Depreciation Allowances - Plant and Equipment Available to Property Investors

The Government has released draft legislation proposing changes to depreciation allowances in relation to plant and equipment available to property investors.

Simply stated, the proposed amendments aim to limit the tax deductions for depreciation of plant and equipment in residential properties.

Should the legislation pass, a residential property investor will not be able to claim depreciation on any plant and equipment found in a second hand property purchased after 7:30 pm on 9 May 2017.

The proposed legislation also impacts on the Capital Gains Tax liability for property investors. The cost of plant and equipment, which is no longer eligible for an income tax deduction, will be able to be claimed as part of the cost base of the asset in respect of a capital gain on disposal of the property.

These changes will have a major impact on the cash flow that an investor will receive on a residential property investment.

As an example let’s assume that a residential property investor acquires a property for $750,000 before and after the introduction of the proposed legislation. Each property is eligible for capital works deductions of $5,450 pa. Depreciation available to the pre-legislation investor is $6,210 pa. Assume the property generates annual rent of $33,800 and all other costs including interest, council rates, repairs and maintenance, property management fees total $40,375.

Under the first scenario the tax loss available to be claimed by the owner is $18,235 which generates a tax saving of $6,200 or $119 per week.

The second scenario, after the changes in legislation, the tax loss available is $12,025, resulting in a tax saving of $4,089 or $78 per week. An additional cash flow burden on the owner of $41 per week to fund ownership of the property.

The capital gains tax benefit available on the eventual sale of the property would result in a reduction of tax payable of $1,055 per year in relation to the now non-deductible depreciation.

The changes will operate to reduce the benefit to your investor by $2,111 each year now and provide a reduction in tax payable on the eventual sale of the property of $1,055 in what may be 20 years’ time.