Depreciation changes pass parliament: what you can't claim
Changes to depreciation legislation announced in the May 2017 Federal Budget have been passed by parliament.
The amendment means that property investors can no longer claim depreciation for plant and equipment assets, such as air conditioning units, solar panels or carpet, in second-hand residential properties (where contracts were exchanged after 7:30pm on May 9, 2017).
According to our analysis, over the first five years of ownership the new law will result in an average loss of around $4236 in depreciation deductions each year for those impacted. However, an important take out is that even these investors will still be able to claim substantial deductions.
Depreciation deductions are split into two components, plant and equipment and capital works allowance.
The new rules do not affect capital works deductions for the structural component of a property or any fixed items that can be claimed such as doors, basins or retaining walls. These deductions typically make up between 85% and 90% of a total claimable amount.
On average, the owner of a three-year-old house purchased for $600,000 (after 7:30pm on May 9, 2017) could expect to claim around $6126 in capital works deductions in the first full financial year alone.
A claim of this amount could still make a substantial difference to a property owner's cash flow and their ability to reduce the holding costs of the property.
In light of this legislation and changing property market conditions, it is more important than ever for property investors to work with specialist quantity surveyors to ensure they are discovering and correctly claiming all legitimate items that they are entitled to under the new laws.
The new rules apply to only a portion of the market, specifically, those investors who purchase a second-hand residential property after 7:30pm on May 9, 2017.
Previously existing legislation will be grandfathered, which means investors who already made a purchase prior to this date can continue to claim depreciation deductions as per before.
Investors who purchase brand new residential properties and commercial owners or tenants, who use their property for the purposes of carrying on a business, are also unaffected.
Owners of second-hand properties will also still be able to claim depreciation for assets they purchase and directly incur an expense on.
Plant and equipment depreciation that could not be claimed throughout ownership due to the amended legislation can be claimed as a capital loss to reduce any future capital gains tax liabilities.
While the new rules will negatively affect thousands of property investors, tax depreciation is still very much applicable and will continue to be used by savvy investors to maximise cash flow from investment properties.