Australian Property Investors will lose two long-standing tax deductions for residential properties as a result of the Federal Budget 2017.
The following extracts state the current law (from the ATO Guide) and the new law (copied from the Budget papers). The precise terms of the new law will not be known until the new measures are legislated.
1. Depreciation of fittings and fixtures
Current Law: Deduction for decline in value of depreciating assets (i.e. depreciation)
When you purchase a rental property, you are treated for tax purposes as having bought a building, plus various separate items of ‘plant’. Items of plant are depreciating assets, such as air conditioners, stoves and other items.
You can deduct an amount equal to the decline in value for an income year of a depreciating asset that you held for any time during the year. However, your deduction is reduced to the extent your use of the asset is for other than a taxable purpose. If you own a rental property, the taxable purpose will generally be for the purpose of producing rental income.
Source: ATO Guide for Rental Property Owners 2016 (page 18)
New Law: limit plant and equipment depreciation deductions to outlays actually incurred by investors
From 1 July 2017, the Government will limit 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 is an integrity measure to address concerns that some plant and equipment items are being depreciated by successive investors in excess of their actual value. Acquisitions of existing plant and equipment items will be reflected in the cost base for capital gains tax purposes for subsequent investors.
These changes will apply on a prospective basis, with existing investments grandfathered. Plant and equipment forming part of residential investment properties as of 9 May 2017 (including contracts already entered into at 7:30PM (AEST) on 9 May 2017) will continue to give rise to deductions for depreciation until either the investor no longer owns the asset, or the asset reaches the end of its effective life.
Investors who purchase plant and equipment for their residential investment property after 9 May 2017 will be able to claim a deduction over the effective life of the asset. However, subsequent owners of a property will be unable to claim deductions for plant and equipment purchased by a previous owner of that property.
This measure is estimated to have a gain to revenue of $260.0 million over the forward estimates period.
Revenue ($m)
Source: 2017-18 Budget Paper No. 2 - Revenue Measures (page 30)
2. Deduction of travel expenses to inspect, maintain and collect rent
Current Law: Travel and car expenses
If you travel to inspect or maintain your property or collect the rent, you may be able to claim the costs of travelling as a deduction. You are allowed a full deduction where the sole purpose of the trip relates to the rental property. However, in other circumstances you may not be able to claim a deduction or you may be entitled to only a partial deduction. If you fly to inspect your rental property, stay overnight, and return home on the following day, all of the airfare and accommodation expenses would generally be allowed as a deduction provided the sole purpose of your trip was to inspect your rental property.
Source: ATO Guide for Rental Property Owners 2016 (page 16)
New Law: disallow the deduction of travel expenses for residential rental property
From 1 July 2017, the Government will disallow deductions for travel expenses related to inspecting, maintaining or collecting rent for a residential rental property.
This is an integrity measure to address concerns that many taxpayers have been claiming travel deductions without correctly apportioning costs, or have claimed travel costs that were for private travel purposes. As part of the Government’s strategy to improve housing outcomes, this measure will provide confidence in the tax system by ensuring tax concessions are better targeted.
This measure will not prevent investors from engaging third parties such as real estate agents for property management services. These expenses will remain deductible.
This measure is estimated to have a gain to revenue of $540.0 million over the forward estimates period.
Revenue ($m)
Source: 2017-18 Budget Paper No. 2 - Revenue Measures (page 29)
Conclusions
The new law to disallow plant and equipment depreciation deductions will apply to new property purchases where the Contract is entered into after 7:30 pm on May 2017. This will particularly affect new build houses and off-the-plan apartment purchasers, because the tax deductions previously available to property investors, which helped to reduce the cash loss from negatively geared property, will no longer be available. Property Investors who install plant and equipment as fittings and fixtures on residential investment property they already own are not affected. The new law leaves building depreciation (capital works deductions) and other fittings and fixtures deductions (kitchen cupboards, blinds, carpets) unaffected.
The new law to disallow the deduction of travel expenses for visits to the property to inspect, maintain and collect rent applies to all property investors and applies to expenses outlaid from 1 July 2017.