Housing Tax Integrity – Limiting Depreciation Deductions – Exposure Draft Released

On 14 July 2017, The Australian Government released an Exposure Draft Legislation formalising the proposed changes introduced in the 2017 Budget.

For a full transcript please follow the link: Housing Tax Integrity – Disallowing Travel Deductions and Limiting Depreciation Deductions | The Treasury.

At first glance, there appears no real surprises and the debate over ‘what is new’ is finally put to rest. Those residential property investors buying new (previously unoccupied) properties need not worry as their entitlements to claim Division 40 plant and equipment depreciation remain as per the following extracts from the Release and the Explanatory Notes:

“The Government will limit plant and equipment depreciation deductions for investors in residential investment properties to assets not previously used.”

“Often developers will acquire and install various depreciating assets in the course of constructing or substantially renovating residential premises. In some cases the property may already have an owner, but in others, the developer or other entity may hold the land and it will not be sold until after construction and installation. In these situations, in which a new asset is installed in new premises, the value of the asset has not yet declined and there is no risk of the valuation of the asset for the purposes of depreciation being refreshed. Accordingly, the amendments do not apply to an asset installed in new residential premises (including substantially renovated premises) if no entity has previously been entitled to any deduction for the decline in value of the asset and no one has resided in the premises in which the asset has been used.”

Example 2.1 of the Explanatory Notes also clarifies items acquired second-hand. In this example, a washing machine is acquired second-hand from a friend and installed within a rental property. Following the ‘not previously used’ analogy, the property owner is not entitled to depreciation the washing machine because it is previously used.

Public consultation on the exposure draft legislation and explanatory material will run for four weeks, closing on Thursday, 10 August 2017. Refer above link for more information.

 

Thanks @RedlineQS . I read the explanatory notes but still dont know if I can keep deducting P&E on a house I bought in 2015 and already have a depreciation schedule for.

I heard existing deductions were going to be grandfathered but I didnt see this provision.

 

I believe they are gradfathered.

 

Yes you can. If you wowned it or had a contract at budget night all is fine.
But if you change title (eg add a spouse to title) this will affect future deductions for half the depreciation.

 

Thanks Paul. I wont add anyone to the title then. Too easy.

 

It may still be worth considering.

 

correct. if selling from one spouse to another the tax benefits from regearing to purchase their share and the ongoing interest deductibility may outweigh the loss of depreciation benefits. thats where good tax modelling comes into play.

 

Absolutely - Depreciation may be a triviality and of little consequence v's the reasons for a change of ownership.

 

And after 5 years the amount claimed for depreciation on fixtures and fittings would be very low anyway.

 

I have had a good read of the proposed (draft) law EM issued by Treasury. Some observations:

• The term "previously used"is a prevailing element. This applies a first use test. The first entity that USES the asset/s OR installs them can claim a depreciation deduction. Only. Examples :
  • Bill buys a property and buys a new oven. Depreciable.
  • Bill buys a property 10 May 17 + and it has a new kitchen being used by the existing tenant. Non-Depreciable once Bill owns it.
  • Bill buys a new OTP property that he contracted before 9th May 2017 and settled after 9th May 2017. Depreciable PROVIDED his tenant is the first user of the premises and HE installs the tenant. A tenant that the developer lets to is NOT eligible as the first user is not Bill. It is the developer / their tenant.
• Asset substitution schemes are intended to be caught. Eg Bill has a older fridge at home and buys a new fridge for the IP and then instals the old fridge in the IP.

PROBLEMS
I have identified a number of arrangements where people will be affected.

1. Owners of property under renovation. Especially where they seek to claim the CGT main residence exemption. The assets cannot be new if the property is occupied during reno. For assets to be depreciable after a reno the property must be vacant and all new asset unused. This issue will get complex for QS reports I suspect.
2. Owners of property who occupy for the first home buyer concessions. This could kill depreciation deductions esp in apartments where Div 40 can be high v's say a older property.
3. Buying second hand goods OF ANY KIND (even those under $300). Deductions are no longer allowed as the assets have been used. eg Gumtree, etc. Floor stock items (ie demonstrator dishwasher) would be OK as it s trading stock of the retailer.
4. Buying a let property from a developer

Can contracts be fiddled with the fix this deduction issue ? No, other than from a developer where the property has never been occupied. The first use test is about use and not ownership dates. Efforts to contract to sell assets does not make them new. If anything it confirms that deductions will not be available for the future owner. An exception appears to be available for builders demonstrator show homes sold fully furnished - this may be available.

 

What if the developer still treats the asset as trading stock and doesn't claim depreciation?

 

Irrelevant I would think. Has the property been lived in?

 

yes, but it is slightly different if a developer is still considering the property trading stock and not claiming any of the benefits an investor would, like depreciation.

If you can't claim depreciation due to being trading stock, this suggests it is still considered new for tax purposes, even though physically lived in.

There was another example someone posted about depreciation of secondhand goods purchased from say factory seconds outlet. Because the goods is trading stock (to the retailer), you can depreciate the asset, even though the good isn't new.

purely my thoughts.

 

You will have to look at the specific legislation or seek legal advice on this. I haven't read the legislation so don't know

 

As Terry stated, you may have to seek a Private Ruling on this. At this stage this still appears to be a grey area. The Legislation does state that the asset must be "not previously used" so this would appear a stumbling block.

 

They have been clever with the 'used' test for eligibility.

This is not relevant:

'...it is slightly different if a developer is still considering the property trading stock and not claiming any of the benefits an investor would, like depreciation.'

An owner occupier who sells a property to an investor has also not been claiming depreciation, but they have been using the Assets. If somebody has been living in a property, even for only a few months, the Assets are 'used'.

Re: Goods purchased as 'factory seconds'. They will be fine. A 'factory second' usually means an oven has a scratch on the front or a fridge has a dent in the side or something like that. The Asset has not been in a property and being used. Buying used Assets off eBay or Gumtree of course is different.

 

thanks to all that replied.

I'll follow this up and see if I can get something more concrete.

 

You're probably not going to get anything more concrete until the legislation is passed. It's still in draft form. The deadline for submissions on the draft was August 10, from memory. Treasury then look at the responses and make some adjustments - perhaps.
Once the legislation changes pass, there will be a bunch of Ruling applications and Interpretative Decisions that go through as people seek clarification on specific circumstances and the ATO clear up some of the grey areas. I imagine this will take about a year.
Scott

 

I believe a developer can supply "new" articles provided the premises had not been tenanted. I expect the final laws will clarify this as its vague. A developer would always sell a unit as trading stock and its same as a retailer IMO with one difference. The retailer sells a unit of trading stock whereas the developer sells a unit that is trading stock and it may comprise many elements eg plant and equipment, etc.. I believe the issue is one concerning whether any former owner has USED the assets or a tenant has USED the assets. Both seemingly may fail unless there is no use. eg A Developer who sells a new unit never tenanted.

We have to wait and see and when its out for consult OR the ATO seeks clarity around what the word "new"means we can have a say in a draft ruling etc

 

further reading the Explanatory Material, it does look like even if the developer classifies the property as trading stock, it still needs to meet the 'new' criteria.

example 2.2
the following needs to be met:

• Developer Co has not claimed any deduction for the decline in value of the assets (and nor has any other entity); and
• no entity has resided in premises in which the assets have been installed.