On the 15th November 2017, Senate passed the anticipated legislation that limits the ability of investors to claim depreciation on second hand assets acquired in investment properties purchased after May 9, 2017.
Whilst there are no surprises in the legislation that has finally passed, we are now in a position to be able to report definitively on the actual changes.
Investors who have purchased an established (not brand new) residential investment property after 7.30pm, Tuesday 9th May 2017 are most likely affected by this change. Purchase being an exchange of contracts.
All of these investors will continue to claim depreciation for both Division 43 (Building) and Division 40 (Plant and Equipment assets) as they have previously. If these investors don't already have a depreciation schedule for their existing investment property, a schedule for these properties will still be prepared in accordance with the legislation that was in place when they purchased their property.
Plant and equipment items are the assets within an investment property that are generally considered 'easily removable' or mechanical in nature (not structural). Examples of typical plant and equipment items include carpet, blinds, kitchen appliances, light shades, security systems, elevators, air conditioners, hot water systems etc. These assets have individual values and effective lives and are one of 2 types of depreciation claimable by investor's, and form one component of an investors depreciation schedule.
Since the mid 80's an investor who purchased an established residential investment property (including it's second-hand plant and equipment assets), could claim for depreciation of those assets (including when depreciation may have been claimed by a previous owner as well). Assets could be assigned new residual values and new effective lives each time a property changed hands, and be depreciated by the new investor accordingly. For example, if an investor purchased a unit in a 5 year old apartment complex with an elevator (effective life of 30 years), this investor could still claim their share of the depreciation value of that lift over the remainder of it's 25 year effective life. The investor would claim depreciation on the lift going forward, as well as on all of the other plant and equipment items they acquired as part of the purchase of the unit.
Going forward, plant and equipment assets acquired when a property is purchased by a subsequent owner no longer qualify as depreciable assets for the new owner. Continuing the example above, the new owner is not entitled to claim any share of the depreciation value of the lift, or any other plant and equipment assets that were acquired as part of the purchase of the unit.
All investors are still able to claim for the depreciation of qualifying built/constructed components of their investment properties.
Often referred to as capital allowance, building write off or Division 43 deductions. These could include:
Buildings are written down at 2.5% per annum over a 40 year effective life. All investors remain eligible to claim for these deductions regardless of when they purchase their property.
The starting value for depreciation purposes is the construction cost of the building at the time it was built. For established properties, the construction cost (minus the value of the plant and equipment items) will need to be established in order to depreciate it accurately. Quantity surveyors are one of the few professions recognised by the ATO to estimate construction costs for new and previously constructed buildings.
Second hand Division 40 plant and equipment assets are still eligible to be claimed, but not in the same way they were previously. The depreciation of these assets can now be deducted as an expense when calculating the capital gain of a property at sale, for tax purposes (CGT - Capital Gains Tax).
Effectively, claiming depreciation on these assets has simply been moved to the end of the ownership period rather than being claimable during ownership.
Tax Depreciation Schedules for affected properties are now more complex than they were previously. A schedule for an established property, should now include these components:
In our team's experience (20 years producing depreciation schedules), the majority of properties we assess would still benefit from a depreciation schedule prepared by a quantity surveyor. The reasons being that most of the properties assessed are either:
Additionally, whilst investors purchasing second-hand property can no longer claim depreciation on the existing plant and equipment, they will be able to deduct that depreciation from the sale price at the time of sale, reducing capital gains tax.
Cash flow is critical for every property investor and nobody wants to leave their money on the table. For investors or advisers who don't feel certain about the depreciation benefits claimable for an investment property we urge you to contact our expert team. We can conduct a free desk-top assessment of your property and provide a professional and reliable estimate of the deductions claimable, allowing you to make a fully informed decision about the value of a depreciation schedule for your circumstances.
Contact our team today on 1300 922 220 or request an estimate online here.
Mark is an expert quantity surveyor, business owner, public speaker and property developer. With 20+ years experience in the construction and quantity surveying industry Mark’s specialist expertise have been sought in consultant capacity by professional bodies such as the National Institute of Accountants and the National Tax and Accountants Association, and he has presented at various property and tax seminars and expos nationwide. Mark holds a Bachelor of Construction Management from the University of Newcastle, is an affiliate member of the Australian Institute of Quantity Surveyors and a Registered Tax Agent.View all posts by Mark Wilkins