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Residential Depreciation Changes: More Uncertainty for Investors

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On budget-night the treasurer, Scott Morrison announced a major change to the depreciation law that applies to residential investment owners. The changes are now in force, even though limited detail is available and what we have been told is open to widely varying interpretation.

The budget announcement, which removed depreciation deductions for subsequent owners of residential plant and equipment, leaves purchasers signing property contracts after 7:30PM (AEST) on 9th of May 2017 in a form of legislative limbo.

Leary & Partners quantity surveyor and tax law expert, Kaylene Arkcoll reports that after the initial shock, many property investors are asking similar questions.

  1. Will this affect plant and equipment supplied by a developer as part of a new property sale?

The Budget Paper says, “Investors who purchase plant and equipment for their residential investment property” will be able to claim a deprecation deduction but “subsequent owners of a property will be unable to claim deductions for plant and equipment purchased by a previous owner of that property” [Budget Paper 2 – Part 1 Revenue Measures]. This appears to limit depreciation to items a taxpayer acquires separately and then adds to their property.

Despite this, there is a general expectation that investors will be entitled to claim depreciation for items which are purchased as part of a new residential property.

“I hope this is correct, but I am not aware of any official confirmation to support this position”, advises Ms Arkcoll.

  1. Will all my depreciable items be affected?

The Budget Paper specifically says that the Government will limit “plant and equipment depreciation deductions”. It also says that, “Plant and equipment items are usually mechanical fixtures or those which can be ‘easily’ removed from a property such as dishwashers and ceiling fans.”

Some people question whether the change will affect items such as carpet, curtains and loose furniture, which are not by general definition “plant and equipment”.

“It’s a reasonable question”, agrees Ms Arkcoll, “but I expect the Budget Paper is reflecting the terminology used in TR 2004/16 ­– Income Tax: Plant in residential rental properties. In this ruling, the term “plant” has an extended meaning which covers the full range of depreciable items in a residential property, including loose items of furniture. However, the addition of the term “equipment” leaves room for speculation.”

  1. How can the change apply to a property I buy now when the law doesn’t exist yet and may never pass the Senate?

It is common for the Government to announce that a policy change will apply from the date of its publication and then ratify this by back-dating the starting date in the enacting legislation. If the proposed change to the depreciation system is passed it will apply as if it had always existed. If it does not pass or is dropped, the current deprecation system will continue as if the announcement was never made.

“Property investors are understandably unhappy about this”, says Ms Arkcoll. “They are effectively being asked to gamble on exactly how, or if, the depreciation system will change.”

The current legislative limbo is a lose-lose position for the whole property industry. New investors making what may be million-dollar investment decisions need to have certainty about the tax rules that will apply. Developers, lenders and owners of existing residential property need to know if there has been a shift in the market dynamics. And they need to know it now, not in hindsight. 

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