Depreciation changes to hit property investors
The federal government’s recently announced changes to depreciation deductions available to property investors were a surprise to many. But what do the changes mean for investors and when will they be implemented?
As part of the federal government’s 2017 budget, changes were announced to the depreciation deductions on offer to property investors.
These pertained to deductions on items in an investment property deemed ‘plant and equipment’ as well as for expenses incurred when travelling to inspect an investment property.
Overall, depreciation benefits are helpful, but investors shouldn’t be buying property for these benefits. Their priority should be on properties with good capital growth or rental income prospects, depending on their goals.
What are the depreciation changes to ‘plant and equipment’?
There are over 100 items that are deemed plant and equipment in an investment property including carpets, hot water systems, stoves, air conditioners, curtains, blinds, dishwashers, ceiling fans, and the list goes on.
In the government’s eyes, these items have an ‘effective life’, typically of 7 years, in which investors can claim a tax deduction from their taxable income for the annual depreciation of these items.
Previously, if an investor bought a property (new or established), they could engage a quantity surveyor who could value these items and then use this information to claim the associated depreciation deductions.
However, under the new legislation, depreciation deductions on ‘plant and equipment’ will only be available to investors buying brand new properties, or investors who pay for plant and equipment items themselves.
This means if an investor buys an established property with a 2-year old dishwasher, they can’t claim the remaining deductions on its ‘effective life’.
Effectively, this reduces investors’ cash flows’ as they don’t receive as much back from the tax man each year.
When will the changes be implemented?
The good news is that these changes are grandfathered, so if you entered into a contract to buy an investment property before 7:30pm on May 9, 2017, nothing changes for you.
However, if you entered into an agreement to buy an investment property after this time, then you will be effected by the new legislation.
Settlement dates are irrelevant. The changes only apply to the contract date, not the settlement date. Therefore, if you entered into a contract to buy an investment property before May 9, 7:30pm but settlement occurred after this date, you will still be able to claim the existing plant and equipment as depreciable items.
Who will be most affected by the changes?
Unfortunately, some of the policy remains unclear as we have heard very little about the details of the changes since budget night on May 9.
As we understand it, if you didn’t buy the plant and equipment item yourself (i.e. it came with the purchase of the investment property), then you don’t get to claim any depreciation against it.
Therefore, we expect this will most impact investors who purchase near new properties or recently renovated properties.
We expect that investors buying new properties will be able to claim the deductions on all items deemed plants and equipment.
Ideally, what we would like to see is that investors can still claim full depreciation relative to how much effective life is left in the item, whether that be 2 years or 7 years, etc.
Travel expense deduction scrapped
Further to the changes to depreciation deductions for plant and equipment, the federal government has also scrapped deduction for travel expenses.
This means investors can no longer claim airfares or petrol, among other expenses, that are incurred when travelling to inspect their investment properties or to collect the rental income.
It’s important to note that the property management fees remain tax deductible though.
Building depreciation allowances remain
Building depreciation allowances remain for investment properties. The depreciation allowance is a percentage of the construction cost of the building, or improvements on the property.
Investors can claim depreciation of 2.5% of the cost of the building or improvements each year. The ‘effective life’ being 40 years.
So if the cost of the building is $300,000 then you can claim 2.5% each year, effectively $7,500 annually, over 40 years. But if the building is 15 years old, you can still claim the remaining 25 years.
To secure this deduction, the house needs to have commenced construction on or after July 18, 1985 or where construction of structural improvements started on or after February 27, 1992.