Proposed changes could impact investors
On 9 May 2017 the Government proposed changes to the depreciation of plant and equipment assets in the Federal Budget. These new rules could impact on investors purchasing rental properties.
The Government made major changes to depreciation legislation last in the mid-1980’s.
As such, concerns are circulating about the impact of changes on investors’ existing arrangements, future purchases and, more widely, the property market.
The upside for investors is that properties purchased prior to 7:30pm on 9 May 2017 (Budget Night) remain unaffected, as the policy will be grandfathered. This means that any investor who exchanged contracts prior to this date can continue to claim depreciation deductions as normal.
Proposed changes outlined in draft legislation Section 2 of Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 remove a subsequent owner’s ability to claim a depreciation deduction for previously used plant and equipment assets in properties which exchanged contracts after Budget Night 9 May.
The draft legislation also confirms that the proposed changes will only apply to second-hand residential properties. Any investor who purchases a brand new property can continue to claim depreciation for plant and equipment as normal.
The changes won’t affect an investor’s ability to claim the capital works component; depreciation of plant and equipment for non-residential/commercial properties is also unaffected.
The Government also advises that amendments to deductions for plant and equipment assets held in residential properties will not affect those carrying on a business, corporate tax entities, superannuation plans (other than SMSFs) and those who hold a property in a large unit trust.
While, generally, the integrity measure has merit, the proposed changes go much further than what is necessary to deliver on the Government’s intention of stopping subsequent owners from claiming deductions in excess of an asset’s value. The approach proposed in the draft legislation treats residential property investors differently by extinguishing a property investor’s ability to claim a deduction based upon a transaction.
We believe this is caused by gaps in current legislation around establishing a depreciable value for second-hand plant and equipment.
The Government has provided investors with the opportunity to have their say regarding the proposed changes by making a submission and taking part in the public consultation here.