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,
What a nice read, though before I order a report could someone please confirm my situation?
So I bought an off-the-plan apartment unit on 11 November 2017 and the settlement date was in late 2018, it actually was my primary place of residence between late 2018 – early 2020.
The unit was officially rented out on 1 July 2020 and 80% of the furniture and appliances were pre-existing ones. So in my scenario, I can’t claim these items under Division 40 at all? Not even those fixtures like range hoods, package aircon, hot water systems?
Thanks.
Eddie
Hi Eddie,
Thanks for your comment.
Yes, that’s correct. You won’t be able to claim pre-existing Division 40 assets which are classed as those that are ‘easily removable or mechanical in nature’ such as hot water systems.
But you’ll still be able to claim all new Division 40 assets, and all capital works (Division 43) of the apartment and a portion of the common areas. On average, capital works make up 85 – 90 per cent of total depreciation claims and if the apartment was constructed in 2018, you could potentially claim capital works until 2058.
Please get in touch with our team on 1300 728 726 and we can provide an obligation-free depreciation estimate over the phone.
Thanks,
The BMT Team
Hi BMT team,
Can I offset capital loss from previously used plant & equipment in the rental property ( leg from 1 July 2017) for which I cannot claim Div 40 against capital gain on shares? Or it is to be used only when selling that rental property?
Thank you,
Anastasiia
Hi Anastasiia,
Thanks for your comment.
You may be able to use this capital loss to offset any capital gain, including shares. However, the property/assets would need to be disposed of (sold) before the amount can be used for the offset.
We strongly recommend discussing this with your accountant, as they can provide advice on this topic.
Thanks,
The BMT Team
Hi BMT Team
Thank you for your reply. Could you please clarify? What is the use of having (pre-existing) plant and equipment depreciation schedule for second-hand residential rental properties purchased after 9th of May 2017? Especially if we cannot use it for income tax deductions as well as capital gain deductions.
Can we just have capital works depreciation schedule only? Much appreciate your guidance. I will ask my accountant for my specific circumstances.
Thanks
I have just used BMT to prepare a depreciation schedule of my investment property. When I sell the property, can I add back the depreciation of plant and equipment that has not been claimed to the cost base of the property when I calculate the capital gain?
Hi Alice,
Thank you for your comment. It’s best to ask your accountant as they’ll be able to assess your personal situation and discuss the finer details with you. In general, plant and equipment assets do not form part of the cost base for capital gain purposes, just the division 43 capital works component.
Thanks,
BMT Team
Hi BMT,
just a quick question,
I understand that a new build (granny flat or home for IP purposes) can have a full Dep schedule carried out.
For older homes that have a reno before sale for an IP purchase, what can we claim. Building only?
We are looking to purchase an existing property in regional NSW for an IP.
Also can you offer your services in Regional NSW, IE Wagga Wagga etc?
Cheers
Peter T
Hi Peter
Yes, that’s correct. For second-hand properties investors can only claim original capital works (division 43) or capital works related renovations.
The exception is if the property has been substantially renovated. We can help ascertain whether the property has been substantially renovated as long as enough detail can be provided from the previous owner. A generic makeover of paint and carpet doesn’t count as substantial for instance, so it’s important to have the correct information.
In regard to your next purchase, we provide services in regional NSW including Wagga Wagga. If you’d like to know more about our services, contact 1300 728 726 or visit bmtqs.com.au/apply-online.
Thanks,
BMT Team
Hi BMT,
If the developer of a block of units in 2018 can’t sell for the price they want and decide to rent these properties out for a while and then sell tenanted to investors I assume the investors cannot claim Plant and Equipment as these items have been used by the tenant?
Thanks
Hi Simon,
A developer can treat vacant units as trading stock and rent them for up to six months. The developer must sell the rented units within this period for an investor to be eligible to claim plant and equipment depreciation. If the developer sells the units after the six month period, the investor can no longer claim depreciation for the assets.
Given the complexity of this scenario, we’d recommend contacting our expert team on 1300 728 726 or enquiring online.
Thanks,
BMT Team
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
I bought a property in 2010.. Lived in it as main residence for 2 years. Rented it out for 1 year. Moved back in.
I am looking to rent it again in 2018.
Can I use same depreciation schedule or I need new schedule?
Only minor repairs. No significant renovation.
Hi Ajay,
Thanks for your comment.
You will be able to use the same schedule if you have not completed any renovations since your last schedule. However, as you have used the property as a primary place of residence and will be renting it out again after the 1st of July 2017, it will be affected by the budget changes. This means you will be unable to claim depreciation for plant and equipment assets. You will only be able to claim for the capital works component.
Thanks,
BMT Team
You mention loss of depreciation on a pre-1997 property after primary residence ceases, but what about where a holiday home purchased years ago is used briefly (say, a week or so periodically) for private purposes after 1.7.17 – does depreciation permanently cease at that point or continue pro-rata afterwards ?
Hi Andrew,
This is a bit of a complex situation. Based on our interpretation of the legislation, you will still be able to claim depreciation for plant and equipment assets provided you do not exceed the maximum four weeks per year it can be used for personal purposes. If you have exceeded this four week period after the 1st of July 2017, you will likely be affected by the budget changes and will be unable to claim depreciation for plant and equipment assets.
In such cases, it’s always best to have a detailed log of when and for how long you used the property for personal purposes, to ensure any claims are compliant with new legislation.
Thanks,
BMT Team
BMT team, I signed a contract to purchase an off the plan new property in June 2017. If once constructed I move in at any point and then move out later on to rent it out as an investment property, do I lose the ability to depreciate the washer/blinds etc. from that day forth?
Hi Ben,
Thanks for your question. Yes that is correct – the new legislation states that 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. The good news is that you’d still be able to claim building write-off for the property, and this generally makes up 85-90 per cent of a depreciation claim.
Thanks,
BMT Team
Hi, I just purchased a 50+ year old investment property. I asked for a depreciation from BMT but was told it wasn’t worth doing due to the age of the property. I thought that I could still claim depreciation on the building itself…would this not be worth claiming?
Hi Michael,
One of our team members, Daniel, was in touch with you today to discuss this directly with you.
If you have any further questions please do not hesitate to let us know.
Thanks,
BMT Team
Good evening,
We have just purchased a unit (built in 1982) within a complex of 6 units at Golden Beach and would like some information regarding depreciation schedules on the building and for existing assets and future improvements/ purchases made against to the unit, not common property. I am aware the rules have changed last year, but would like some guidance.
Ross and Lyn Jenkins
Hi Ross and Lyn,
Thank you for getting in touch.
Congratulations on your new purchase – of course we’d be more than happy to provide you with this information.
One of our team will be in contact with you shortly to discuss these depreciation rules in light of the recent changes and specific to your new property.
Feel free to send us an email at socialmedia@bmtqs.com.au if you require anything else in the meantime.
Thanks,
BMT Team