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Parliament passes new legislation on depreciation; could cause loss in investor deductions

Changes to depreciation legislation announced in the May 2017 Federal Budget and detailed in Treasury Laws Amendment (Housing Tax Integrity) Bill 2017, have been passed by the Parliament of Australia.

The new legislation means owners of second-hand residential properties (where contracts are exchanged after 7:30pm on the 9th of May 2017) will be ineligible to claim depreciation on certain assets.

BMT Tax Depreciation Chief Executive Officer, Bradley Beer, said: “According to our analysis over the first five years of ownership the new law will result in an average loss of around $4,236 in depreciation deductions each year for those impacted. However, an important take out is that even these investors will still be able to claim substantial deductions.”

Depreciation deductions are split into two components, plant and equipment and capital works allowance.

“The new rules do not affect capital works deductions for the structural component of a property or any fixed items that can be claimed such as doors, basins or retaining walls. These deductions typically make up between 85 to 90 per cent of a total claimable amount,” said Mr Beer.

“On average, the owner of a three-year-old house purchased for $600,000 (after 7:30pm on the 9th of May 2017) could expect to claim around $6,126 in capital works deductions in the first full financial year alone.

“A claim of this amount could still make a substantial difference to a property owner’s cash flow and their ability to reduce the holding costs of the property.

The new rules apply to only a portion of the market, specifically, those investors who purchase a second-hand residential property after 7:30pm on the 9th of May 2017.

Previously existing legislation will be grandfathered, which means investors who already made a purchase prior to this date can continue to claim depreciation deductions as per before. Investors who purchase brand new residential properties and commercial owners or tenants, who use their property for the purposes of carrying on a business, are also unaffected.

“Owners of second-hand properties will also still be able to claim depreciation for assets they purchase and directly incur an expense on,” said Mr Beer.

Plant and equipment depreciation that could not be claimed throughout ownership due to the amended legislation can be claimed as a capital loss to reduce any future capital gains tax liabilities.


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