Recently the federal government announced some proposed changes relating to plant and equipment deductions. Since then we’ve had time to review how this could affect residential property investors.
Although we are not expecting the legislation to be finalised anytime soon, we have been talking with government with the aim of developing fair policy which covers all the necessary factors.
Many investors who have contacted us have asked how they will be affected. The proposed changes won’t have any effect on properties that are already owned. It will only affect owners who have exchanged contracts on an investment property after the 9th of May 2017.
Below are the key points to answer the questions investors have relating to the proposed changes. Because the legislation is yet to be finalised, it is important to note that further changes may still take place.
- What changes have been proposed?
- What is plant and equipment?
- When will the changes take place?
- Who will be affected by this change?
- How will these investors be affected?
- Who won’t be affected by these proposed changes?
- Depreciation scenario – before and after 9th of May
What changes have been proposed?
- Subsequent owners (those who purchase a second hand property) who exchange contracts after the 9th of May 2017 will not be able to claim depreciation on existing plant and equipment assets
- Although there is nothing specific mentioned about new properties, we expect that investors will be able to depreciate new plant and equipment assets within a new property as they have been previously. This will continue as normal
- Any additional assets added to a property can be depreciated as normal.
- Investors will still be eligible to claim qualifying capital works deductions, which are the deductions available on the structure of the building. This includes any additional capital works carried out by themselves or a previous owner. The capital works deduction is available on properties that commenced construction after the 16th of September 1987
- The budget notes advise that existing investments will be grandfathered. This means that any investor who exchanged contracts prior to the 9th of May 2017 can still claim plant and equipment depreciation per normal
What is plant and equipment?
- These are the easily removable or mechanical assets found within an investment property
- Some examples include air conditioners, hot water systems, smoke alarms, garbage bins, blinds and curtains
- The Australian Taxation Office provides individual effective lives for plant and equipment which can be used to calculate the rate of depreciation over time
When will the changes take place?
- The proposed new legislation was expected to be passed from the 1st of July 2017. However, the legislation is yet to be passed and the government has provided investors and relevant parties with the opportunity to have their say by making a submission until the 10th of August 2017.
Who will be affected by this change?
- Property investors who exchanged contracts to purchase a second hand residential property after 7:30pm on the 9th of May 2017
How will these investors be affected?
- These investors will only be able to claim plant and equipment depreciation on the assets they purchase and add to the property themselves
- Investors who purchase a second hand property should still contact a specialist Quantity Surveyor to discuss the deductions they can claim for qualifying capital works deductions
Who won’t be affected by these proposed changes?
- Owners of brand new residential properties who exchanged contracts both before and after the 9th of May
- Residential property investors who exchanged contracts prior to the 9th of May 2017
- The amendments don’t affect deductions that arise in the course of carrying on a business. This means commercial property owners and their tenants can continue to use the existing rules. Corporate tax entities, superannuation plans (other than Self-managed Super Funds) and large unit trusts are also unaffected
- Home owners are unaffected as only income producing properties will be impacted. Clarity is needed around those who decide to turn their primary place of residence into an investment property, especially those who purchase their property prior to the 9th of May 2017 and they decide later to rent it out
Depreciation scenario – before and after 9th of May
The following tables show the deductions an investor would receive for both a three year old and a ten year old residential property purchased for $600,000. They examine the deductions an investor who exchanged contracts prior to the 9th of May could claim compared with the likely depreciation deductions they could claim if they exchanged contracts after the 9th of May under the proposed new legislation.