The government has recently released a draft legislation, detailing the proposed plant and equipment depreciation changes as announced last May. The draft provided information about an investor’s eligibility to claim depreciation.
The government has allowed the public to air out their opinions about these proposed new measures. The public consultation will in fact be open until 10 August 2017. The measures are yet to be legislated so let’s take a look at how these changes could affect investors.
The Bill intends to amend the Income Tax Assessment Act 1997 to limit deductions for plant and equipment in residential premises. It will reduce the amount an investor can claim for a previously used depreciating asset, which means they cannot claim depreciation for second-hand properties under contracts dated after 9 May 2017.
The draft legislation also provides details about a reduced CGT liability for property investors. Those who are not eligible to claim depreciation on second-hand plant and equipment may claim a capital loss for the decline in value of these assets. It will offset a capital gain and can be carried forward to offset future capital gains, if needed.
The value of the previously used assets will be based on the time of purchase while the decline in value will be calculated so a termination value can be determined at the time the property is sold. The capital loss will reduce the owner’s capital gains tax liability.
The following scenarios will show the owner’s income before and after the proposed new measures. The draft provides an example where an owner receives a total income of $560 a week or $29,120, for a three year old house bought for $600,000. Property expenses include interest, property management fees, council rates, repairs, maintenance and insurance totaling $41,028.
The first scenario shows the investor being able to claim a total depreciation of $12,397 for capital works deductions and plant and equipment depreciation. The investor experiences a weekly cost of $56 per week.
The second scenario shows the investor being able to claim only $6,126 in capital works deductions and unable to claim $6,271 in plant and equipment depreciation. The investor will have a weekly cost of $101 per week.
The proposed legislation will reduce the depreciation deductions for property investors, who may experience a cash flow reduction every year. The changes may be much more than what is necessary to stop subsequent owners from claiming deductions in excess. A possible solution could be establishing a depreciable value for second-hand plant and equipment.
Chan & Naylor Group has nationwide offices in Brisbane and Capalaba in Queensland, Melbourne and Moonee Ponds in Victoria, East Perth in Western Australia, and Bankstown, Parramatta, Pymble, North Sydney, and Sydney in New South Wales.