Federal Budget 2017 –
Residential Property Investors lose depreciation and travel
deductions
Australian Property Investors will lose two long-standing
tax deductions for residential properties as a result of the
Federal Budget 2017.
The following extracts state the current law (from
the ATO Guide) and the new law (copied from the Budget
papers). The precise terms of the new law will not be known
until the new measures are legislated.
1. Depreciation of fittings and fixtures
Current Law: Deduction for decline in value of
depreciating assets (i.e. depreciation)
When you purchase a rental property, you are treated
for tax purposes as having bought a building, plus various
separate items of ‘plant’. Items of plant are depreciating
assets, such as air conditioners, stoves and other items.
You can deduct an amount equal to the decline in
value for an income year of a depreciating asset that you
held for any time during the year. However, your deduction
is reduced to the extent your use of the asset is for other
than a taxable purpose. If you own a rental property, the
taxable purpose will generally be for the purpose of
producing rental income.
Source: ATO Guide for Rental Property Owners 2016
(page 18)
New Law: limit plant and equipment depreciation
deductions to outlays actually incurred by investors
From 1 July 2017, the Government will limit plant and
equipment depreciation deductions to outlays actually
incurred by investors in residential real estate properties.
Plant and equipment items are usually mechanical fixtures or
those which can be ‘easily’ removed from a property such as
dishwashers and ceiling fans.
This is an integrity measure to address concerns that
some plant and equipment items are being depreciated by
successive investors in excess of their actual value.
Acquisitions of existing plant and equipment items will be
reflected in the cost base for capital gains tax purposes
for subsequent investors.
These changes will apply on a prospective basis, with
existing investments grandfathered. Plant and equipment
forming part of residential investment properties as of 9
May 2017 (including contracts already entered into at 7:30PM
(AEST) on 9 May 2017) will continue to give rise to
deductions for depreciation until either the investor no
longer owns the asset, or the asset reaches the end of its
effective life.
Investors who purchase plant and equipment for their
residential investment property after 9 May 2017 will be
able to claim a deduction over the effective life of the
asset. However, subsequent owners of a property will be
unable to claim deductions for plant and equipment purchased
by a previous owner of that property.
This measure is estimated to have a gain to revenue
of $260.0 million over the forward estimates period.
Revenue ($m)
| |
2016-17 |
2017-18 |
2018-19 |
2019-20 |
2020-21 |
| Australian Taxation Office |
-- |
-- |
40.0 |
100.0 |
120.0 |
Source: 2017-18 Budget Paper No. 2 - Revenue Measures
(page 30)
2. Deduction of travel expenses to inspect, maintain
and collect rent
Current Law: Travel and car expenses
If you travel to inspect or maintain your property or
collect the rent, you may be able to claim the costs of
travelling as a deduction. You are allowed a full deduction
where the sole purpose of the trip relates to the rental
property. However, in other circumstances you may not be
able to claim a deduction or you may be entitled to only a
partial deduction. If you fly to inspect your rental
property, stay overnight, and return home on the following
day, all of the airfare and accommodation expenses would
generally be allowed as a deduction provided the sole
purpose of your trip was to inspect your rental property.
Source: ATO Guide for Rental Property Owners 2016
(page 16)
New Law: disallow the deduction of travel expenses
for residential rental property
From 1 July 2017, the Government will disallow
deductions for travel expenses related to inspecting,
maintaining or collecting rent for a residential rental
property.
This is an integrity measure to address concerns that
many taxpayers have been claiming travel deductions without
correctly apportioning costs, or have claimed travel costs
that were for private travel purposes. As part of the
Government’s strategy to improve housing outcomes, this
measure will provide confidence in the tax system by
ensuring tax concessions are better targeted.
This measure will not prevent investors from engaging
third parties such as real estate agents for property
management services. These expenses will remain deductible.
This measure is estimated to have a gain to revenue
of $540.0 million over the forward estimates period.
Revenue ($m)
| |
2016-17 |
2017-18 |
2018-19 |
2019-20 |
2020-21 |
| Australian Taxation Office |
-- |
-- |
160.0 |
180.0 |
200.0 |
Source: 2017-18 Budget Paper No. 2 - Revenue Measures
(page 29)
Conclusions
The new law to disallow plant and equipment
depreciation deductions will apply to new property purchases
where the Contract is entered into after 7:30 pm on May
2017. This will particularly affect new build houses and
off-the-plan apartment purchasers, because the tax
deductions previously available to property investors, which
helped to reduce the cash loss from negatively geared
property, will no longer be available. Property Investors
who install plant and equipment as fittings and fixtures on
residential investment property they already own are not
affected. The new law leaves building depreciation (capital
works deductions) and other fittings and fixtures deductions
(kitchen cupboards, blinds, carpets) unaffected.
The new law to disallow the deduction of travel
expenses for visits to the property to inspect, maintain and
collect rent applies to all property investors and applies
to expenses outlaid from 1 July 2017. |
