Say Goodbye To Two More Tax Deductions 

Income tax deductions for the decline in value (depreciation) of previously used plant and equipment in rental premises used for residential accommodation are no longer allowed.

From July 1, 2017, the Government has limited plant and equipment depreciation deductions to outlays actually incurred by investors in residential real estate properties. Plant and equipment items are usually mechanical fixtures or those which can be ‘easily’ removed from a property such as dishwashers and ceiling fans.

This means property investors can only claim depreciation on dishwashers, fans, and other fixtures they’ve paid for themselves.

The changes apply from 1 July 2017 to:
• Previously used plant and equipment acquired at or after 7.30 pm on 9 May 2017 unless it was acquired under a contract     entered into before this time
• Plant and equipment acquired before 1 July 2017 but not used to earn income in either the current or previous year

The new depreciation changes won’t have any effect on property that are already owned before the budget night. The changes only affect owners who have exchanged contracts on an investment property after 7:30 PM on 9 May 2017.

Investors who have purchased new plant and equipment will continue to be able to claim a deduction over the effective life of the asset. The Australia Taxation Office (ATO) release a very large table of assets with varying assessments of the expected life of each asset type.

These rates are then used to claim the depreciation in taxpayer tax returns. There is the ability to use different rates if the life of an assets have been reduced by say abnormal wear and tear.

Another item missed by taxpayers is to identify the ability to write off certain assets which have broken, no longer used, replaced and not written off/scrapped as a tax deduction. So reviewing your depreciation schedule each year to identify such assets is important.

So investors who are looking to purchase rental properties need to factor in these changes to their calculations when deciding on an investment. The tax deduction for depreciation can be sizeable and increases negative gearing for an investor.

The other beauty of depreciation is that it is a non cash flow outlay. Unlike rates or land tax which need to be paid from cash as an ongoing expense, depreciation deductions flow from the initial capital outlay.

So the purchase of new rental properties will retain the ability to claim both building allowances and also depreciable assets. Building allowances are generally 2.5% of the building cost.

It is important to either obtain a depreciation schedule from either the property developer (not common) or a Quantity Surveyor.

So if you have a rental property purchased before 9 May 2017 which can continue to claim depreciation, do the calculations before looking to purchase a property which is not “new” because this non cash flow benefit will not be available.

Another tax deduction in relation to rental properties has been removed and that is travel expenses. In the past, you were able to claim expenses related to travel costs to inspect the property, oversee repairs, collecting rent and other associated tasks connected with the ongoing management of the property. For some taxpayers, this included airfares to fly from other locations.

In addition, you are also not able to add the travel cost as a capital cost and add to the cost base of the property. Your original cost base is the purchase cost of the property, plus stamp duty and legal fees. Throughout the life of the property, capital improvements are added to the property. In other areas of tax, where something is not tax deductible, it can be then be treated as a capital item. In this case, no luck as it has been ruled out.

This change also applies from 1 July 2017 and was delivered as part of the May 2017 budget revenue measures and applies to individuals only.

So unless you purchase a new rental property, you will be precluded from adopting depreciation from assets purchased by the previous owner.

So before you make a decision on the purchase one of a number of options, consult your investment adviser first.

Robert Moore
MSI Taylor Business Services
Accountants & Business Adviser
www.msitaylor.com.au