A sledge hammer to residential tax depreciation

On Budget night the Government announced the following, at least the parts in the quotations that follow. This is easily the biggest business risk to the tax depreciation industry ever.

While no real clarity as to what changes the Government will make can be achieved until we see the legislation, based on what is in the Budget papers, there may not be much of a tax depreciation industry left…

“From 1 July 2017, the Government will limit plant and equipment depreciation deductions to outlays actually incurred by investors in residential real estate properties. “

So why are they doing this?

“This is an integrity measure to address concerns that some plant and equipment items are being depreciated by successive investors in excess of their actual value. “

This occurs when I buy a $1,000 dishwasher for my rental property, depreciate it to zero and sell my rental property to you for $1 million. I treat the whole sale price as a payment for the rental property, and none of it for the dishwasher. I do this as the gain rental property is concessionally taxed under the 50% CGT discount while there is no such concession on the balancing adjustment that arises if I sell you a depreciable asset greater than its written down value.

You call in a tax depreciation specialist who states in the prepared tax depreciation schedule you purchased the building for $999,500, and the dishwasher for $500. You claim $500 in depreciation.

This dishwasher has now been depreciated 1.5 times… and this can happen again and again…

“Plant and equipment forming part of residential investment properties as of 9 May 2017 (including contracts already entered into at 7:30PM (AEST) on 9 May 2017) will continue to give rise to deductions for depreciation until either the investor no longer owns the asset, or the asset reaches the end of its effective life.”

If you owned the property before the budget, there will be no change to your depreciation claims.

But many of these owners already have their tax depreciation schedules. So not a lot of new work here, and much less over time.

“Investors who purchase plant and equipment for their residential investment property after 9 May 2017 will be able to claim a deduction over the effective life of the asset.”

Irrespective of when you bought your rental property (before or after Budget night), if you go out and buy a dishwasher from Harvey Norman for your rental property, you can depreciate it.

But as I have an invoice and a debit in my bank account as I bought the dishwasher I don’t need a tax depreciation schedule to work out what to claim for these depreciable asset. Arguably, I can’t even use an estimate of the cost in a depreciation schedule for this dishwasher I personally bought as I know the actual price, and I am going to need to keep the invoice to show I personally bought it to be able to claim any deductions at all.

“However, subsequent owners of a property will be unable to claim deductions for plant and equipment purchased by a previous owner of that property.”

If I buy a property that has depreciable assets in it that someone else paid for, including the developer of new residential property who purchased the item and is the previous owner of the property, then I can’t depreciate these items so I don’t need a tax depreciation schedule.

Reading the words of the announcement literally, and that is all we can do until we see any legislation, unless you are the owner/builder, or you own the land and you pay the builder to build on your land, or doing renovations, including a knock down/rebuild to the rental property you own, or you owned the property before the budget, then you can’t claim depreciation so you don’t need a tax depreciation schedule.

Even if you are an owner/builder or building on land you own or you are doing a renovation you need to show you personally bought the depreciable asset to be able to claim depreciation. The only way to prove this is to show that you paid for it, which means you know the actual price. Once again, if I know the actual price, I can’t use an  estimation in tax depreciation schedule instead. So even owner/builders and renovators will not need a tax depreciation schedule.

So, unless you bought the property before budget night, then all you need in a tax depreciation schedule is just the Div 43 deduction, being 2.5% of the undeducted construction expenses. I am pretty sure that the fee for estimating this one number number (the undeducted construction expenses) is not not going to be enough to keep all the current industry going as the pre budget properties work starts to wind down.





Paper and slides for Centrepoint session

As promised to all those attending the Centrepoint master class tomorrow, below are the slides and technical paper.

Small Business Restructures and Super Paper

Small Business Restructures and Super Presentation