On the 9th of May 2017, the Federal Treasurer Scott Morrison announced in his budget a proposal that will change aspects of Property Depreciation. After a period of public consultation, input from companies such as Write It Off and debate in the senate new legislation was passed 15/11/17 and applies from 1/7/17.
These changes include:
- The only Plant and Articles e.g. dishwasher, carpet, cooktop, hot water systems that can be depreciated are the ones purchased by the investor or part of a brand new property.
- You are unable to depreciate any Plant and Article assets purchased as part of a 2nd hand property if you entered into the contract after 9/5/17.
- You are still able to claim depreciation on any Capital Works expenditure including the original Construction Cost of the building if built post 1987.
- The Govt is allowing you to treat any lost depreciation as a capital loss thus increasing your cost base by the amount of depreciation you could have claimed under the old rules when you sell the property. This could drastically reduce any future Capital Gains Tax payable.
These changes do not effect:
- Any existing property investors with properties rented before 1/7/17.
- Brand new properties
- Commercial properties
- Properties owned by companies as defined under Section 960-115 of the Income Tax Assessment Act but does apply to Self-Managed Superannuation Funds
Remember, you can still claim the Div. 43 capital works allowance which represents approx. 70 – 90% of your claim under the old rules.
Is it still worth buying a 2nd hand Investment Property?
If you are thinking of buying a 2nd hand property as an investment then there are a few main points to consider.
- Was the property constructed after 15/9/87? If so, a large depreciation claim of the building is still available to you.
- You can still claim depreciation on capital works done after 15/9/87 and structural improvements after 27/2/92 even if you didn’t do them.
- You can only claim depreciation on plant and equipment you have purchased for rental purposes.
- Older properties (older than 16/9/87) could still have a sizeable depreciation benefit. If there has been money spent by previous owners on capital works assets such extensions or new kitchen and bathrooms, it may still be worth getting a professional depreciation report done. Write It Off could assist you with the potential depreciation claim before purchase or before engaging our services.
With these 4 points considered, you need to think through your own investment strategy to understand which property best suits your needs. It is important to not just buy a property based on what tax benefits you receive, it’s part of the equation but should not be a definitive reason of what to purchase. Other considerations include potential rental yield, potential for capitals gains, maintenance costs & upkeep costs.
Potential impacts on the property market:
The budget proposal came under the auspices of Housing Tax Integrity Bill. Its main focus was to stop property owners potentially claiming depreciation on plant and articles assets under Div. 40 that had previously been depreciated before by former owners. Thus limiting depreciation on plant and articles to only brand new assets either part of a new property or installed by the owner for investment purposes.
Will this also influence the property market?
We believe that in the long run it will. Driven purely by the amount of their potential depreciation claim, property investors may now be more inclined to buy only buy brand new properties thus increasing demand in this part of the market. But what happens when it comes time to sell it? Well, as it is not as appealing to a property investor because it is now a 2nd hand property the market is potentially halved to owner occupiers only. This can only decrease demand and lower any potential sale value. This is a direct outside influence on the free property market and can only hurt the property industry. Furthermore, investors may not see property as the ideal option for investing and rental stock may start to decline. In the end rental yields will rise but those who are trying to transition from renters to property owners are now only going to find this all the more difficult. We will have to wait and see the true impacts of this new legislation, but it will take a long time before we know. In meantime considerable damage could have been done and the main negative impact could be on those who can ill afford it most. Low income earners in the rental market and first home buyers trying to get into the property market which is what the government is trying to avoid.
If unsure about any of the aspects discussed in this article, then please speak to our office on 1300 883 760 or firstname.lastname@example.org
Written by Steve Wynn BEc ANU