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.

 

 

 

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About Ken Mansell

As a stay at home Dad most of the week this is my way of pretending I am still the tax counsel of ASX and SEC listed companies, working at big 4 firms, working at the Federal Treasury, on the Henry Review and at Parliament House for the previous government.
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5 Responses to A sledge hammer to residential tax depreciation

  1. Simon Hanau says:

    I may be bias, but I understand the services of the QS will still be required. The main reason you require a QS in the first instance is to calculate the Division 43 amount. The Division 40 allowances were always capable of being estimated by the client under ‘self-assessment’ rules.
    For new properties, the client will require a full schedule (as before). I understand it as ‘business as usual’ for new properties. The first owner of the property is entitled to depreciate both Division 40 and Division 43 and the QS is required to estimate the original construction cost and/or break-down the build cost (where construction cost is known ie owner-built) into non-depreciable items, plant and equipment and building. The QS expertise is also required for the apportionment, across depreciable items and non-depreciable items, of builder’s preliminaries, overheads, consultants fees and council fees and charges.
    For post 9 May 2017 purchases, and where the property qualifies for Division 43 depreciation and/or has undergone Division 43 improvements, the services of the QS are still required to estimate the original construction cost as, we all know, that this figure is never passed on to successive purchasers. The QS is also required to break down this original construction cost to establish an amount for Division 43 depreciation after deducting an amount for non-depreciable items (which now include plant and equipment items).
    Your thoughts???
    Cheers
    Simon Hanau B.App.Sc(QS), AAIQS

    • Ken Mansell says:

      I dont think new properties will require a div 40 schedule as the developer purchased the dishwasher, not the first person to live in the property. The words of the budget announcement dont relate to who first lived in the property but rather who was the first owner of the depreciable asset and only that person (the developer) can claim div 40 deductions.

      • Simon Hanau says:

        Thanks Ken for the reply.

        There is certainly a lot of confusion over this grey area at the moment.

        Given an alternate proposal (last year) where the Government (Labor) was looking at limiting depreciation to new properties only, I see this proposed change as ‘similar but different’ ie I do not believe it would be an intention to cease plant and equipment depreciation for all investment properties.

        In the case of new properties the builder/developer is similar to a retailer ie not a physical owner of the goods. The builder/developer does not claim depreciation on the goods and they are sold as new to the first purchaser of the property.

        All in my opinion. I guess we all wait for clarification by the ATO.

  2. Pingback: Tax Depreciation Changes | Tax Rambling

  3. Pingback: Tax Depreciation Bill in Parliament | Tax Rambling

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