New Rules For Property Investors Via Tax Depreciation Rate Changes In TR 2019/5
How will new rules via tax depreciation rate changes in TR 2019/5 impact property investors? Mike Mortlock identifies the winners and the losers of this amendment.
Back in March, we flagged that the ATO was consulting with the Australian Institute of Quantity Surveyors (AIQS) over changes to plant and equipment effective lives.
Now before your attention sets fire to itself and you’re off at the mercy of the rest of the internet, let me explain why this development matters to property investors. The effective life of a plant asset affects how quickly it will depreciate, consequently what it’s contribution to your annual deductions will be.
For example; under the diminishing value method, carpet had an effective life of 10 years, so the calculation was 200 divided by 10 giving you a 20% depreciation rate. Under the new ruling, it has now changed to 8 years, so 200 divided by 8 is 25%. To put this in real terms, here’s an example of the deductions on a new house with $5,000 worth of carpet:
Each year the ATO issues a document outlining the assets they deem to be plant and equipment items across all industries. Residential property hasn’t really changed since July 2004, so this is an infrequent real change to residential tax depreciation.
The ruling not only specifies the effective lives of the assets but can and does add new ones each year (though normally only commercial assets).
Depreciation really consists of two main categories:
- The building structure deductions or division 43 deductions
- Plant and equipment assets or division 40
The division 43 rules remain the same but this new legislation with the sexy title of TR 2019/5 marks some key changes for division 40 assets.
Before I detail the changes, I want to talk about this being a double-edged sword. I’m sure a lot of quantity surveyors (as evidenced by the new assets) pinged back multiple suggestions for new plant assets. More plant and equipment assets are undoubtedly great news for people purchasing brand-new property or installing the assets themselves in a renovation, but it will in effect minimise the deductions for established properties.
What on earth am I getting at? Well, let’s say you have a brand-new property that costs $300,000 to build. You could expect around $30,000 to be assigned to the plant and equipment assets. The addition of new plant assets can effectively increase the total plant value to say $32,000, but it lowers the balance of division 43 assets. I know, it even sounds confusing to me, so here’s another graphic:
Now, plant and equipment items all depreciate at different rates. On average you’ll find them roughly between 25-40%. The division 43 structural deductions are a set 2.5% for residential property. So, you can see that it is better to have more plant items and less structure because of those depreciation rates.
Why the double-edged sword? I promise, I’m getting to it!
It’s a double-edged sword because on the 9th of May 2017 the Prime Minister (then Federal Treasurer) announced that if you exchanged contracts on a property after that date, you would only be able to claim depreciation deductions for plant and equipment items on either a brand-new residential property, or if you added the asset yourself (say in a renovation to an existing tenanted property). So, the new legislation is more great news for investors buying brand-new, and an additional kick in the teeth for those buying established property.
Essentially by adding more plant and equipment items to the pool, you’re taking from items that used to be considered part of the building structure. So, if you buy a two-year-old house, you used to be able to claim 2.5% of the value of the rainwater tanks each year. Now that they’re new plant and equipment items, your claim on them is zero!
So, to wrap up (I can hear the cheers from here), with most investors purchasing established properties, 61.8% of them in fact according to our research, more plant and equipment items being acknowledged actually reduces depreciation deductions.
Conversely, investors buying new are now even more incentivised to do so.
After all that, what’s changed?
Well a few assets have had their effective lives changed; I won’t go through the whole list but the keys ones that will affect most investors are:
- Water pumps
- Bathroom accessories (changed from 5 years as an instant write-off to 3 years)
- Washing Machines and Clothes Dryers
What are the new assets?
- Digital peepholes (my personal favourite just because it sounds so creepy)
- Home automation control assets
- Hydronic heaters
- Rainwater Tanks (is a pretty big one for houses)
- Folding Arm awnings
- Skylight controls and motors
- One or two other inconsequential ones for an article that has gone on long enough
There you have it. For quantity surveyors, it’s a big week. For normal human beings, it will go largely unnoticed, but it does impact investors buying both new and established properties. Like the 2017 changes, the winner again is new properties and the looser established ones!