Guidance on the Federal Government’s plan to tighten depreciation deductions

Two months after the Federal Budget announcement, property investors have received guidance on the Federal Government’s plan to tighten depreciation deductions available for residential properties.

Depreciation is the tax break for investors who own income-producing investment properties. Depreciation is an important, but sometimes overlooked, component of any investment property’s viability among the nation's two million landlords.

In what was described as an “integrity measure", the Government will limit plant and equipment depreciation deductions for investors in residential investment properties to assets not previously used. Plant and equipment items are usually mechanical fixtures or those which can be easily removed from a property such as dishwashers and ceiling fans.

Plant and equipment used or installed in residential investment properties as of the May 9, 2017 Budget night will continue to give rise to deductions for depreciation until either the investor is no longer owns the asset, or the asset reaches the end of its effective life.

Public consultation on the draft legislation will run until August 10.  

The measure is calculated to claw back $260 million over the next four years of the budget.

The key takeout is that if an investor acquires a second-hand residential property after May 10, 2017, which contains “previously used” depreciating assets, they will no longer be able to claim depreciation on those assets in future tax returns.

It address government concerns that some items were being claimed as tax write-offs by successive investors often in excess of their actual value.

The proposed changes only relate to residential property. Commercial, industrial, retail and other non-residential properties are not affected. 

The building allowance or claims on the structure of the residential building has not been changed. Investors will still need a depreciation schedule to calculate these deductions which typically represents between 80 to 85 percent of the construction cost of a property.

If investors renovate a property that is being used as an investment, they will still be able to claim depreciation on it after the renovations.

Perhaps the most interesting point, according to Washington Brown's quantity surveyor Tyron Hyde, is that while investors purchasing second-hand property can now no longer claim depreciation on the existing plant and equipment, they will have the benefit of paying less capital gains tax when they sell the property. 

Hyde noted what investors would have been able to claim in depreciation under the previous legislation, now simply gets taken off the sale price when it comes to capital gains tax calculations.

Finally it should be noted buyers of brand new property will carry on claiming depreciation exactly the way they have done so to date.

"This is great news for the property industry and the way it should be," Hyde said.

This article first appeared in The Daily Telegraph.