In recent years, property depreciation rules in Australia have undergone significant changes, particularly impacting investors in second-hand residential properties. Understanding these changes is crucial for maximising your tax benefits and ensuring compliance with Australian tax law.
The most significant change came with the 2017 Federal Budget, effective from 1 July 2017. Under this change, investors who acquire second-hand residential properties after 7:30 pm AEST on 9 May 2017 can no longer claim depreciation deductions on previously used plant and equipment assets under Division 40 of ITAA 1997. This means items like air conditioners, carpets, and blinds, if previously used, are not eligible for depreciation by the new owner. The rationale was to prevent successive owners from claiming depreciation on the same assets, a practice the ATO viewed as 'double-dipping'. However, capital works deductions under Division 43, which relate to the building structure and fixed items, remain unaffected and can still be claimed.
To see how this plays out in practice, consider a 2009-built 2-bedroom apartment in Fortitude Valley, Brisbane, purchased in 2023 for $700,000. The plant and equipment assets, such as the air conditioning system and carpets, are deemed used by the previous owner. Therefore, you cannot claim depreciation on these items. However, you can still claim capital works deductions on the building structure, potentially reducing your tax liability by $3,000 annually, assuming a marginal tax rate of 37%.
In our experience reviewing thousands of properties across Australia, many investors overlook the importance of obtaining a detailed depreciation schedule. Failing to do so often results in missed deductions. Another common error is misunderstanding the distinction between Division 40 and Division 43 deductions, leading to incorrect claims. Additionally, investors frequently underestimate the benefits of capital works deductions, which can significantly affect long-term tax planning.
The answer can differ depending on your situation. If you acquired a second-hand property before the changes took effect, your depreciation claims on plant and equipment may be grandfathered, allowing for previous rules to apply. Properties owned within a Self-Managed Super Fund (SMSF) may have different implications, and partial-year ownership can affect your depreciation calculations. Commercial properties are not subject to the same restrictions as residential properties, allowing for broader depreciation claims.
Determining the exact impact of these changes requires professional advice. A Chartered Quantity Surveyor can provide a detailed depreciation schedule tailored to your property, while an accountant can integrate these figures into your overall tax strategy. This collaboration ensures you maximise your deductions and remain compliant.
To navigate these changes, consider the following steps: