Housing Tax Integrity – Limiting Depreciation Deductions – What Have We Learned?

It’s been a little over two weeks now since the Australian Government released an Exposure Draft Legislation formalising the proposed changes introduced in the 2017 Budget (for a full transcript please follow the link: https://treasury.gov.au/ConsultationsandReviews/Consultations/2017/Housing-Tax-Integrity).

Having had time to take it all in, review industry opinion and attend an AIQS Webinar on the subject, I have put together a bullet point summary of what we know thus far:

• First and foremost, investment property depreciation comprises depreciation on the building (Division 43) and depreciation on the plant and equipment (Division 40)*. The changes relate to Division 40 depreciation only.
• It is important to note that the changes relate to contracts entered into after 7:30PM on 9 May 2017 i.e. the changes relate to the contract date not the settlement date.
• Investors who entered into contracts prior to 7:30PM on 9 May 2017 are not affected by the changes. However, you will still be affected if you turn your principal place of residence (acquried prior to 7:30PM on 9 May 2017) into an investment property after 1 Jul 2017.
• The changes relate to residential properties only. Commercial properties are not affected by the changes.
• Investors who buy brand new ‘previously unoccupied’ properties are not affected by the changes and continue to claim depreciation on the Division 40 items.
• Investors who entered into contracts to buy existing ‘previously occupied’ residential properties post 7:30PM on 9 May 2017 are affected. These investors can no longer claim depreciation on the existing Division 40 items that came with the property. They will be able to claim depreciation on any new plant and equipment items they add or replace. In most situations, the investor will still require a Tax Depreciation and Capital Allowances Schedule in order to claim the Division 43 building depreciation, however, the requirement for a Schedule will be dictated by the age of the property or, if built prior to 15 Sep 1987, the extent of renovations completed by the previous owner.
• Investors take note, where you add or replace plant and equipment items they must be acquired new from a retailer in order to claim depreciation. Plant and equipment items acquired secondhand (via Gumtree, etc) cannot be depreciated.

*such as carpets, blinds, appliances, hot water systems, air conditioning assets, fans, light fittings, smoke detectors, garage door motors, pool equipment, alarms, solar systems, etc.