23 May 2019
accountants news

Depreciation legislation changes explained

The Federal Government made changes to depreciation legislation on November 15th, 2017 relating to previously used plant and equipment assets found in second-hand residential properties.

It’s important to know how the new rules may affect you and why the expert advice of a specialist Quantity Surveyor will ensure depreciation deductions are correct and maximised.

What changes were made?

From the 1st of July 2017, plant and equipment depreciation deductions were limited to only those outlays incurred by residential property investors. The new laws mean if you exchanged contracts on any second-hand residential investment property after 7:30pm on the 9th of May 2017, you can no longer claim plant and equipment for existing assets found in the property.

What is plant and equipment?

Plant and equipment assets 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.

Which deductions aren’t affected?

You can still claim qualifying capital works deductions (division 43). These are the deductions available on the structure of the building and any items permanently fixed to the building. Examples include the roof, doors, windows, kitchen cupboards, toilets and baths.

Capital works deductions typically make up between 85 and 90 per cent of the total amount an investor can claim.

Often second-hand properties have been renovated and any capital improvements made to the property can result in capital works deductions even if these were completed by a previous owner.

Who isn’t affected?

If you exchanged contracts before 7:30pm on the 9th of May 2017, you are not affected as the rules have been grandfathered, meaning you can continue to claim depreciation as normal.

The rules also don’t apply if you purchase and install new assets to your residential property yourself.

If you own a brand-new residential property, regardless of when purchased, you are also unaffected.

If your investment property is substantially renovated, you can also claim plant and equipment depreciation.

Non-residential and commercial properties and deductions which arise in the course of carrying on a business are unaffected. Properties held by public unit trusts, managed investment trusts, corporate tax entities and by superannuation plans (other than
Self-Managed Super Funds) are also not affected.

Depreciation scenario – before and after 7:30pm, 9th of May 2017

The following tables show the deductions an investor would receive for both a three year old and a ten year old residential property purchased for $600,000.

They examine the deductions an investor who exchanged contracts prior to 7:30pm on the 9th of May 2017 could claim compared with the likely depreciation deductions they could claim if they exchanged contracts after this date.

What impact have the changes had on average depreciation deductions?

In a recent study of the tens of thousands of depreciation schedules completed during the 2017/2018 financial year, BMT Tax Depreciation found investors an average first-year depreciation deduction of $8,121.

Furthermore, of those investors with properties affected by the changes to depreciation legislation, BMT found investors still had an average claim of $5,651 in 2017/2018.

Still unsure what these changes will look like for you?

It is essential to always seek expert guidance on the depreciation you can claim to ensure you are not missing out on valuable deductions.

Contact us to discuss how these changes may impact you, and how simple it is to reap the maximum reward from your investment property.

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