The 2017 budget introduced significant changes to how investors can claim depreciation on second-hand residential properties in Australia. These changes specifically target Division 40, which covers plant and equipment, altering the landscape for property investors acquiring used properties after 9 May 2017.
How the 2017 Budget Change Affects Depreciation
Under the 2017 budget changes, investors who purchase second-hand residential properties after 7:30pm AEST on 9 May 2017 can no longer claim Division 40 depreciation deductions on previously used plant and equipment. This means items like air conditioners, carpets, and appliances are excluded from depreciation claims if they were already in use by the previous owner. However, Division 43, which covers capital works deductions, remains unaffected. A common misconception is that all depreciation is lost, but capital works deductions can still be claimed for eligible properties.
How This Works in Practice
Consider a scenario involving a 2009-built 2-bedroom apartment in Fortitude Valley, Brisbane, purchased in 2023 for $750,000. Prior to the 2017 budget changes, an investor could claim depreciation on both Division 40 and Division 43. Now, only Division 43 is claimable for used plant and equipment. Assuming the apartment has $50,000 worth of eligible capital works, the investor can claim 2.5% annually, equating to $1,250 per year. At a 37% marginal tax rate, this results in a tax saving of $462.50 annually. Previously, including Division 40 items might have added another $2,000 in deductions, significantly increasing the tax saving.
Professional Insight
In our experience, the 2017 changes have prompted many investors to reconsider their purchasing strategies, often opting for new builds to maximise depreciation benefits. One thing we frequently see is investors overlooking the capital works deductions, assuming all depreciation benefits are lost. What most investors don't realise is that getting a detailed depreciation schedule from a qualified Quantity Surveyor can uncover substantial capital works deductions even in older properties. Additionally, maintaining accurate records of renovations or improvements is crucial, as these can enhance your depreciation claims significantly.
When Does the Answer Change?
When Should You Seek Professional Advice?
Complexities arise from individual circumstances, such as the property's acquisition date, renovation history, and ownership structure. These factors influence the applicability of the 2017 changes. Consulting with a Chartered Quantity Surveyor ensures a thorough depreciation schedule, while an accountant can provide guidance on tax implications tailored to your situation.