Property investors may all be affected by changes made to property depreciation deductions in the May 2017 Budget. That law applies to residential properties after 9th May 2017.
Many property owners mistakenly believe that existing properties are unaffected. This is not the case and care must now be taken by all property owners. Assuming that the existing quantity surveyor tax report is valid and fully deductible could expose taxpayers to ATO review and denied deductions, often well after the event. All Quantity Survey reports are exposed to loss of the depreciation deduction element of the schedule (Div 40). The capital allowance element (Div 43) is unaffected.
The key issue is that ALL Quantity Surveyor reports whether prepared before the law change, or after, may lose the Division 40 depreciation deductions in some instances. Annual review of so-called “grandfathered” property reports must occur. Issues which may lead to loss of the deduction:
• The property is an investment property at the 9 May 2017 and after that, the owners or a third party (ie relatives, friends) use the property for more than incidental use. The ATO view on this is very brief and regular single night stays for example may fail. This issue affects all rented holiday homes;
• The owners stay in an existing investment property while conducting repairs or renovations for more than a single night;
• A property that was an investment property prior to 9th May 2017 is used for any private purpose (eg parents, overseas visitors etc) or as the home of the owners and then later recommences to be an investment use property.
• The taxpayers own home where a portion of property use is for income producing purposes. Eg Airbnb or rented rooms. The taxpayers own occupancy will mean depreciation deductions may be reduced or lost.
Property owners who install and incur costs for new assets subject to depreciation after 9th May 2017 may continue to claim depreciation deductions which can be easily entered by the tax adviser in the return. However, future deductions for these assets must also consider the above issues which may stop deductions when the use of the property is affected.
The good news is that Property owners do not “lose” the past depreciation benefits if they are affected. Capital Gains losses that reduce CGT are available for assets when the assets are later disposed of with the property or made obsolete (eg an old Air Conditioner). Diligent property tax advisers will identify and claim this when many DIY taxpayers will overlook this benefit.
As property focussed tax advisers we support a large number of affected taxpayers and the above issue is merely one of many issues our advisers are alert for.
We welcome property investor enquiries if you are seeking assistance and support for your property portfolio.
Accounting & Tax Manager