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Residential Property Investors lose depreciation and travel deductions

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Federal Budget 2017 - Residential Property Investors lose depreciation and travel deductions

Anthony J Cordato
 
Australia May 12 2017
 

From 1 July 2017, Australian Property Investors will lose two long-standing tax deductions for residential properties as a result of the Federal Budget 2017.

The following extracts state the current law (from the ATO Guide) and the new law (copied from the Budget papers). The precise terms of the new law will not be known until the new measures are legislated.

1. Depreciation of fittings and fixtures

Current Law: Deduction for decline in value of depreciating assets (i.e. depreciation)

When you purchase a rental property, you are treated for tax purposes as having bought a building, plus various separate items of ‘plant’. Items of plant are depreciating assets, such as air conditioners, stoves and other items.

You can deduct an amount equal to the decline in value for an income year of a depreciating asset that you held for any time during the year. However, your deduction is reduced to the extent your use of the asset is for other than a taxable purpose. If you own a rental property, the taxable purpose will generally be for the purpose of producing rental income.

Source: ATO Guide for Rental Property Owners 2016 (page 18)

New Law: limit plant and equipment depreciation deductions to outlays actually incurred by investors

From 1 July 2017, the Government will limit plant and equipment depreciation deductions to outlays actually incurred by investors in residential real estate properties. Plant and equipment items are usually mechanical fixtures or those which can be ‘easily’ removed from a property such as dishwashers and ceiling fans.

This is an integrity measure to address concerns that some plant and equipment items are being depreciated by successive investors in excess of their actual value. Acquisitions of existing plant and equipment items will be reflected in the cost base for capital gains tax purposes for subsequent investors.

These changes will apply on a prospective basis, with existing investments grandfathered. Plant and equipment forming part of residential investment properties as of 9 May 2017 (including contracts already entered into at 7:30PM (AEST) on 9 May 2017) will continue to give rise to deductions for depreciation until either the investor no longer owns the asset, or the asset reaches the end of its effective life.

Investors who purchase plant and equipment for their residential investment property after 9 May 2017 will be able to claim a deduction over the effective life of the asset. However, subsequent owners of a property will be unable to claim deductions for plant and equipment purchased by a previous owner of that property.

This measure is estimated to have a gain to revenue of $260.0 million over the forward estimates period.

 Revenue ($m)

 

2016‑17

2017‑18

2018‑19

2019‑20

2020‑21

Australian Taxation Office

40.0

100.0

120.0

Source:   2017-18 Budget Paper No. 2 - Revenue Measures (page 30)

Government turns GST on its head for new property sales

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Government turns GST on its head for new property sales

Steve Healy Jon Denovan Cameron Steele
 
Australia May 12 2017

The Budget measures include a radical plan to shift the responsibility of accounting for GST from property developers to purchasers. Under the proposal, purchasers must remit the GST directly to the Australian Taxation Office (ATO) as part of the settlement process.

The proposal will apply to newly constructed residential properties and new subdivisions from 1 July 2018.

What does this mean for the developers?

The full impact fordevelopers will depend on the final form of the legislation. The critical question is whether the purchaser’s liability will be interim or final.

If the purchaser’s liability to account for GST is non-final, the purchaser may be required to collect a notional amount and a true-up may then occur when the property developer submits its business activity statement (BAS). This may present cash-flow and funding issues for developers, particularly if the GST amount remitted by the purchaser is significantly more than the developer’s actual GST liability.