The Bill to limit tax depreciation for residential buildings has started its process through the Parliament.
I have discussed these changes before, firstly when they were announced on Budget night, and second when draft legislation was released for consultation.
But now we have the Bill in Parliament and in the next few weeks the Parliament will be voting on making this law. So it is time to stop hoping these changes might just go away.
The legislation is almost exactly like the draft law (which I have covered before) and so, generally the only way to get any Division 40 depreciation deductions on a RESIDENTIAL rental property is to have acquired the rental before 10 May 2017 or to have acquired “new residential” property, but in either case you can have never have used it as your residence as you have always been renting it out.
CHANGES FROM THE DRAFT LAW #1 – Incidental or occasional use
And this lead to the only substantial change from the draft law. The law states that you cannot claim depreciation on any asset used in a rental property if the asset was “previously used”.
An asset is ‘previously used’ for an entity if:
- the entity is not the first entity that used the asset or installed the asset ready for use (within the meaning of Division 40) other than as trading stock;
- the asset is used or installed ready for use during any income year in premises that are, at that time, a residence of the entity; or
- the asset is used or installed ready for use during any income year for a purpose that is not a taxable purpose, other than incidental or occasional use.
So if someone owned it before you and they are not a retailer you cannot claim depreciation deductions. If you used the asset in a building that was your residence you can’t claim a deduction. And if you used the asset in a building that was used for a “purpose that is not a taxable purpose”, then you get not claim unless the use was incidental or occasional.
The concern from the draft law was that if I had a rental property at a wonderful holiday location, and if I stay in my rental property for one night I would lose all future deductions. To stop this happen the Bill allows “incidental and occasional use”.
The EM states:
For example, spending a weekend in a holiday home or allowing relatives to stay for one weekend in the holiday home free of charge that is usually used for rent would generally be occasional use
One weekend… And it also states:
staying at the property for one evening while carrying out maintenance activities would generally be incidental use.
One night… ouch
CHANGES FROM THE DRAFT LAW #2 – buying almost new residential…
These amendments do not apply to an asset held by that entity that was installed in premises supplied as new residential premises if:
- no entity has previously been entitled to any deduction for the decline in value of the asset; and
- no one resided in residential premises in which the asset has been used before it was held by the current owner; or
- the asset was used or installed in new residential premises (or related real property) that were supplied to the entity within six months of the premises becoming new residential premises, and the asset had not been used or installed in a residence before that use or installation.
So there is a new “6 month rule”. Why have they done this?
Allowing entities to access the exception for assets only used or installed in new residential premises supplied within six months of the premises becoming new residential premises ensures that entities acquiring tenanted apartments are not disadvantaged.
How does this work in practice?
Hannah purchases two apartments off the plan from Developer Co. The apartments are supplied three months after completion – one is already tenanted and the other is vacant.
In addition to the construction of the apartments, Developer Co has fitted out the apartments, installing ready for use depreciating assets including curtains and furniture prior to settlement and the transfer of the title to Hannah. Developer Co has also fitted out the shared areas of the complex in which the apartment is located, installing ready for use a range of deprecating assets that are the joint property of the apartment owners.
All of these assets are new at the time of installation. As these assets were first installed by Developer Co, not Hannah, they are previously used and a deduction would not be available under the general rules established by these amendments.
However, a deduction is still available to Hannah for the depreciating assets (including Hannah’s share of the assets installed in the shared areas of the apartment) for the period she holds the assets as:
- The assets have been installed ready for use in premises that were supplied to Hannah as new residential premises or in other real property supplied as part of the supply of residential premises;
- Developer Co has not claimed any deduction for the decline in value of the assets (and nor has any other entity); and
- either (excluding assets installed in the common property):
- for assets in the first apartment, the assets were only used or installed in the apartment, which was supplied to Hannah as new residential premises within six months of the apartment first becoming residential premises; or
- for assets in the second apartment, no entity has resided in residential premises in which the assets have been installed before Hannah held the assets.
CHANGES FROM THE DRAFT LAW #3 – More examples – none of which are comforting…
There are also some additional examples…
if a developer installs an asset in premises it intends to sell, this will generally constitute use as trading stock. If the developer rents out the property containing the asset while it seeks to find a purchaser, the property and hence the asset are used, at least in part, for a purpose other than as trading stock and the asset would be previously used in the hands of any subsequent purchaser (subject to the exception outlined below for assets used or installed in certain new residential premises).
No depreciation deductions if a developer rents out the premises and then sells it…
if an individual acquires a new apartment and uses it as their residence in an income year before renting it out, any assets used in the premises would generally have been used wholly for personal use or enjoyment during that income year. The individual would not subsequently be able to access any deductions for the decline in value of those assets while it is being rented out.
No depreciation deductions if you live in the house…