What investors need to know about the Budget changes to depreciation tax

If you’ve been following the 2017 Budget, you probably already know that it included a fair few policies aimed at property investors. One of them was changes to claims you can make on your tax for depreciation of plant and equipment assets in your residential investment property.

You might be wondering how the changes affect you - so here at Mozo we’ve collected the need to know information, and some of the top tips from industry experts to help you wrap your head around it.

What are the changes?

Basically, these new rules limit the amount of tax deductions investors can make each year.

“In essence, unless you as the buyer had physically purchased the items – you can no longer depreciate them,” says Tyron Hyde, Director at quantity surveying firm Washington Brown.

Here are the key things to remember:

  • Investors can now only claim tax deductions if they buy a brand new residential property or add new plant and equipment items themselves.
  • If you bought an investment property before May 9 2017, it won’t be affected by the changes, and you can go on claiming as usual.
  • The capital works deduction hasn’t changed - so if a house was built after 16 September 1987, you can still claim 2.5% each year for depreciation of the structure.
  • Commercial, industrial and other non-residential properties aren’t affected.

How does it affect you?

“Plant and equipment” basically covers any loose items that can be easily removed from the property - including floating timber floors, air conditioners, blinds and curtains, carpet, ovens, dishwashers, hot water systems, security systems, and smoke alarms.

Generally speaking, investors can claim between 10% and 20% on these depreciable items. That’s often between $5,000 and $10,000 a year in depreciation deductions, according to Raine & Horne executive chairman Angus Raine.

So these changes could put new investors in a tighter financial position than usual, and mean that you might have to rethink your budget before signing on the dotted line.

What to do now:

If you’ve got your eye on an investment property, there are a few things you can do to minimise the damage the new depreciation tax rules could do to your budget, including:

Don’t jump the gun

First things first, while there’s every likelihood these changes will come into effect, they’re not set in stone just yet. Before the tax changes announced in the Budget can become law, they have to be approved by Parliament - so don’t make any big moves until everything is settled, says Mozo property expert Steve Jovcevski.

Consider your buying strategy

If these changes do come into effect, a property would have to be built after 1987 for you to claim any depreciation benefits. That means buying a second-hand property might not look like such a good idea anymore, says personal finance writer Anthony Keane. Buying new off the plan might be more appealing, and you may have to rethink your investment strategy.

Snag a fixer-upper

Hyde says, “If you renovate a property that was built after 1987 or if the renovation involves additions/extensions to the building structure, you can still claim both the depreciation on the plant and equipment as well as the depreciation on the building.” So if you don’t want to buy new, bagging a bargain older property and doing renovations means you’ll still enjoy depreciation tax benefits.

Plan for the long term

Always invest with one eye on the future, is Jovcevski’s recommendation. That means choosing an investment property that will still be a good investment 5, 10 or 20 years down the track and not focusing on tax deductions as your main property buying criteria. Instead, look for an opportunity where you can continually increase your rental yield - that way, changes to tax deductions won’t be such a big deal for your bottom line.

Planning to buy an investment property in 2017? Make sure you have one of the top investment loans around to help keep your costs low.