26 Oct Tax Q&A: Availability Of Depreciation For Investors
Q: I’m looking at purchasing an off-the-plan apartment, which is supposedly due for completion shortly. The vendors are a couple who must have entered into a contract of sale with the developer some years ago and have decided to sell for whatever reason.
I would like to know – is it true that depreciation on plant and equipment will not be available for an investor who purchases a property from someone who is unable to settle their off-the-plan purchase?
Kindest regards, Winston
A: Great question! The short answer is no. It is not true – which is great news for you. As part of the initiative to slow down the investor market by limiting non-cash incentives, it was announced in the federal budget on 9 May 2017 that acquirers of ‘previously used’ plant and equipment assets will no longer be able to claim depreciation on these assets if a residential property is rented out for income purposes.
This includes home appliances like ovens, dishwashers, air conditioning and other household items. This new regulation is applicable to residential properties purchased on or after 7:30pm on 9 May 2017, unless the contract of sale was inked before this date.
It also covers plant and equipment assets acquired before 1 July 2017 that were not used to generate income. A caveat is that the dwelling must have generated income for the owner between 1 July 2016 and 30 June 2017. The government-issued memorandum in relation to this law states the following:
“The amendments also apply to assets acquired before this time if the assets were first used or installed ready for use by an entity during or prior to the income year in which this measure was publicly announced (generally the 2016–17 income year), but the asset was not used at all for a taxable purpose in that income year.“
The key factor here is the term ‘previously used’. In your case, the plant and equipment items have not been used previously. While you are not technically the first owner, the items in the property have been sold to you as brand new.
Accordingly, you will be able to claim the depreciation on these items, since they have not been used for a taxable purpose.
In addition, the new ruling applies only to residential dwellings; the old laws are still in effect in relation to commercial, industrial and other kinds of non-residential properties. The ATO states:
“The changes do not affect deductions that arise in the course of carrying on a business, or for:
• corporate tax entities
• superannuation plans other than self-managed superannuation funds
• public unit trusts
• managed investment trusts
• unit trusts or partnerships whose members are the above listed entities.”
“While you are not technically the first owner, the items in the property have been sold to you as brand new”
It is worth noting that property investors will be able to claim the depreciation on the structure of the building (the building allowance) regardless of whether the building is used or not, as there have been no changes to this part of the equation.
This includes components like the bricks and the concrete used in construction. The only caveat regarding this is that the residential building needs to have been built after 1987 in order for you to qualify for these allowances.
The good news is that this allowance represents between 85% and 90% of the building cost, and a depreciation schedule from a quantity surveyor will far more than pay for itself.
Need to know
– The new depreciation ruling applies only to previously used assets.
– An asset is new if sold as such to a new owner.
– The building allowance covers the majority of the building cost.
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