Budget 2017 Depreciation Deductions

IN the Federal Budget on 9th May, depreciation allowances forming part of an investors income tax deductions for second hand residential investment properties were effectively killed off.

This will apply to the purchase of any second hand properties where the contract to buy is entered into after 7.30pm on 9th May 2017.

Contracts entered into prior to this date will be grandfathered and deductions will still be able to be claimed.

What this means is not entirely clear yet.

Will this mean, for example, that items previously considered to be plant and equipment and therefore deductible under Division 40 of the ITAA could now simply form part of the building and therefore become deductible as part of the building and included under Division 43 Capital Works deductions?

Items of plant and equipment that could previously be depreciated under Division 40 include carpets, air conditioning, dishwashers, ceiling fans etc.

The level of deductions for plant and equipment in residential investments varies between different types of assets from free standing houses to high rise strata titled property, but could represent as much as 15% of the total deductions available. In the early years this can be in the order of 40-60% of the overall annual claim, which is a significant loss of deductions.

The effective lives of these items were previously considered to be lower than the general building structure and therefore they could be depreciated quicker giving a higher write off value per annum.

Under Division 43 the general building only attracts a 2.5% deduction per annum based on the original cost to construct and so annual deductions will be significantly lower per annum.

There are, as yet, no details on how these plant and equipment items values will need to be treated during a tax payers ownership, but will likely have to be calculated as their written down value as at the time of purchase.

There are also no details as to how costs for post 9th May renovations, refurbishments and extensions to investment assets will be treated or whether an investor can or cannot depreciate these items going forward.

On a positive note, this may influence a boost in residential development as investors may be drawn to the higher deductions they can achieve by acquiring assets in new residential developments that are currently underway or planned into the future.

Napier & Blakeley were the first company in Australia to prepare depreciation schedules and as you can imagine there have been numerous changes to depreciation legislation since we started in 1985. Accordingly we will work through these changes as more information becomes available and will provide updates on this as information rolls out in due course.

Please contact any of the people below for further assistance: