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Depreciation

The property market has finally received some clarity in relation to the Government’s plan to reduce depreciation deductions for residential properties. And we think the news is pretty good!

Last month The Treasury Office released a draft bill regarding how depreciation deductions on a second-hand property can be claimed moving forward. They also invited interested parties to make submissions.

Key points of interest from the draft Legislation are;

  • If you acquire a second-hand residential property after May 10, 2017, which contains “previously used” depreciating assets, you will no longer be able to claim depreciation on those assets.
  • Acquirers of brand new property will carry on claiming depreciation exactly the way they have done so to date.
  • The proposed changes only relate to residential property. Commercial, industrial, retail and other non-residential properties are not affected in the slightest.
  • The building allowance or claims on the structure of the building has not changed at all. You will still need a Depreciation Schedule to calculate these deductions. This component typically represents approximately between 80 to 85 percent of the construction cost of a property.
  • The proposed changes do not apply if you buy the property in a corporate tax entity, super fund (note Self Managed Super Funds do not apply here) or a large unit trust.
  • If you engage a builder to build a house and it remains an investment property, you will still be able to claim depreciation on both the structure and the Plant and Equipment items.
  • If you renovate a property that is being used as an investment, you will still be able to claim depreciation on it when you have finished the renovations.
  • If you renovate a house, whilst living it in, then sell the property to an investor, the asset will be deemed to have been previously used and the new owner cannot claim depreciation.
  • Perhaps the most interesting point: Whilst investors purchasing second-hand property can now no longer claim depreciation on the existing plant and equipment, they will have the benefit of paying less capital gains tax when they sell the property.

Depreciation

In summary, what you would’ve been able to claim in depreciation under the previous legislation, now simply gets taken off the sale price in the event you sell the property in the future.

Here is an example of how this will work:

Peter buys a property in September 2017 for $600k, included within the property was $25k worth of previously used depreciating assets. As they were previously used, Peter can’t claim depreciation on those items.

Peter sells the property in 2022 for $800k, which included $15k worth of those depreciation assets.

Peter can now claim a capital loss of $10k ($25k-$15k) for the portion that Peter has not claimed in depreciation.

SUMMARY OF THE PROPOSED CHANGES

It will still be just as critical for all property investors to get a breakdown of the building allowance & plant and equipment values so you can:

  1. Claim the building allowance (where applicable) and
  2. Reduce the CGT payable when selling the property by deducting the unclaimed Plant and Equipment allowances.

If you purchased an investment property prior to The Budget, you are not affected and you should get a depreciation schedule quote now. Contact the office on 07 5443 8773 or drop us an email HERE and we can arrange a deprecation schedule for you. Our people guarantee that you will get more back on your tax in depreciation in the first year than it costs to get their report done – or they will refund you for the cost of their report.