Property investors to lose some tax depreciation deductions benefit
In the May 2017 Budget, the Government announced that for existing properties bought after 9 May 2017, removable fixtures and fittings depreciation deductions are limited to only those expenses directly incurred by investors. This measure is yet to be legislated by Parliament. Removable fixtures and fittings items are usually mechanical fixtures or those which can be ‘easily’ removed from a property such as dishwashers, ceiling fans and ducted heating.
Investors will be able to depreciate new removable fixtures and fittings assets within a new property and items they add to their property; however, investors who acquire an existing property after 9th of May 2017 will not be able to claim depreciation on existing removable fixtures and fittings assets at the time of purchase.
Investors will still be able to claim qualifying capital works deductions, including any additional capital works carried out by themselves or a previous owner. Investors who had purchased a property up until the 9th of May 2017 will be able to claim depreciation as before.
Illustrated Example: Existing Unit purchased from another owner for a total purchase cost of $440k.
|Written down value at settlement date*||Bought until 9 May 2017||Bought after 9 May 2017|
|Original construction cost (capital works)||$200k||2.5% p.a. = $5k p.a. depreciation||No change; Still 2.5% p.a. = $5k p.a. depreciation|
|Original removable fixtures and fittings cost||$30k||Approx. say 10% p.a. (varies from property to property*) = $3k p.a. removable fixtures and fittings allowance||None|
|The balance relating to land, other costs and developer/previous owner’s profit||$210k||None||None|
|Total||$440k||$8k p.a.||$5k p.a.|
* You get a quantity surveyor to prepare a depreciation schedule, which gives you the split and depreciation rates.
This will have the following impact on your cashflow:
|per year||Over the life of the plant & equipment|
|Reduction in your tax deduction||$3k||$30k|
|Reduction in tax at 39% (varies for different tax payers) personal tax rate||$1.2k||$12k|
Sasi’s Tip 1: If you’re thinking of buying an investment property, not directly from the developer but from another owner, be aware of the impact on your cash flows.
Sasi’s Tip 2: Watch out for government proposals in future years to further reduce other deductions as part of a slow-burn approach to reducing deductions in Australian tax returns.
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