In the 2017-18 Budget, the Government announced a package of measures designed to reduce pressure on housing affordability. As part of this package, the tax law is to be amended to improve the integrity of the tax system for deductions relating to investment properties by limiting deductions for property investors relating to the decline in value of plant and equipment and travel expenses for residential rental property.

Here are the Limits

In July, the Treasurer’s Office released a draft bill regarding how depreciation expenses on a second-hand property can be claimed from this financial year.

What does the change to Division 40 mean?

If you acquire a second-hand residential property after 9 May 2017 for the purpose of gaining or producing assessable income you no longer can claim depreciation on existing plant and equipment (eg carpet, blinds, kitchen appliances, security system, air conditioners, hot water systems). However, you will be able to claim the decline in value of plant and equipment in the established property if you replace the acquired assets with new assets.

A depreciation deduction on a brand new residential property is not affected. Another good news item is that the proposed changes do not affect commercial, industrial, retail and other non-residential properties.

How are Division 43 deductions affected?

The building allowance or capital works deductions on the structure of the building has not changed at all. All investors will still be able to deduct construction costs in respect of the following capital works:

  • buildings or extensions, alterations or improvements to a building
  • structural improvements or extensions, alterations or improvements to structural improvements
  • environmental protection earthworks.

Capital gains tax consequences

If you purchase an old investment property and can no longer claim depreciation on the existing plant and equipment you may benefit from paying less capital gains tax when you sell the property as there is a clause in a draft bill that allows you to use the losses arising from the decline in value in Division 40 assets as a capital loss in Capital Gain.

Need help?

Please contact our team of Accountants at The Quinn Group on (02) 9223 9166 or submit and online enquiry form today.