Investors to be hit hard by budget depreciation rules: Leary & Partners

Investors in residential property, particularly strata units, will be hit hard after the budget announcements, according to quantity surveyors Leary & Partners.

The budget has stripped investors buying second-hand residential properties of a major tax deduction, said quantity surveyor and tax law expert Kaylene Arkcoll. 

Pre-budget there was much speculation about limits on negative gearing, but the government unexpectedly announced it was restricting depreciation claims by investors.

"Purchasers of second-hand residential investment units have lost their ability to claim depreciation on plant and equipment which is part of the property at the time of purchase,” said Arkcoll, saying it was one of the standard forms of residential investment deduction.

The government will limit plant and equipment depreciation deductions to outlays actually incurred by investors. There is no lead-time with these changes and apply to all contracts after Budget night.

The change is forecast to save $260 million dollars over the next four years.

Depreciation claims on investment properties is a powerful driver for most investors, said Arkcoll. 

For second-hand residential properties, the budget blocks this avenue of investment joy for everyone except investors who carry out renovations or replacements. 

"Older building stock may now be less desirable,” said Arkcoll. 

Under new rules coming into effect from July 1, depreciation deductions for plant and equipment items such as washing machines and ceiling fans will only be allowed if the investor actually bought them. It is described as an “integrity measure" and is intended to address concerns that items are being claimed as tax write-offs by successive investors in excess of their actual value.

The changes will apply to any items purchased after budget night, May 9, but existing investments will be grandfathered.

Details of the policy are still limited but Arkcoll said that it appears that:

- The intent of the policy is to restrict depreciation claims to items purchased and installed in the property by the claiming taxpayer. 

- Depreciation deductions will remain available for items that are part of a new property purchased from a developer, although this is not explicitly stated in the budget papers. 

- Subsequent purchasers of the property will no longer be able to claim depreciation based on the second-hand value of the plant and equipment.  

- Taxpayers already depreciating plant and equipment can continue to claim deductions in the current manner.

"The removal of depreciation claims will have a double impact on strata property owners", she said.

"They will lose both the claim for depreciable items inside their unit and depreciation of their share of common plant and equipment. This will mean a reduction in annual tax deductions that in the early years of ownership range from approximately $3,000 for a simple unit to over $40,000 for an upmarket unit in a high-rise development."

She said that till More details are available, i.e. when the draft legislation is released, it would be difficult to fully assess the ramifications of the budget announcement. 

"The elephant in the room remains the government's ability to pass such a substantial change through a volatile senate,” Arkcoll said.

"Thankfully, there has been no change to the 2.5 percent Division 43 construction allowance which applies to most properties constructed in the past thirty years.”