Depreciation changes are good news
WHEN the Federal Budget was handed down back in May, one of the measures announced as part of a plan to improve housing affordability was a reduction in allowable depreciation deductions for residential investment properties.
After a few months of nervously waiting for more detail on exactly what this meant for property investors, the uncertainty over depreciation changes has dissipated with the release of a draft bill.
And while the changes are still very significant, the depreciation industry – and indeed the property industry as a whole – have largely breathed a sigh of relief, as all appears to be much more positive than we first thought.
So what exactly does it mean for property? Here’s my take on it…
There’s some good news for those buying second-hand property
The changes won’t be retrospective, so existing property owners won’t be affected.
The biggest benefits will be bestowed upon those who buy brand new property – and in turn the development industry - as there will be no changes to the way in which these investors can claim depreciation. That is, they can claim on building structure and plant and equipment.
Similarly, people building a house for investment purposes will be able to claim depreciation on both the structure and plant and equipment.
If you renovate an investment property you’ll also be able to claim depreciation for plant and equipment upon completion, but if you renovate a home you’re living in and sell, an investor purchaser won’t be able to claim depreciation as the items are considered to be previously used.
Those buying second-hand properties after May 10, 2017 will experience the greatest changes, with depreciation no longer able to be claimed on ‘previously used’ depreciating assets – ie. existing plant and equipment items. These depreciation deductions will be restricted to those who actually purchased the items.
But, importantly, these buyers will have the advantage of paying less capital gains tax (CGT) when it comes time to sell because the amount they would have been able to claim in depreciation under the old rules will now be taken off the sale price at the end of the day instead.
As an example of this, let’s say an investor:
- Buys a house in June 2017 for $800,000 (including $40,000 worth of plant and equipment items that, under the old rules, could have been claimed as depreciating assets)
- Sells the house in 2025 for $1 million (including $25,000 of those deprecating assets)
The result? A capital loss of $15,000 can now be claimed in lieu of the assets having being depreciated.
Property types and ownership structures
While existing property owners won’t be impacted by the changes, moving forward buyers of property outside the residential asset class will also be unaffected, as the new rules apply only to homes.
The proposed changes are also irrelevant for those buying in a corporate tax entity, superannuation fund (excluding self-managed super funds) or a large unit trust, which means many more investors may become interested in buying in company tax structures.
So what do you need a depreciation schedule for?
Property investors who purchased a property prior to May 10 can still claim depreciation on the building structure and plant and equipment, so they need a depreciation schedule to make the most of deductions and improve cash flow.
Since the depreciation changes announced in the Federal Budget and outlined in the draft bill relate only to claims on plant and equipment items, a depreciation schedule for the building structure is still needed for those purchasing existing properties after May 10 to calculate these claims when tax time rolls around. This is usually around 85 per cent of the construction cost of a property.
Those buying second-hand properties after May 10 will also require a breakdown of the plant and equipment values provided in a depreciation schedule to be able to reduce the CGT payable when selling by deducting the unclaimed plant and equipment allowances.
The changes are yet to be finalised
While it’s positive for now, like any legislation the draft bill is detailed, and it could change as submissions are received between now and August 10.
Stayed tuned for the final bill, and any updates.