Got tax queries regarding your property investments and wealth creation strategies? Our experts are on hand to answer them.
Q: I’m still very confused about the updated depreciation rules that were introduced earlier this year. I purchased a property in May – we actually signed the contract on 2 May and settled on 2 June. It’s a second-hand property, and a huge drawcard for us when buying it was the depreciation – at the time, it was estimated that we would receive around $6,000 or $7,000 per year in depreciation deductions, which are essential to managing it as an investment property. I’m now worried that I won’t be able to depreciate it because of the federal government’s decision to change the depreciation rules around plant and equipment. Where do I stand?
Cheers, Nigel
A: You’re not the only one who’s been confused! But the good news for you is that because you exchanged contracts prior to the budget on 9 May 2017, you will not be affected at all.
The changes are grandfathered, which means that those investors who entered into a contract prior to the budget can claim depreciation in exactly the same way as the law allowed at the time they made their decision to invest in the property. And so they should be able to. On 14 July 2017, the Treasury Office released a draft bill regarding how depreciation deductions on second-hand property could be claimed moving forward.
"Investors purchasing secondhand property ... will have the benefit of paying less capital gains tax when they sell"
It’s complicated, to say the least, but the main takeaway is that if you acquire a second-hand residential property after 10 May 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 in exactly the way they have done so to date. This is great news for the property industry and is the way it should be.
Investors should note that the changes announced by the government only relate to residential properties. This means that any other property types, including commercial, industrial, retail and other nonresidential properties, are not affected by changes to depreciation deductions in the slightest.
Perhaps the most interesting point of the draft bill is that while investors purchasing second-hand property can 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.
In my view, the draft bill could have been a lot worse for both the property industry and the quantity surveying profession. It will still be just as critical for all property investors to get a breakdown of the building allowance and plant and equipment values so you can:
• claim the building allowance (where applicable) and
• reduce the capital gains tax payable when selling the property by deducting the unclaimed plant and equipment allowances.
Need to know
- Property acquired prior to the budget announcement attracts depreciation as before.
- Budget changes apply only to residential property.
- Investors pay less CGT when they sell a property acquired second-hand.
Tyron Hyde
is director of
Washington Brown
