Depreciation rules: an unpdate

Major changes to tax deprecation has important implications for property finance sector and investors

By Paul Bennion, Managing Director, DEPPRO

Everyone involved in the property sector needs to be aware of important changes to tax deprecation benefits for properties that were signaled in the Federal Budget earlier this year and have now become law.

For example, the implications of the new changes may well see a greater demand for lending by investors for new properties rather than second hand homes moving forward. It may also result in property investors seeking more finance to purchase commercial properties over the coming years as commercial properties are unaffected by these important new tax deprecation changes.

This new legislation means that owners of second-hand residential properties (where contracts are exchanged after 7.30pm on May 9, 2017) will be ineligible to claim depreciation on certain assets.

Investors can no longer claim depreciation for plant and equipment assets, such as air conditioning units, blinds, curtains, ovens, cooktops, dishwashers, hot-water systems, security systems, solar panels or carpet in second-hand residential properties.
However, there has been no change to capital works rules which give the ability to claim a percentage of construction costs. These costs include buildings or extensions, alterations, improvements to a building or structural improvements such as new driveways, fences and retaining walls.

These costs are written off over 40 years, which is a longer period than other depreciating assets and generally make up 85 to 90 per cent of an investors' total claimable amount.
The positive news is that investors who bought a property before 7.30pm on May 9, 2017 can continue to claim depreciation. Previously existing legislation will be grandfathered, which means investors who already made a purchase before this date can continue to claim depreciation deductions as before.

It's also good news for investors who bought a brand new residential property or a new or second-hand commercial property. In both circumstances, they can continue to claim depreciation and will be unaffected by the changes.
However, if an investor bought a residential property after 7.30pm on May 9, 2017, they will no longer be able to claim depreciation on plant and equipment that they didn't buy but they can still purchase new plant and equipment for their second-hand property, and still claim depreciation for these assets they buy and directly incur an expense on.

These changes to tax depreciation highlight the importance for investors to obtain a tax depreciation schedule from a professional tax depreciation company when the buy a property.
This on-site inspection will identify what items an investor can and cannot legitimately claim in tax deprecation benefits.
Each year, the ATO focuses on reviewing tax returns made by property investors and it is fair to say that these new changes to tax depreciation will be the focus the ATO moving forward to ensure that property investor properly comply with them.
That is why is now critical for property investors to have professional tax deprecation report undertake for every new property they purchase.
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