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Plenty of lucrative deductions available

New legislation, new opportunities for investors

Changes announced as part of the 9th of May 2017 federal budget have now been legislated after being passed by the Senate on the 15th of November 2017.

Plenty of lucrative deductions available

For many property investors the new rules, outlined in Treasury Laws Amendment (Housing Tax Integrity) Bill 2017, have made what was already a complex topic a little more difficult to understand.

The new rules do not affect capital works deductions at all. The amended legislation only restricts property investors from claiming depreciation deductions for the decline in value of ‘previously used’ depreciating assets (plant and equipment) within second-hand residential investment properties.

An incorrect assumption some property investors have made after hearing about the changes is that they are no longer eligible to make a claim.

It’s important to note that the new legislation only applies to investors who exchange contracts on a second-hand residential property after 7:30pm on the 9th of May 2017.

Even in cases where investors are affected by the change, there are still thousands of dollars to be claimed, particularly as capital works deductions typically make up between 85 to 90 per cent of the total claim.

The new legislation provides opportunities for investors in the following scenarios as it does not impact them:

  • Investors who purchase a brand-new residential property
  • Investors who exchanged contracts on a residential property prior to 7:30pm on the 9th of May 2017
  • Investors who add new plant and equipment assets to their property after purchase and directly incur the expense
  • Investors who purchase properties which are considered to have been substantially renovated by the previous owner
  • Non-residential and commercial properties
  • Any deductions that arise in the course of carrying on a business
  • Any residential property held in a superannuation plan (other than Self-Managed Super Funds)
  • Investors who hold residential property in corporate tax entities, including company entities
  • Home owners who turned their primary place of residence into a rental property prior to the 1st of July 2017

For affected investors, it’s important to note that the changes only impact the existing plant and equipment depreciation deductions found within a second-hand residential property. These are the easily removable fixtures and fittings such as carpets, hot water systems and air conditioners. Any brand-new plant and equipment assets added to the property after purchase are depreciable.

The capital works allowance, which is the component investors can deduct for the building structure, is unchanged. Examples include walls, the roof, doors, kitchen cupboards and more. These deductions can be claimed at a rate of 2.5 per cent per year for a maximum of forty years for any property in which construction commenced after the 15th of September 1987.

Often older properties have been renovated and qualifying capital works completed by a previous owner can be claimed by the new owner for any years that remain in the forty year period.

The table featured provides an example of common capital works items which the owner of a second-hand residential investment property could claim.

In this scenario the investor exchanged contracts on a fifteen year old, four bedroom, two bathroom house after 7:30pm on the 9th of May 2017. The previous owner of the property had completed renovations which included updating the kitchen through installing new cupboards and benchtops five years ago and adding an outdoor pergola seven years ago.

Capital works deductions
Item Capital works rate Remaining effective life (years) First full financial year deduction Five year cumulative deductions
Original structure and fixed items 2.50% 25 $6,250 $31,250
Kitchen cupboards (replaced 5 years ago) 2.50% 35 $289 $1,445
Kitchen benchtop (replaced 5 years ago) 2.50% 35 $72 $360
Outdoor pergola (installed 7 years ago) 2.50% 33 $240 $1,200
Plumbing (updated 5 years ago) 2.50% 35 $68 $340
Tiling (updated 5 years ago) 2.50% 35 $130 $650
Total $7,049 $35,245

As the example shows, the investor would be eligible to claim $7,049 in capital works deductions in the first full financial year, or $35,245 in cumulative deductions over five years.

The investor would also be eligible to claim depreciation for any brand-new plant and equipment assets they chose to purchase and add to the property themselves.

Any plant and equipment assets that were installed by the previous owner can be excluded from the depreciation schedule and included in a capital loss schedule. This schedule can be used by the owner to offset any Capital Gains Tax liabilities should they choose to dispose of any assets or sell the property in future.

There are still substantial deductions available for any investors affected by the new legislation. It’s always worthwhile consulting with a Quantity Surveyor to discuss what deductions can be claimed.

Investors can learn more about the recent depreciation legislation changes by downloading our budget white paper.