Purchasers of second-hand residential investment units have lost their ability to claim depreciation on plant and equipment which is part of the property at the time of purchase.
In a change forecast to save $260 million dollars over the next four years, the Government will,
“limit plant and equipment depreciation deductions to outlays actually incurred by investors in residential real estate properties” [Budget Paper 2 – Part 1 Revenue Measures].
The policy change will apply to all contracts entered after 7.30pm (AEST) on 9 May 2017.
Details of the policy are still limited, but it appears that:
- The intent of the policy is to restrict depreciation claims to items purchased and installed in the property by the claiming taxpayer.
- We assume that depreciation deductions will remain available for items that are part of a new property purchased from a developer, although this is not explicitly stated in the budget papers.
- Subsequent purchasers of the property will no longer be able to claim depreciation based on the second-hand value of the plant and equipment.
- Instead the value of the pre-existing plant and equipment will become part of the cost base of the property for capital gains tax purposes.
- Taxpayers already depreciating plant and equipment can continue to claim deductions in the current manner.
The budget papers describe the policy change as
“an integrity measure to address concerns that some plant and equipment items are being depreciated by successive investors in excess of their actual value”.
The removal of depreciation claims will have a double impact on strata property owners, who lose both the claim for depreciable items inside their unit and depreciation of their share of common plant and equipment.
This will mean a reduction in annual tax deduction that in the early years of ownership can range from approximately $3,000 for a simple unit to over $40,000 for an upmarket unit in a high-rise development.
Until we see more detail we won’t be able to fully assess the ramifications of the budget announcement. It is likely that we will be operating with uncertainty for an extended period until the draft legislation is released. And the elephant in the room remains the government’s ability to pass such a substantial change through a volatile senate.
In the meantime, it will be interesting to observe how the budget announcement and surrounding uncertainty impacts the interest of investors in older building stock. We expect it to cause a further skewing toward investment in new buildings.
Thankfully, there has been no change to the 2.5% Division 43 construction allowance which applies to most developments constructed in the past thirty years.