If you're thinking about buying a property for income-producing purposes, you may be aware that you can claim many related items of expenditure against your tax return. You may also know that you can claim for property depreciation and, traditionally, this can make quite a difference to the overall cash flow of the project. However, did you know that there have been some significant changes introduced by the Australian government recently, that can impact your decision to buy the property in the first place? What should you be aware of?
After a proposal put forward in the federal budget, politicians have now enacted legislation that affects whether you can claim depreciation on plant and equipment. Essentially, if you buy a second-hand, residential property for income-producing purposes, then you cannot claim any allowances for the plant and equipment within.
This change does not affect any brand-new property; nor does it affect any existing second-hand properties on your portfolio, as you can continue as you did before.
You may still claim depreciation for the building itself going forward. However, most of the benefit would traditionally have been associated with plant and equipment depreciation rather than capital allowances, so this change is significant.
As you may expect, there are subtle nuances scattered throughout the legislation. For example, if you buy a second-hand property and choose to renovate it yourself with all-new white goods, for example, you will be able to claim depreciation on those. In this case, you are incurring this expense and not a previous owner.
Understanding the Value
You will need to be careful when you buy any second-hand property, so you can be sure of your ground before you proceed. You may need to factor in renovation costs anyway and in this case may still be able to take advantage of depreciation, but it pays to have a full understanding of the new law.
Some experts believe that there is a relatively easy workaround. If the owner of such a building is a corporate tax entity, then they are not affected by this new law. Consequently, you may be able to set up a company to handle your transaction and may be able to itemise plant and equipment depreciation for the full benefit.
Understanding the Law
Get in touch with an accountant who has studied this new legislation carefully, so that you move forward with clarity.