In the May 2017 budget, the Federal Government announced changes in relation to rental property deductions for depreciating assets and travelling deductions. These areas have been singled out by the Government as a part of their push to ‘Reduce Pressure on Housing Affordability’.
The legislation relating to these changes has recently been released, meaning that we are now able to see how this will affect your deductions and potential refunds! We have listed a summary of the changes below.
Changes to travel related to use of residential premises
The changes to travel relating to residential premises is simple in that there is one rule for most property owners. From 1 July 2017, travel expenditure incurred in receiving income from residential properties is no longer deductible for property owners and is not recognised in the cost base of the property for capital gains tax purposes.
This includes all travel expenses for your residential property, including travel for maintenance, property agent meetings, bond reviews etc. Travel expenditure includes motor vehicle expenses, taxi or hire car costs, airfares, public transport costs, and any meals or accommodation related to the travel.
There are two groups that these new changes do not apply to – those who are in the business of property investing and excluded entities (such as corporate tax entities and public unit trusts). The ATO has specifically stated that owning multiple rental properties will not meet the requirement of ‘business in the business of rental properties.’
Luckily, the changes will not prevent property owners from engaging real estate agents to provide property management services (including travelling to inspections) for investment properties!
Changes to Depreciating Asset Deductions
Sadly, the changes to depreciating asset deductions are not as simple. From 1 July 2017, depreciation claims on assets have changed depending on whether the assets already exist when a property is purchased and whether they are new or used assets.
Under these changes, a deduction cannot be claimed for assets that are already installed in a property that is purchased or starts being rented after 9 May 2017, which will significantly reduce the deductions for some new property owners. The rules in relation to capital works deductions for buildings are not changing under this new legislation.
Assets purchased after 9 May 2017 will also be affected, depending on whether they are a “previously used” asset. An asset is "previously used" if you are not the first person to use the asset or if the asset is purchased in a year that the property is not being used to produce income, even if the property later becomes income-producing. If an asset is “previously used” when it is installed on a property, a deduction will not be able to be claimed for the depreciation of that asset.
The changes will not apply to an asset installed in properties supplied as new residential premises, including substantially renovated premises, as long as a deduction has not been previously claimed for depreciation on the asset and the property has not been lived in since being built or renovated.
If you believe that you may be affected by these changes, we recommend you contact your tax adviser.