The 2018 federal budget introduced changes to depreciation deductions in relation to residential rental properties. These changes aim to limit the ability to claim the depreciation deduction to the investor who initially purchased the asset.
Previously property investors could claim expenses for depreciation of certain items in a rental property, regardless of whether they were purchased new or second-hand.
From 1 July 2017 you cannot claim depreciation of second-hand equipment in residential rental properties if it was acquired on or after 7:30 pm on 9 May 2017. This means that if you entered into a contract to purchase a property prior to 9 May 2017, as per the previous rules you can continue to claim depreciation deductions on any pre-existing assets in that property. However if purchased after the date, you must have purchased the item new and not second-hand to be able to claim depreciation on the asset.
Additionally, you cannot claim depreciation on items installed on or after 1 July 2017 if they has ever been used for a private purpose. Therefore properties which have been lived in and turned into an investment property by their owners before 1 July 2017 are not affected, and owners can continue to claim plant and equipment depreciation.
Plant and equipment items are assets that can normally be easily removed or relocated, such as floor coverings, appliances and air-conditioning.
Any investor who purchases a brand new property can continue to claim depreciation for plant and equipment items as normal. Similarly depreciation can still be claimed on eligible new assets regardless of when the property was purchased.
The legislation states that these changes will not affect depreciation of plant and equipment for non-residential/commercial properties. The changes will also not apply to assets held in residential properties owned by an entity carrying on a business of property investing, or an excluded entity being a corporate tax entity, superannuation plans other than a Self-Managed Super Fund, public unit trust, or a managed investment trust.
The changes will not affect the ability to claim capital works deductions, which are the deductions on fixed items and structural improvements such as new kitchens and bathrooms.
However when purchasing second-hand assets, the cost of the plant will form part of the cost base of the property disposed and by extension will reduce the capital gain tax liability upon sale.
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Author: Danielle Pomersbach