The federal government recently announced some proposed changes relating to the depreciation of plant and equipment assets in investment properties.
Understandably, many investors are concerned about how they will be affected.
In a nutshell, the proposed changes won’t have any effect on properties that are already owned. It will only affect owners who have exchanged contracts on an investment property after 7:30pm on May 9, 2017.
Below are key points which answer some common questions in relation to the proposed changes. Because the legislation is yet to be finalised, it is important to note that further changes may still take place.
What changes have been proposed?
- Subsequent owners (those who purchase a second-hand property) who exchange contracts after 7:30pm on May 9, 2017 will not be able to claim depreciation on existing plant and equipment assets
- Although there is nothing specific mentioned about new properties, we expect that investors will be able to depreciate new plant and equipment assets within a new property, as was the case previously
- Any additional assets added to a property can be depreciated as normal
- Investors will still be eligible to claim qualifying capital works deductions, which are the deductions available on the structure of the building. The capital works deduction is available on properties that commenced construction after September 16, 1987
- The budget notes advise that existing investments will be grandfathered. This means that any investor who exchanged contracts prior to May 9, 2017 can still claim plant and equipment depreciation per normal
What is plant and equipment?
These are the easily removable or mechanical assets found within an investment property. Some examples include air conditioners, hot water systems, smoke alarms, garbage bins, blinds and curtains. The Australian Taxation Office provides individual effective lives for plant and equipment which can be used to calculate the rate of depreciation over time.
When will the changes take place?
It was proposed the new legislation would be in force from July 1, 2017. However, at the time of writing, these proposed changes have not yet passed through Parliament to become law.
Who will be affected by this change?
The new rules will affect property investors who exchanged contracts to purchase a second hand residential property after 7:30pm on May 9. These investors will only be able to claim plant and equipment depreciation on the assets they purchase and add to the property themselves. Investors who purchase a second hand property should still contact a specialist quantity surveyor to discuss the deductions they can claim for qualifying capital works deductions.
Who won’t be affected by these proposed changes?
- Owners of brand new residential properties who exchanged contracts both before and after May 9
- Residential property investors who exchanged contracts prior to 7:30pm on May 9, 2017
- Commercial property owners and their tenants. It appears the changes relate only to residential investment properties
- Home owners are unaffected as only income producing properties will be impacted. However, those who decide to turn their primary place of residence into an investment property are only affected if their property was purchased after the 9th of May 2017
Depreciation scenario – before and after May 9
The following tables show the deductions an investor would receive for both a three-year-old and a 10-year-old residential property purchased for $350,000. They examine the deductions an investor who exchanged contracts prior to the May 9 could claim compared with the likely capital works deductions they could claim if they exchanged contracts after May 9 under the proposed new legislation.