The 2017 federal budget has proposed major changes to tax depreciation legislation, which will affect property investors across Australia.
Those investors who have exchanged contracts for an income producing property after 9th May 2017 will be primarily affected. Depreciation describes the declining value of an asset as it ages over time and tax depreciation allows this lost value of an asset to then be claimed by the owner as a legitimate tax deduction.
There are two main sub sections of depreciation:
Division 43 aka ‘Capital Works’- Relates to the structure of the building (ie. concrete slab, roof & tiling).
Division 40 aka ‘Plant & Equipment’- includes items that can be easily removed from the property without causing damage (ie. Blinds, carpet, cooktops & hot water systems).
The Australian Tax Office (ATO) allows owners with an investment property to claim depreciation deductions for the declining value of their asset. Capital works deductions can be claimed on the building’s structure and depreciation can be claimed on the plant and equipment assets within the property.
What changes have been proposed?
For all properties purchased after the 9th May 2017 there will be only two ways in which depreciation on plant & equipment items can be claimed.
Investors who purchase a ‘second hand’ residential property will not be able to claim depreciation on the properties existing plant & equipment assets. This measure has been introduced with the intention of preventing multiple owners from repeatedly depreciating the same assets each time the property is sold.
How does this affect you?
Tax depreciation schedules produced prior to 9th May 2017 will remain valid. Investors who have purchased their investment property prior to 9th May 2017 will be ‘grandfathered’ & permitted to continue to claim plant & equipment items until the value either runs out or the property is sold. However, if you are the second person to own an existing investment property there will be no depreciation deductions available to the plant & equipment items within the property.
As the proposed changes limit the depreciation deductions available to investors, those purchasing an investment property post 9th May 2017 must consider the tax implications & how these changes will affect the properties cash flow. For example, an investor who purchased an income producing property prior to 9th May 2017 is permitted to claim both capital works deductions + plant & equipment depreciation resulting in a greater tax deduction value for this investor & typically lower holding costs for the property.
Had this same investor purchased the same property after the 9th May 2017 they would only be permitted to claim capital works deductions and would miss out on the value of any existing plant and equipment deductions that previously could have been claimed. This would reduce the overall tax depreciation claimable, which may result in higher holding costs when compared to if the property purchased prior to 9th May 2017.
If you would like further information or have specific questions about the recent changes to tax depreciation & how this affects your property you should seek further advice from your accountant. To enquire about Hive’s management services please contact us on 1300 882 326.