In new measures that will apply from 1 July 2017 (for plant and equipment acquired after 9 May 2017), depreciation deductions will no longer be allowed on removable type assets, typically plant and equipment, acquired with an existing residential investment property. Depreciation deductions will only be available for newly acquired assets, where the property owner directly incurs the expenditure. Under this measure, the entire purchase price will be allocated to the property’s cost base for capital gains tax purposes, rather than being apportioned between the property, and removable assets such as carpets, dishwashers and air-conditioning units. The allocation of the purchase price as between the property and the component assets would ordinarily be performed by a qualified quantity surveyor.
The rules may prevent genuine purchasers of newer homes, with relatively high amounts of undeducted depreciation, from claiming deductions for the decline in value of these assets. Deductions will no longer be available over the life of the asset, but will instead form part of the cost base of the property.
Legislation will also be introduced to limit deductions available for travel expenditure for inspecting, maintaining or collecting rent. Deductions were previously available for travel on an apportionment basis. Whilst these rules are being tightened, deductions will still be allowed for investors using real estate agents to manage investment properties on their behalf.
Although the Government has not specifically targeted negative gearing, these measures (in effect) target tax deductions and the tax effectiveness of holding rental properties. Investors will need to take into consideration these proposed changes when looking to invest in pre-existing rental properties. For new properties, depreciation benefits may still be available where an investor buys the depreciable assets as part of the purchase. However, the extent that depreciation may be available for all depreciable assets will be subject to the detail of the new provisions.