The Government has released an Exposure Draft Bill to implement the 2017/18 Budget announcement to limit depreciation and travel expense deductions for certain residential landlords.
Under the Bill, depreciation deductions will be disallowed for landlords for plant and equipment installed in (or used in) residential rental premises unless:
- the landlord is carrying on a business of renting residential premises, or is a corporate tax entity, APRA-regulated superannuation fund or widely held unit trust with 300+ members;
- the premises are ‘new residential premises’ within the meaning of the GST Act that no one had already lived in when the asset was installed in (or first used in) the premises; or
- the asset was purchased new by the landlord from the trading stock of a shop or other supplier, and the landlord has not previously used the asset for personal or other non-taxable purposes.
The second exemption above will allow off-the-plan purchasers to claim depreciation deductions for plant and equipment already installed in (or used in) the property when they take possession.
Average mum and dad investors
The average mum and dad investor will not be able to claim depreciation deductions for plant and equipment already installed in an established residential property that they purchase themselves, or through their SMSF or family trust. Nor will they be able to claim depreciation deductions for plant and equipment purchased second-hand or re-applied from a (personal) non-taxable purpose for use in their residential rental property.
Instead, the decline in value of those assets will be a capital loss when they dispose of the property or asset.
Perhaps inadvertently, the extension to assets ‘used in’ residential premises will mean landlords cannot claim depreciation deductions for their tools they use for repairs and maintenance either, unless one of the three exemptions applies.
Management and other fees (including for repairs and maintenance) they pay to an estate agent will still be tax deductible.
Low value assets (valued under $1,000) for which depreciation deductions will be disallowed by the changes cannot instead be allocated to the low value pool and written off that way.
The changes will take effect from 1 July 2017. However, plant and equipment acquired before 9 May 2017 (or acquired under a contract entered into before that date) and for which depreciation deductions are claimed in 2016/17 will not be affected.
The Bill will also deny travel expenses for landlords of residential rental premises from 1 July 2017, unless the first exemption above is met. The denied deduction cannot instead count towards CGT cost base of the premises or be claimed over 5 years as a s.40-880 ‘black hole’ deduction.
Not used for residential accommodation
The Bill does not affect deductions in relation to residential premises that are not used for residential accommodation, for example a house rented out as medical consulting rooms, or one that is vacant and used to sell electricity generated by roof top solar panels.
The Exposure Draft Bill has been released for consultation with submissions due by 10 August 2017.