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Investment property deduction rules tightened

The Government has introduced legislation to give effect to its announcement in this year’s Budget that it would tighten up on the depreciation and deductibility rules for property investors.

The new rules, set out in Treasury Laws Amendment (Housing Tax Integrity) Bill 2017, are designed to address concerns that some taxpayers have been claiming travel deductions without correctly apportioning costs, and that depreciation deductions claimed by some residential property investors are being overstated.

In an article in the Weekly Tax Bulletin, Michael Hay, a tax partner at Pitcher Partners, and Joshua Goldsmith, a tax consultant at Pitcher Partners, say the bill spells out what the Government meant when it said the new law would cover “investors”.

“The bill states that the new rules do not apply to companies, super funds other than self-managed funds, public unit trusts, managed investment trusts or partnerships where each member of the partnership is an aforementioned entity,” Hay and Goldsmith say.

“Therefore, the new rules will most commonly apply to individuals and private trusts, including SMSFs.”

Under the new travel rule, travel costs incurred in gaining or producing assessable income from residential premises is not deductible unless incurred by certain institutional entities or by an entity in the course of carrying on a business.

Further, travel expenses cannot form part of the cost base for capital gains tax purposes.

Under the new depreciation rule, the amount an investor can deduct for a depreciating asset is reduced to the extent that the asset is a previously used asset used for the purposes of gaining or producing assessable income from the use of residential premises for residential accommodation.

If a depreciating asset was used wholly for this purpose, no deduction is available.

To be able to claim a deduction the investor must have held the asset at the first time it was first used or installed ready for use and the asset has never been used or installed in a residence of the investor or for purposes other than taxable purposes, except for incidental or occasional use.

The new rules will apply to plant and equipment (depreciable assets) installed in existing residential properties at the time the premises are acquired for rental purposes.

The rules will also apply to depreciable assets installed in a property at a time when it was used as a residence rather than a rental property.

In an example provide in the information memorandum accompanying the bill, Craig acquires an apartment that he intends to offer for rent. The apartment is three years old and has been used as a residence most of that time.

The apartment was carpeted by the previous owner. Craig acquires curtains, which are new, a used washing machine and a new fridge. He puts the new fridge in his own apartment and puts his old one in the rental apartment.

The new depreciation rule means Craig cannot deduct anything for the decline in the value of the carpet, washing machine or fridge for their use in generating assessable income.

He can claim a deduction for the decline in the value of the curtains, as they are not “previously used”.

The amendments apply to outgoings incurred on or after July 1, 2017, unless a depreciable asset was acquired before May 9, 2017 or acquired under a contract entered into before that date.