Here are the changes to depreciation affecting residential property that you need to know about.
Prior to the release of the May budget, the Australian Tax Office (ATO) allowed owners of investment properties (income producing properties) to claim depreciation deductions to the wear and tear that occurs to a buildings structure (division 43) and the plant and equipment assets within (division 40).
Division 43 includes things like concrete, timber, tiling, cabinetry etc.
Division 40 items are described loosely as items easily removed from a property without damage such as air conditioner units, curtains & blinds, carpets, ovens, cooktops, dishwashers, range hoods, hot water systems, smoke alarms etc. It’s quite a long list. In fact, there are round 150 individual assets that can be claimed as division 40 items for residential property.
The proposed changes in the budget relate to the depreciation of plant and equipment assets and the eligibility to claim these deductions. Currently, investors are eligible to claim qualifying plant and equipment depreciation on assets found in an investment property they purchase, even if they were installed by a previous owner.
“Under the new rules which are yet to be legislated by Parliament, investors will be able to depreciate new plant and equipment assets and items they add to their property, however subsequent owners will not be able to claim depreciation on existing plant and equipment assets,” said the Chief Executive Officer of BMT Tax Depreciation, Bradley Beer.
“This change will have a major impact on investors, essentially reducing the annual deductions they can claim therefore reducing their cash return each year. This could lead to investors being in a tighter financial position and may discourage future investors from purchasing a second hand residential property,” said Mr Beer.
“It is our understanding at this stage that if the property is new, they will be able to continue to depreciate plant and equipment as they were previously. We are seeking further clarification on this,” said Mr Beer.
Investors will still be able to claim division 43 deductions including any additional capital works carried out by a previous owner.
The budget stipulates that existing investments will be grandfathered – meaning anyone who has purchased a property up until the 9th of May 2017 will be able to claim depreciation as per normal. However, if an investor exchanges contracts after this date, there could be different depreciation rules applied.
It remains to be seen exactly how these changes will be rolled out and how they will affect plant & equipment assets. Certainly a space to watch.
For more information on this matter, head here.