As part of the Federal Budget in May this year, the Government announced major changes to the operation of the depreciation regime, specifically in relation to residential property investors. The announced changes limit the depreciation deductions on “plant and equipment”, being any equipment that can be easily removed from the structure of a building, to items that have been paid for by the investor, not items of plant and equipment that are included as part of the acquisition of the property.
With legislation now in Parliament to give effect to these announcements, there is more certainty as to the impact and scope of the changes.
Summary of change
As currently before parliament, the law is as follows:
- The restrictions apply to residential rental properties only. All other types of property will continue to be able to claim depreciation deductions under the “old” regime. Practically, the new system only applies to individual investors, discretionary trusts and Self-Managed Superannuation Funds;
- The new law applies only to “depreciating assets.” The new law does not seek to limit deductions for capital works. That is, the depreciation on buildings will continue to be available at 2.5% or 4%, depending on the type and use of the of building;
- The new laws have effect from 1 July 2016. Accordingly, any properties acquired after this date will be subject to the new regime. Except in limited circumstances, properties that were acquired prior to 1 July 2016 will be grandfathered under the old regime;
- As announced in the budget, the new regime limits depreciation deductions to items of plant and equipment (i.e. not buildings work) that have been purchased by the taxpayer. Accordingly, any items of plant and equipment that are paid for by the taxpayer and installed ready for use by the taxpayer will still be entitled to depreciation deductions;
- Depreciation will not be able to be claimed under the new regime if the items are second hand. Only items that are first used in a residential rental property will be depreciable;
- You should be able to claim depreciation on the items of plant and equipment that are acquired as part of an off the plan purchase.
As with many items in taxation, there are certain exemptions and concessions available. Should you wish to discuss your personal circumstances and how the new regime will impact you, please do not hesitate to contact your ESV engagement partner.