Depreciation is the natural wear and tear that occurs to a building and the assets within it over time and it’s one of three (3) key tools property investors use to make holding investment property more affordable and tax effective.
The proposed new laws to depreciation will result in a reduction in the depreciation for plant and equipment assets or fittings for a new residential (investment) property. Commercial properties are exempt from these changes. The key date for new property investors is the 9th of May 2017, contract exchanged; where after this date; investors will be entitled to building write-offs or capital works depreciation, which is the wear and tear to the building itself.
Here is a comparison of depreciation savings Before and After:
$550,000 APARTMENT -NSW BEFORE AFTER NEW LAWS – May 2017
|Year 1 $15,812.50||Year 1 $7,562.5|
|Year 2 $12,375||Year 2 $7,562.5|
|Year 3 $11,000||Year 3 $7,562.5|
|Year 4 $9,625||Year 4 $7,562.5|
|Year 5 $8937.5||Year 5 $7,562.5|
|Year 6 $8,250||Year 6 $7,562.5|
|Year 7 $8,250||Year 7 $7,562.5|
|Year 8 $7,562.50||Year 8 $7,562.5|
|Year 9 $7,562.50||Year 9 $7,562.5|
|Year 10 $6,875||Year 10 $7,562.5|
Residential property investors will still be able to depreciate plant and equipment fittings if they pay for these fittings. Now, this is hardly an appealing prospect, given that this is an extra cost to the property investor. However, market practice might see, developers building units, without key fittings, such as microwaves, dryers, washing machines, and ovens. This will reduce the cost of investment properties and it will allow investors that purchase these items to depreciate these fittings.
So, let’s summarise the key changes to residential property depreciation:
- Properties purchased before 9th of May 2017, will not lose plant & fittings depreciation benefits. Happy days for these people
- Brand new properties will offer the greatest depreciation benefits, compared to buying existing property.
- Existing investment property depreciation benefits are still available; they are not as much as prior to the 9th of May 2017.
These changes mean that property investing outside super, will be harder for many average income investors, as compared to investing in super; which is typically funded by employer super contributions and rental income which are all concessionally taxed at 15%; using tax deductions to reduce the holding costs of new property, is a key tool for property investors outside super. In the first 3-5 years when acquisitions costs are higher, it is these tax deductions that make holding property and funding property, cash flow neutral. Therefore, investors must calculate their property holding costs, in net dollar terms, given the drop in depreciation deductions and rental property travel costs; as is done with super property investments; to get a clear indication of the cost of holding an investment property. These changes were passed on the 15th of November 2017 making these changes law, from the 9th of May 2017.
Warning: This is general information only and it is no substitute for advice. Always obtain a depreciation schedule for all investment property purchases in an SMSF and particularly when purchasing outside super.