available for the wear and tear of the building structure and fixed items).
Depreciation of plant and equipment for non-residential/commercial properties is also unaffected.
The legislation also states that amendments to deductions for plant and equipment assets held in residential properties will not affect those carrying on a business, corporate tax entities, superannuation plans (other than Self-Managed Super Funds) and those who hold a property in a large unit trust.
Properties which have been lived in and turned into an investment property by their owners prior to the 1st of July 2017 are not affected. Owners can continue to claim plant and equipment depreciation and capital works deductions.
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 the 1st of July 2017. Plant and equipment assets within this scenario are considered previously used.
There are scenarios where the values of plant and equipment will be needed. This includes when an asset is scrapped, where there is a partial or full CGT exemption and where the exchange date and settlement date on the sale of the property occur in separate financial years. Depending on the circumstances, a property investor who is unable to claim depreciation on previously used plant and equipment assets due to these amendments should be able to claim a capital loss for the decline in value of the plant and equipment assets. This capital loss should only be able to offset a capital gain and if needed can be carried forward to offset future capital gains.
Case study
The below scenario explains in detail how depreciation plays a role in assisting a residential property investor to improve the cash return from their property. It also compares the depreciation deductions for the first full financial year on a three year old house purchased for $600,000 before and after the 9th of May 2017.
In the example, the owner receives a rental income of $560 per week or a total income of $29,120. Expenses for the property, such as interest, council rates, property management fees, insurance and repairs and maintenance total $41,028.
In the first scenario, the owner is able to claim a total depreciation claim of $12,397 from both capital works deductions and plant and equipment depreciation.
Using depreciation, this investor is experiencing a weekly cost of $56 per week to hold the property.
In the second scenario, as the owner exchanged contracts on the property after the 9th of May 2017, they are only able to claim $6,126 in capital works deductions and will be unable to claim $6,271 in plant and equipment deductions.
This reduced claim would result in the investors weekly cost of holding the investment property increasing from $56 to $101, a difference of $45 per week or $2,340 in the first full financial year.
It’s important to note that the change will have the same effect on both positive and negative cash flow scenarios.
While we believe that generally the integrity measure has merit, the legislative changes go much further than what was necessary to deliver on the government’s intention of stopping subsequent owners from claiming deductions in excess of an asset’s value. The approach outlined in the legislation treats residential property investors differently by extinguishing a property investor’s ability to claim a deductions based upon a transaction.
We believe this is caused by gaps in current legislation around establishing a depreciable value for second-hand plant and equipment.
It’s more important than ever to work with a specialist Quantity Surveyor to ensure that all deductions are identified and claimed correctly under the new legislation.
Each and every BMT Tax Depreciation Schedule will be tailored to suit an individual’s property investment scenario, ensuring that all deductions are maximised.
Hi.
I have purchased a 2bedroom off-the-plan apartment, settlement is end of 2019, I will living in the property but will rent out the other room, Could I claim half of depreciation on Division 40 plant and equipment and Division 43 Capital Works? What if i decide to rent out the whole place after living in it for a year? Will i be able to claim the whole depreciation?
Thank you.
Cherry
Hi Cherry,
If you’re renting out a portion of your property you can claim a percentage of the plant and equipment assets and capital works. This percentage will be based on how much of the property is being leased. A tax depreciation schedule will outline the deductions available and your accountant will discuss the final percentage you’re able to claim based on your financial position.
If you decide to rent out the whole property after living in it for a year, you won’t be able to claim for any existing plant and equipment assets as they will be deemed second-hand under current legislation. You will still be eligible to claim capital works depreciation and any brand new assets you add once it’s being utilised as a rental property.
Thanks,
BMT Team
Hi,
Could you please clarify the following:
If an individual purchases a new property prior to May 9 2017 and rents out a part of the property and also lives in it as their principle place of residence (prior to 1 July 2017) can they continue to claim depreciation on plant and equipment indefinitely under the grandfathering rules?
Or; if the individuals chooses to stop renting a part of the property (previously rented prior to 1 July 2017) for a period of time after 1 July 2017 and then decides to rent out the property solely as a rental property are the plant and equipment assets now classified as previously used?
Andrew
Hi Andrew,
In relation to the first scenario the investor would be able to claim a percentage of the plant and equipment assets. This percentage will be reflective of the portion of property being rented out. A tax depreciation schedule will outline the deductions available and your accountant will discuss the final percentage you’re able to claim based on your financial position.
In relation to the second scenario, if the investor decides to stop renting a portion of the property, lives in it as a primary place of residence and then re-rents it after 1st July 2017, they will not be able to claim on the existing plant and equipment assets. The existing plant and equipment will be deemed second-hand under current legislation. The investor will still be entitled to claim for the capital works as well as any brand new assets added to the property once it’s being utilised as a rental.
Thanks,
BMT Team
Hi there,
I purchased my property in 2009 (not new), I lived in till July 2017 and leased it out from 1 August 2017 till now.
I have done some additional work to the property between 2010-2014, eg, installed new evaporative cooling, new shutter window, new ranghood, new pergola & decking. Was advised that this could not be included in Depreciation schedule, I cannot claim tax deduction on them. Is that correct?
Thanks
Sarah
Hi Sarah,
Thanks for getting in touch. We will have a member of our team contact you to help answer your question.
Thanks,
BMT Team.
Hi there
We are selling our property. The property is 6 years old. We bought to rent out whilst overseas, and on return to Australia we lived in as our main residence. We had a tax depreciation schedule prepared back in 2012. The property was rented out for the period 2012 to 2017. However, we did NOT use the tax depreciation allowances, due to overseas tax rules i.e all the tax depreciation remains unused.
One possible buyer is looking at the property for investment purposes. Are they able to make use of any of the unused prior years tax allowances, or are they only able to use the tax allowances for the relevant years for their own period of ownership?
Appreciate your thoughts
Hi Mike,
Thanks for getting in touch. We will have a member of our team contact you to help answer your question.
Thanks,
BMT Team
Hello,
We moved into our brand new home that we built in November 2016. We lived in this house until January 2018 where we had to move and we then leased it out as an investment property. We had a Depreciation Schedule prepared but are now confused as we are being given mixed messages. We have now been told that we cannot claim depreciation as we lived in the home in 2017. We have also been told that the new legislation does not affect us as we purchased the house prior to May 2017. We have also been told that we can only claim Division 43 capital works under the new laws but not Division 40. As we are being given mixed messages are you able to clarify what is accurate please?
Thank you kindly
Mel
Hi Mel,
Thanks for getting in touch. This can be a complex topic, so your confusion is understandable!
As per the legislation, 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 the 1st of July 2017. Plant and equipment assets within this scenario are considered previously used.
So no, you would not be able to claim depreciation for plant and equipment assets, but you would still be eligible to claim the full capital works deduction, which typically makes up the majority of claims.
We hope this helps – please don’t hesitate to give us a call if you’d like to discuss further.
Thanks,
BMT Team