Investors often find themselves puzzled by the rules surrounding depreciation on second-hand residential properties. Since the 2017 budget changes, the landscape has shifted significantly, impacting the way investors can claim depreciation on these properties.
Under Division 40 of ITAA 1997, depreciation deductions on plant and equipment (such as appliances and carpets) are no longer available for investors who acquired second-hand residential properties after 7:30pm AEST on 9 May 2017. This means if you purchased a property with existing, previously used assets, you can't claim depreciation on those assets. Pre-existing owners were, however, grandfathered, allowing them to continue claiming as before.
The primary misconception here is that all depreciation is off-limits, but that's not the case. You can still claim depreciation on new plant and equipment you install after purchasing the property, as well as on capital works under Division 43, which covers the structural elements of the building and some fixed assets, provided the building commenced construction after 16 September 1987.
To see how this plays out in practice, consider a 2010-built 3-bedroom house in Adelaide, purchased in 2022 for $750,000. The investor can't claim depreciation on the existing dishwasher or air conditioning unit. However, if they replace the air conditioning unit with a new one costing $3,500, they can claim depreciation on this new asset. Assuming the effective life of the air conditioning unit is 10 years, the annual depreciation deduction would be $350. At a 37% marginal tax rate, this translates to a $129.50 tax saving per year.
In our experience reviewing thousands of properties across Australia, investors frequently overlook the potential benefits of replacing older assets. Many miss out on claiming new plant and equipment deductions simply because they assume all depreciation is unavailable. Additionally, confusion around the effective life of assets often leads to incorrect claims or missed opportunities. It's also common for investors to neglect capital works deductions, which can still offer substantial tax benefits.
The answer can differ depending on your situation. If you purchased a property before 7:30pm AEST on 9 May 2017, you can continue to claim depreciation on existing plant and equipment. For properties owned by SMSFs, the rules follow the standard investor guidelines unless specific fund rules apply. Commercial properties, however, do not fall under these restrictions and can claim depreciation on both new and existing plant and equipment. Joint ownership may also affect the way depreciation is calculated and claimed, making it crucial to understand each owner's entitlements.
Depreciation rules can be complex, and the specifics often depend on individual circumstances. Engaging a Chartered Quantity Surveyor alongside your accountant ensures you maximise your deductions while remaining compliant with the legislation. A QS can provide a detailed depreciation schedule tailored to your property, identifying all possible deductions.
Here are some practical steps to take next: