How Do Recent Changes To The Property Depreciation Legislation Impact Me?
Back in May 2017, the Australian Federal Government proposed legislation amendments to plant and equipment deductions, which were passed into law by the Senate mid-November.
These amendments addressed concerns that successive property investors were claiming tax write-offs on depreciable items, often in excess of their true value.
The resultant change to the Income Tax Assessment Act 1997 for property investors means that any previously used depreciating assets in a second hand residential property acquired after 7.30pm on the 9th of May 2017, cannot be claimed in future tax returns.
However, existing investments (purchased pre 9th May 2017) will be grandfathered, so investors can continue claiming plant and equipment depreciation as before. Along with owners of brand new residential properties, investors who renovate an investment property will also be able to claim deductions over the life of any newly purchased assets.
As these changes only impact income producing properties, actual home owners remain unaffected unless they choose to rent out their primary place of residence after the 1st of July 2017.
Commercial properties, superannuation plans that hold residential property, public unit and managed investment trusts, and properties held under company entities, all remain exempt from the amendment; as will a property deemed to have been substantially renovated by the previous owner for the purposes of selling.
So exactly what sorts of things constitute Plant and Equipment Assets?
These tend to be the easily removable or mechanical assets found in most investment properties. Items such as air-conditioners, blinds, curtains, dishwashers, smoke alarms and garbage bins. The Australian Tax Office provides a detailed depreciation schedule to help calculate each items diminishing value.
But what about Capital Works Deductions?
These changes to plant and equipment depreciation do not affect qualifying capital works deductions, which are claims available on the wear and tear of a residential building’s structure and include any structural improvements made in the course of a renovation. Degradation on items such as bathtubs, toilets, cabinets, doors, walls and windows can all be claimed as division 43 capital works allowances.
Anything that meets the capital improvements criteria can be claimed if completed by the current owner of the property. If a property has been substantially renovated by the previous owner to sell, the investing purchaser can claim depreciation on the new plant and equipment assets and any available qualifying capital works deductions.
*Note: All previously used plant and equipment will be excluded from the depreciation schedule.
Cosmetic changes such as painting, sanding floors, replacing light fittings, curtains or carpet, are not regarded as substantial renovation. The ATO defines the substantial renovation of a building where all, or much of, the structure is removed or replaced and the property is affected as a whole.
It’s important to note that a large swag of investors will be largely unaffected by the changes to depreciation legislation; for anyone who exchanged contracts prior to 7.30pm on the 9th of May 2017, those who invested in new or substantially renovated residential properties before or after this date, or commercial property investors, it’s business as usual.