The Government announced in the 2017/18 budget measures to assist with the problems of housing affordability. These measures affected the tax legislation in relation to investment properties which limited plant and equipment.
These changes were implemented to stop entities claiming inflated deductions relating to their rental properties by ‘refreshing’ the values of previously used depreciating assets in residential rental properties.
Furthermore, the legislation changes on the second-hand property now defer the depreciation benefit for the decline in value of Division 40 plant until the sale of the property.
As a result, the amounts that would previously have been claimed under Division 40 plant are now utilised at disposal and form the basis of a CGT event. Any capital loss will be offset against the capital gain incurred on the sale of land and buildings.
Here is an example of how property depreciation affected by the changes:
Residential Property Example
Since the introduction of the legislation, many properties are still unaware of the impact of the changes. The following example provides an example of the tax implications on a residential property purchased for $425,000 and disposal of $750,000 over a 5-year period with tax calculated at an average 37%.
As the example demonstrates, there is no difference in the total tax payable over the 5-year period. The only changes are on claiming the tax benefit and the impact on cashflow. Although your second-hand property may not be eligible to claim Division 40 deductions immediately, any deferred depreciation benefit should still be calculated and reported as a “Capital Loss” when you sell the property.
A depreciation schedule is essential to any property investor regardless of a property’s age. Therefore, your depreciation schedule will include Capital Loss Deductions on a second-hand property, which will be needed to calculate the written down value needed at property disposal.
Furthermore, it is also advisable to maintain and manage your depreciation schedule throughout property ownership. Any disposals or additions of plant and equipment to the property will affect your entitlements.
Contact Koste for more information about your tax depreciation on your property that purchases before or after 9 May 2017.
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