I love a good game of diversion. It's always interesting to look at the bills passed on days where there are other big announcements happening or on a Friday afternoon when we're deep in our second wine after a big week.
It's no surprise therefore, that a bill slipped through unobtrusively on November 15 when the nation was focussed on the result of the same-sex marriage survey. However, many Australians who have bought a rental property this year or are thinking of buying a rental property will be affected by this change.
The bill was the seemingly innocuous Treasury Laws Amendment (Housing Tax Integrity) Bill 2017. The new legislation, passed two weeks ago, 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.
According to BMT Tax Depreciation chief executive Bradley Beer, this small change will impact thousands of property investors, with an average loss of around $4236 a year in depreciation-related deductions over the first five years of ownership.
Put simply, property investors will now miss out on a total tax saving over a five-year period of $7201.20 for an average tax payer.
It's important to understand there has been no change to capital works rules. The capital works rules are 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 sealed driveways, fences and retaining walls. These costs are written off over 40 years, which is a longer period than other depreciating assets and typically make up 85 to 90 per cent of an investors' total claimable amount.
Instead, the amendment to depreciation rules as detailed in the bill mean that 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.
How do you claim for these expenses if you've bought a second-hand property? In the past, you would have paid for a depreciation report that would list all the plant and equipment you could claim, value them and calculate depreciation. It was a non-cash deduction that allowed you to claim depreciation for items you didn't individually purchase. It's also something that made purchasing investment properties appealing from a cash flow point of view because the additional refund from depreciation helped fund the property. Particularly for mum and dad investors who were relying on the property to build wealth outside the superannuation system because they're concerned they're not going to have enough income to fund their retirement.
So, if you're a property investor, what does this bill mean for you?
The good news is if you bought your property before 7.30pm on May 9, 2017 you 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 instances, you can continue to claim depreciation and will be unaffected by the changes.
The bad news exists for those of you who bought a residential property after 7.30pm on May 9, 2017, as you will no longer be able to claim depreciation on plant and equipment that you didn't buy. Of course, if you buy plant and equipment for your second-hand property, you can still claim depreciation for assets you buy and directly incur an expense on.
The only silver lining is that while in the past, property investors received the upfront cashflow of plant and equipment depreciation deductions, they had to add back the depreciation claimed when they sold the property. This means that any future capital gains made should be lower as a result of these add-backs no longer applying.
Despite these changes, property investment is still a favoured investment by many Australians. However, it is more important than ever before to ensure you have both the cashflow to afford the property in the long term and are aware of what you are and are not able to claim.
Melissa Browne is CEO of accounting firm A&TA; and financial planning firm The Money Barre. Her latest book Unf*ck your Finances will be released Jan 2018.
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