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 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