The Treasury Laws Amendment (Housing Tax Integrity) Act 2017 received Royal Assent on 30 November 2017, following a lengthy passage through Federal Parliament since its introduction in September 2017. The new Act introduces the following important Federal Budget measures regarding residential property:
Subject to the exceptions noted below, the removed deductions will impact investors to the extent they are deriving rental income from “residential premises” (defined in s.995-1 ITAA 1997 and the GSTA 1999 as including houses, apartments, hotel or boarding house rooms and even house boats) with predominant use as residential accommodation. See GSTR 2012/5 - GST Residential Premises for further details.
Importantly, residential property deductions incurred either:
will be unaffected by these changes (i.e. current deductibility provisions will continue to apply after 1 July 2017 in these cases). A further specific exception for new residential premises may also apply regarding the depreciation deduction removal – see details below.
As illustrated below, travel deductions incurred by residential rental property investors from 1 July 2017 (i.e. 2017/18 onwards) will become non-deductible and also unable to form part of the residential property’s CGT cost base (subject to the exceptions noted above). The legislation and ATO website notes that the types of travel costs affected will include, but not necessarily be limited to, travel for inspection, maintenance, rent collection, preparing for second or subsequent new tenants or visits to the managing agent’s office or body corporate meetings.
TIP – the ATO document “Rental Properties – travel expenses” currently details the treatment of residential investor travel deductions and, therefore, the deductions which will be lost from 1 July 2017.
In income years commencing from 1 July 2017, residential rental property depreciating assets (e.g. carpet, air conditioners, dish washers, ovens and more) which are either:
will generally become ineligible for depreciation deductions for tax purposes to the extent that the depreciating asset is used to produce residential rental income and is a “previously used asset” (see C below) which:
Where the depreciating asset meets the above timing and usage conditions, depreciation deductions will be replaced with potential capital gains treatment under CGT Event K7 (generally as a capital loss - see ss.104-235 and 104-230 ITAA 1997) at the time when the asset is sold, scrapped, destroyed or otherwise subject to a ‘balancing adjustment event’ (see s.40-295 ITAA 1997) for depreciation purposes. See below the diagram for further details.
NOTE – The above “second-hand” asset rule (see C above) will not remove depreciation deductibility if the prior owner’s use was solely either:
Off-the-plan purchases for investment purposes, which include depreciating assets in the price paid, are therefore unlikely to be affected by the above non-deductibility rules (see C above).
TIP – The ATO document “Rental Properties 2017” currently details common rental property depreciating assets which will be subject to treatment as a capital loss if the above conditions (and no exceptions) apply.
NOTE – To the extent depreciation deductions are denied under the new legislation, CGT Event K7 will generally give rise to a capital loss [assuming that the asset’s termination value (e.g. market value on disposal, scrapping etc) is less than the asset’s cost]. The difference between cost and termination value will be claimable as a capital loss at the “balancing adjustment event” time (e.g. sale/scrapping etc – see s.40-295 ITAA 1997 for details) to the extent that it reflects amounts not deducted due to the new residential property investor deduction rules or private non-deductible purposes.
If, for example, a residential property investor’s depreciating asset was:
and its entire decline in value was made non-deductible due to the new residential property investor deduction rules, then a $30,000 capital loss ($40,000 - $10,000) would arise under CGT Event K7 when sold/scrapped etc.
If instead only 25% of the asset’s total decline in value was made non-deductible under the new residential property investor deductions and a further 33.33% represented a private use year (including the entirety of 2016/17 – see A above) then:
such that a total CGT Event K7 capital loss of $17,500 ($7,500 + $10,000) would arise when the asset was sold/scrapped or similar.
Importantly, the above capital loss treatment:
In addition to details available at www.taxastute.com.au, Tax Astute clients receive more information and specific details, questions and answers underlying the brief snapshot summary above as a part of their:
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