Depreciation Changes for Established Properties in 2017
Although the Feds are against getting rid of negative gearing they have been making some changes that are restricting the amount of negative gearing available on an established (read second hand) property in the area of non-cash deductions.
Assuming it becomes law it seems as if the government has actually ripped a fairly big hole in Negative Gearing with this particular proposal.
Take a $500,000 property bought new before or after May 9, 2017. Over 5 years the Plant and Equipment deduction is at least $24,300 and Capital Cost is $20,000 - total non-cash deductions of $44,300. If the same property is bought second hand after May 9 then total non-cash deductions is reduced to $20,000.
This is how this 2017/2018 Federal Budget measure affects purchasers of established properties:
It does it by limiting plant and equipment depreciation deductions to payments actually made by the investor for residential investment properties purchased from Budget night 9th May 2017.
Examples of items covered by this measure are dishwashers, blinds, ceiling fans and room airconditioning units.
For plant & equipment items that are already in place as of the 9th May 2017 (including contracts dated prior to 7.30pm on 9th May 2017), depreciation can still be claimed by the current investor until the asset is full depreciated or the investor does not own the asset.
Also, plant & equipment items purchased by investors for their rental property after 7.30pm on the 9th May 2017, depreciation can still be claimed until the asset is fully depreciated.
Subsequent owners of a residential investment property will not be able to claim any deductions for plant & equipment purchased by a previous owner of that property.
Commentary:
This is a tax change which will have strong impact over time. Essentially if you spend money on a depreciable item for a residential property you can write it off according to the depreciation rules. When you sell the property the buyer is no longer allowed to go and have a Quantity Surveyor establish the remaining value of the fixtures and fittings and continue to claim depreciation on them.
This has been common practice ever since Paul Keating brought back negative gearing in the late 1980s. At the time because of rental property shortages it was positively encouraged.
It has even been possible to apportion values to fixtures and fittings in a contract in order to either create a profit on the sale of the items or a loss in the hands of the Seller.
Building depreciation at 2.5% per annum remains. Depending on the age of the building, if it is say 4 years old, usually this normally represents between 50% and 65% of non- cash deductibles with the balance made up of fixtures and fittings.
We have an excellent calculator on the www.palmbeachfn.com.au website under the Investor tab.
If you're buying a new building it won't affect you at all, only if you buy an established property. Buyers will find themselves balancing immediate tax benefits again higher potential capital gains in prime locations. From an agency point of view it will be interesting to watch how it pans out in the southern Gold Coast. I am betting that quality will win.
A considerable amount of lobbying is going on over this provision so keep your eyes open when it hits the Senate.
by David Hamilton
Depreciation Changes for Established Properties in 2017
palmbeachfn.com.au June 2017 First National Palm Beach 15 Palm Beach Ave Palm Beach, Queensland 4221
Phone: 07 5559 9600