How Recent Tax Changes Affect Property Depreciation Claims
Property depreciation has long been a valuable tool for Australian property investors, allowing them to claim tax deductions on the wear and tear of their investment properties. However, recent changes to tax legislation have significantly impacted how depreciation claims can be made. This article will explore these changes, their implications for property investors, and strategies to navigate the new landscape effectively.
Understanding Property Depreciation
Property depreciation allows investors to claim deductions on the decline in value of their investment property over time. There are two main types of depreciation:
- Capital Works Depreciation (Division 43): This relates to the building’s structure and permanently fixed assets, such as walls, floors, and roofs. Properties built after 16 September 1987 are eligible for capital works deductions.
- Plant and Equipment Depreciation (Division 40): This covers removable fixtures and fittings, such as appliances, carpets, and air conditioners. The value of these items depreciates over time, and investors can claim deductions based on their effective life.
Key Changes to Depreciation Legislation
1. Treasury Laws Amendment (Housing Tax Integrity) Bill 2017
One of the most significant changes to property depreciation in recent years came with the Treasury Laws Amendment (Housing Tax Integrity) Bill 2017. This legislation, which took effect from 1 July 2017, introduced stricter rules on claiming depreciation for second-hand properties.
Key Points:
- Investors can no longer claim depreciation on previously used plant and equipment in second-hand residential properties purchased after 9 May 2017.
- Depreciation claims for plant and equipment are now limited to new items only.
- Capital works deductions remain unaffected, allowing investors to continue claiming depreciation on the building’s structure.
Implications:
- Reduced tax benefits for investors purchasing second-hand properties.
- Increased attractiveness of new or substantially renovated properties for depreciation purposes.
2. Removal of Commercial Building Depreciation
Effective from the 2024/25 income year, the Australian government has removed depreciation deductions for commercial buildings. This change reverses the temporary reinstatement of commercial building depreciation introduced in 2020 as part of the COVID-19 economic response.
Key Points:
- Commercial buildings will no longer be eligible for depreciation deductions from 1 April 2024.
- The annual depreciation rate for commercial buildings is set at 0%, effectively eliminating the deduction.
Implications:
- Increased tax liability for commercial property owners.
- Potential impact on the commercial property market, with reduced incentives for investment.
Strategies for Navigating the Changes
Despite the recent changes, there are several strategies property investors can employ to maximise their depreciation claims and optimise their tax outcomes:
1. Focus on New or Substantially Renovated Properties
Investing in new or substantially renovated properties allows investors to claim depreciation on both capital works and plant and equipment. This can significantly enhance the tax benefits and overall returns on investment.
Action Steps:
- Prioritise new builds or properties that have undergone substantial renovations.
- Ensure that renovations meet the ATO’s criteria for substantial improvements to qualify for depreciation.
2. Leverage Capital Works Deductions
Capital works deductions remain a valuable component of property depreciation claims. Properties built after 16 September 1987 are eligible for these deductions, which can be claimed over 40 years.
Action Steps:
- Verify the construction date of the property to determine eligibility for capital works deductions.
- Obtain a detailed depreciation schedule from a qualified quantity surveyor to maximise claims.
3. Consider Plant and Equipment Upgrades
For second-hand properties, investors can still claim depreciation on new plant and equipment items added to the property. This includes appliances, fixtures, and fittings installed after the purchase.
Action Steps:
- Invest in upgrading plant and equipment in existing properties to maximise depreciation claims.
- Keep detailed records of all new installations and their costs.
4. Utilise Professional Services
Navigating the complexities of property depreciation and recent legislative changes can be challenging. Engaging a professional quantity surveyor can help ensure that all eligible deductions are identified and claimed.
Action Steps:
- Consult with a qualified quantity surveyor to obtain a comprehensive depreciation schedule.
- Seek advice from a tax professional to understand the full implications of recent changes on your investment strategy.
Impact on Investment Strategy
The recent changes to property depreciation legislation have several broader implications for property investment strategies:
1. Shift Towards New Developments
The restrictions on claiming depreciation for second-hand properties may lead investors to focus more on new developments. This shift could impact demand and pricing in the property market, particularly for new builds.
2. Increased Importance of Renovations
Substantial renovations can make second-hand properties eligible for depreciation claims, making renovation projects more attractive to investors. This could drive increased activity in the renovation market.
3. Re-evaluation of Commercial Investments
The removal of commercial building depreciation may prompt investors to re-evaluate their commercial property portfolios. Some may shift their focus to residential properties or other investment classes with more favourable tax treatment.
The recent changes to property depreciation legislation represent a significant shift in the Australian property investment landscape. While these changes limit the ability to claim depreciation on second-hand properties and commercial buildings, there are still opportunities to maximise tax benefits through strategic investment choices.
By focusing on new or substantially renovated properties, leveraging capital works deductions, upgrading plant and equipment, and utilising professional services, investors can navigate the new rules effectively and continue to optimise their investment returns.
Staying informed about legislative changes and seeking professional advice are crucial steps in adapting to the evolving tax environment. With careful planning and strategic decision-making, property investors can continue to build wealth and achieve their financial goals in the current market.