The who, what and how of changes to deductions for residential rental properties.
Legislation is now in place from the May 2017 Budget where the Government announced a raft of proposals it hoped would relieve the pressure on residential property prices. Two of these measures are targeted at reducing the income tax deductions passive investors in rental residential properties can claim on travel expenses and depreciation of assets used in those properties.
Who is affected?
Individuals, SMSFs and smaller trusts (including family trusts) who are not carrying on a business will be impacted by these amendments.
What types of real property are affected?
The amendments apply to residential premises that are used for residential accommodation. This is described broadly as ‘land or buildings that provide minimum shelter and basic living facilities which is occupied or designed to be occupied by a person’. This includes houses, flats and apartments. It also includes commercial residential premises such as hotels and boarding houses.
Importantly, the property must also be used for residential accommodation. Where residential premises are being used to derive income other than residential rent (for example, a partnership of dentists leases a house fitted out as a dental practice), these provisions do not apply.
Denial of travel deductions – All rental properties
Any travel expenditure incurred by the taxpayer in relation to the property will no longer be deductible from 1 July 2017.
The term ‘travel’ takes its ordinary meaning. It includes motor vehicle expenses, taxis, airfares, and any meals and accommodation costs associated with the travel. It covers everything, like flying to the Gold Coast to inspect your rental apartment, or driving to the next suburb to mow the lawns at a house you rent out.
Building Capital Allowance (Building Depreciation)
There are no changes to the rules relating to the capital works deduction that apply to buildings.
Capital works deductions are income tax deductions that can be claimed for expenses such as:
- building construction costs
- the cost of altering a building
- the cost of capital improvements to the surrounding property.
The building does not need to be new for these to be claimed.
Depreciation deduction limitation – Properties purchased after 9 May 2017
The deduction for depreciation on assets used or installed ready for use in residential premises that are purchased after 9 May 2017 will no longer be able to claimed where the depreciable assets have been previously used (like installing a second-hand oven into your rental’s kitchen). These rules do not apply to properties purchased prior to 9 May 2017.
Assets previously used
Assets defined as ‘previously used’ are assets that:
- the taxpayer did not own when they were first used or installed ready for use (i.e. purchased second-hand)
- were used or installed ready for use in a rental premises that the taxpayer previously used as a residence (either main residence or otherwise, such as a holiday house).
The items that can be depreciated are brand new items that:
- are installed in premises supplied as new residential premises/premises that have been substantially renovated, and
- were acquired as new by the taxpayer for premises not previously resided in, or they were used or installed within six months of the premises being completed and were not previously installed in any residence.
This is intended to cover new purchases from builders or developers, including off-the-plan purchases. This will also apply where a taxpayer purchases new premises from the developer within six months of construction being completed where the property is tenanted.
If you have questions or are unsure about any of these changes, please contact us … we’re here to help!