Recent Budget Changes and Tax Depreciation
In the past 2 months, I have been approached by clients, tax agents, accountants and many property investors asking about the recent budget changes announced on 9 May 2017. Most of them thought that from 1 July 2017, we are no longer to claim depreciation on investment property.
This is completely wrong!
However, during federal budget night on 9 May 2017, there are some notable changes to how property investor can claim depreciation on their investment property. The most notable change is:
Taxpayers are no longer able to claim deductions on the depreciation of second hand Division 40 assets for any residential property acquired post the budget night.
These changes raised a lot of questions by quantity surveyor, tax agents and property investors in general. They’re all in confusion on how to strategise their investment property, so they’re able to maximise cash flow on these properties.
Thankfully, on 14 July 2017, the Treasury Office released an exposure draft bill on the changes related claiming depreciation on Division 40 assets. This exposure draft explains details behind the changes which I will go through in this post.
Before I go through the changes as shown in the exposure draft, please note that the changes on deductions claim from depreciation of assets only affect Division 40 assets. These assets are commonly known as Plant and Equipment, which is an asset that is easily removable in a property. These assets include: kitchen appliances (such as cooktop, oven, range hood, dishwasher), air conditioning system, hot water system, window blinds, floor coverings (such as carpet and floating timber), etc. These assets usually made up 10% to 20% of total construction cost of a property.
There are no changes in how you can claim deductions on Division 43 (Capital Work) of an investment property. This is the ‘shell’ of property, in which not easily removable or fix in the building. These Division 43 usually made up 80% to 90% of total construction cost. Therefore, a big chunk of depreciation claim still available as deduction.
Now, to summarise the exposure draft, I have made several keypoints of the new draft law on the plant and equipment (Division 40) depreciation deductions:
If you (taxpayer) acquire a residential property after 9 May 2017 7:30PM with second hand / used Division 40 assets, you are no longer able to claim deductions on decline in value (depreciation) of these used assets. This is automatically applied to all second hand property purchase as any assets in the property has been used by previous owner.
The changes only apply to residential property acquire after 9 May 2017 7:30PM. By acquiring means that you enter purchase contract. So if you enter a purchase contract prior to 9 May 2017 7:30PM, you will be able to claim deductions on second hand / used Division 40 assets. This is also true even if you settled on the property post 9 May 2017, but enter purchase contract before 9 May 2017 7:30PM.
The changes only apply to residential property. So, if you own any other type of property such as commercial, industrial, traveler’s accommodation and other non-residential property, you will still be able to claim deductions on depreciation of all Division 40 assets.
The changes exclude any residential property own by company, super fund, and other corporate tax property.
You will continue to claim deductions on depreciation of Division 40 assets from brand new properties even if the property was develop / built by other party. Developer or builder may purchase Division 40 assets and installed it ready to use for the property before selling it to you. However, as quoted in the exposure draft, the value of these assets has not yet declined, so it is still considered as brand new, ready to use when the property change ownership to the first purchaser.
The same rules as point above apply to owner who substantially renovate a property and purchase new Division 40 assets for future owner of the property. Future owner will be able to claim Division 40 as brand new asset.
However, if the previous owner renovates the property, then use the assets even just couple of days (by living in it during renovation time, or literally use the asset), as new owner of the property, you will no longer be able to claim deductions on these assets as the Division 40 assets are considered as used by previous owner.
You will be able to claim deductions on new Division 40 assets that you purchase even if the property is second hand. This is also true if you do renovations to the property yourself, you will still be able to claim all depreciation deductions normally.
It is important to note that It is not all losses for secondhand residential property purchaser, as there is a clause in exposure draft that allow you to use the losses arise from the decline in value in Division 40 assets as a capital loss in Capital Gain. This means that you will be paying less Capital Gain Tax (CGT) when you sell your property in the future.
What do I mean by this?
Let’s take an example below:
Investor A purchase residential property A that has $40,000 worth of second hand Division 40 assets. Under the new rules, Investor A no longer able to claim deductions on depreciation of these assets.
Sometimes in the future, Investor A decide to sell the property. The second hand Division 40 assets now only worth $10,000 as the assets continue to decline in value (depreciate) over time.
When CGT event arise, Investor A able to reduce their CGT with the capital losses from the decline in value of these assets: $40,000 - $10,000 = $30,000 losses.
After claiming $30,000 capital losses in Investor A’s CGT event, Investor A is paying less Capital Gain Tax.
YES, it is true that the changes affect the way investor can claim deductions especially in second hand property.
YES, you are no longer able to claim deductions on depreciation of second hand Division 40 assets.
YES, you are still able able to claim Division 40 assets normally in brand new residential property.
YES, you can use the capital losses arise from second hand Division 40 assets to reduce your Capital Gain Tax.
REMEMBER, the key date is 9 May 2017 7:30PM and the keywords is acquire which means any party enter purchase contract, not settled.
With these new changes, what is going to change in Ardeevee Depreciation Tax Depreciation Report?
For owner who acquire residential investment property post 9 May 2017 7:30PM, please consult with our Quantity Surveyor beforehand to ensure that you will be able to maximise your deductions. There will be no changes to the report for brand new property or property acquired pre 9 May 2017 7:30PM.
For owner who acquire second hand residential property / assets post 9 May 2017 7:30PM and have their tax depreciation report prepared by Ardeevee Depreciation Quantity Surveyor, there will be a new feature that show the estimates and yearly decline in value on Division 40 assets that they own as purchased.
This allow owner to use the report to work out the capital losses arise from decline in value of these Division 40 assets. The owner then can use the figure to claim capital losses against their Capital Gain Tax.
Therefore, whether you purchase residential property post or pre 9 May 2017, we are still taking care of you to maximise your deductions. This is our promise and guarantee.
Thank you for reading the summary of the most recent big change to depreciation law. I hope that by reading this, you will be smarter on your investment property strategy.
Please do not hesitate to ask me any question you may have on Tax Depreciation area. You can leave a comment below, or send me an e-mail about it: firstname.lastname@example.org .