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New depreciation cuts imminent, but ‘substantial’ deductions still on offer, says expert

17 November 2017 Tim Neary and Sasha Karen
New depreciation cuts imminent, but 'substantial' deductions still on offer says expert

Legislation impacting travel expenses and plant and equipment depreciation is one step away from coming into effect, but one expert claims that there are still “substantial” deductions to be had. 

The Turnbull government has passed both the Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 and the Foreign Acquisitions and Takeovers Fees Imposition Amendment (Vacancy Fees) Bill 2017 through both houses of Parliament, only requiring royal assent from the Governor-General to come into effect.

These changes, should they get the green light from the Governor-General, remained mostly unchanged from their draft legislation, as mentioned previously for the plant and equipment reforms and foreign investor reforms.

In a joint statement by Treasurer Scott Morrison and Assistant Minister to the Treasurer Michael Sukkar MP, these changes will help housing affordability and private renters.

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“The vacancy charge builds on the Turnbull government’s strengthened foreign investment regime to increase the number of houses available to live in,” the statement reads.

“The charge provides a financial incentive for the foreign owner to make their property available on the rental market, helping provide more homes for Australian families.”

As regards to the Housing Tax Integrity Bill, these measures are described as curbing investors who attempt to exploit the tax system.

“This [travel cost deductions reform] will improve the integrity of the tax system by preventing residential property investors from taking holidays at taxpayers’ expense,” the statement said.

“Limiting plant and equipment depreciation deductions will remove the existing opportunities for items to be depreciated by multiple owners in excess of their actual value.”

BMT Tax Depreciation CEO Bradley Beer said that analysis shows that over the first five years of ownership, the new laws will result in an average loss of around $4,236 in depreciation deductions each year for those impacted.

However, he said that even these investors will still be able to claim “substantial” deductions.

“The new rules do not affect capital works deductions for the structural component of a property or any fixed items that can be claimed such as doors, basins or retaining walls,” Mr Beer said. “These deductions typically make up between 85 [per cent] and 90 per cent of a total claimable amount.”

Mr Beer added that the new rules apply to only a portion of the market, specifically those investors who purchase a second-hand residential property after 9 May 2017.

He said that the previously existing legislation will be grandfathered, which means investors who already made a purchase prior to this date can continue to claim depreciation deductions as per before.

Mr Beer also said that investors who purchase brand-new residential properties and commercial owners or tenants who use their property for the purposes of carrying on a business are also unaffected. 

“Owners of second-hand properties will also still be able to claim depreciation for assets they purchase and directly incur an expense on,” Mr Beer said.

Plant and equipment depreciation that could not be claimed throughout ownership due to the amended legislation can be claimed as a capital loss to reduce any future capital gains tax liabilities.

“While the new rules will negatively affect thousands of property investors, tax depreciation is still very much applicable and will continue to be used by savvy investors to maximise cash flow from investment properties,” the CEO said. 

As they stand, these bills, if turned into acts, will impact investors through the following legislation:

• Under the Foreign Acquisitions and Takeovers Fees Imposition Amendment (Vacancy Fees) Bill 2017:

Foreign investors will be hit with a fee starting from $5,500 for a property purchased for $1 million or less if their property has been occupied for less than 183 days in a year;

Will penalise those who fail to submit or keep records, with a fee of $52,500; and

Come into effect retroactively from 7:30pm, 9 May 2017.

• Under The Treasury Laws Amendment (Housing Tax Integrity) Bill 2017:

Individual investors will be unable to claim travelling costs for deductions;

Only allow assets to be deducted for the first time they are installed or used in a residential property;

Come into effect retroactively from 1 July 2017.

New depreciation cuts imminent, but ‘substantial’ deductions still on offer, says expert
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