Top 5 questions for property investors about the new depreciation regime
Introduction
The Government announced sweeping changes to the depreciation regime for property investors in the 2017-18 Budget.
The Treasury Laws Amendment (Housing Tax Integrity) Act 2017 implements these proposed measures and could have a significant impact on property investors going forward.
What are the rules trying to achieve?
The Government was concerned about the ‘refreshing’ of values of depreciating assets from one property investor to the next and therefore, the ability to ‘over depreciate’ items across multiple owners.
For example, a fridge acquired by a landlord for their investment property for $1,100 is fully depreciated. When the property is sold (along with the fridge), there are no tax consequences in relation to the fridge on the basis that it is worthless. The incoming purchaser (another investor) obtains a report that the fridge is worth $350 and this amount is depreciated.
What do the new rules say?
The new rules:
- apply to residential premises only (taking its definition from the GST Act); and
- do not apply to excepted entities.
The new rules reduce your depreciation deductions from the use of residential premises to provide residential accommodation (but not in the course of carrying on business) if:
- you did not hold the asset when it was first used or installed ready for use (other than as trading stock) by any entity; or
- at any time during the income year (or an earlier income year), the asset was used, or installed ready for use, either:
- in residential premises that were one of your residences at that time; or
- for a purpose that was not a taxable purpose, and in a way that was not occasional.
Therefore, broadly, if you did not acquire the depreciating asset new, or you acquired it new but it was first used for private purposes (such as in your own home), the depreciation deductions are reduced.
Who are excepted entities not subject to the new rules?
Excepted entities are corporate tax entities, superannuation plans (other than SMSFs), public unit trusts, managed investment schemes and partnerships or unit trusts if all members/unit holders are other excepted entities.
What if I buy a new property including new depreciating assets?
A specific exception applies for depreciating assets acquired along with the purchase of new residential premises where (amongst other things), either:
- at no earlier time was an entity residing in the residential premises in which the depreciating asset was used, or installed ready for use; or
- the depreciating asset was previously used, or installed ready for use but the supply of the new residential premises occurs within 6 months of the property becoming new residential premises.
On eventual disposal, or the depreciating asset stops being used, a balance adjustment is triggered. However, to the extent that the relevant depreciation amounts have not been deductible, they will likely trigger a capital loss (capable of being carried forward and offset against any capital gain on the eventual disposal of the property itself).
What about my existing depreciating assets?
The new rules apply from 1 July 2017 onwards for depreciating assets acquired under contracts entered into (or otherwise acquired) at or after 7:30pm (ACT time) on 9 May 2017.
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