Hien Hoang: 0448 012 728 and Brian Spurrell: 0412 011 946

This month’s column should be of interest to readers who generate assessable income from residential rental properties.

In particular this update will inform you of recent legislative changes that affect deductions for depreciation of plant and equipment and travel expenses relating to rental properties. For a more comprehensive coverage of tax issues relating to rental property investment refer to my column in the March edition of The Diary which is also available on the PTAS Accountants website.

a) Depreciation of existing plant and equipment

Owners of residential rental properties purchased prior to 9th May 2017 were able to claim depreciation on existing plant and equipment that was included in the purchase of the residential property and will continue to be able to do so.

Rental property owners who exchanged contracts to purchase second hand residential properties after 7.30pm on the 9th May 2017 can no longer claim depreciation on existing (second-hand) plant and equipment as they are deemed to form part of the purchase price of the property and are no longer severable as depreciable assets but will be reflected in the cost base of the property for capital gains tax purposes. Subsequent purchases of new plant and equipment will of course be depreciable under the provisions of Division 40 of the Tax Act.

If you have purchased a new residential rental property after 9th May 2017 then items of plant and equipment will not be second-hand and depreciation will be claimable at the appropriate rates under Division 40 of the Tax Act.

Whilst the new legislation applies to Division 40 items of plant and equipment that are second-hand and do not form part of the property’s structure such as an oven, range hood, dishwasher or carpet, capital works which come under the provisions of Division 43 of the Tax Act and relate to the building structure or are permanent fixtures are not affected by the new legislation and will continue to be deductible at 2.5% for up to 40 years provided the construction of the property commenced and/or any subsequent structural improvements were made after 15th September 1987.

If you have a residential rental property and you have not engaged a Tax Depreciation Quantity Surveyor to prepare a depreciation report for your property, you could be missing out on thousands of dollars of deductions that you are rightfully entitled to.

b) Residential Rental Property Travel Expenses

The second legislative change denies a deduction for travel expenses relating to a residential investment property as from 1st July 2017 unless you are carrying on a business of property investing or are an excluded entity such as a company or the property is a commercial rental property such as a warehouse, commercial office building or shop.

Generally, owning one or several rental properties will not be regarded as being in the business of rental properties but rather is considered simply to be a type of investment.

Up until the 2016/17 tax year travel expenses could be claimed for travel to and from the rental property for preparing the property for new tenants, inspecting the property periodically, undertaking repairs and maintenance, collecting rent and visiting your agent etc.
Going forward, you may prefer to delegate these duties to an agent in which case the fees charged by the agent to carry out these duties would still be deductible.

If you have a commercial rental investment property then you can still claim travel expenses as the new legislation is not applicable to commercial rental properties.

Whilst the above two legislative changes have reduced the deductions available to owners of residential rental properties to some extent it is important that you are able to justify the deductions you are entitled to claim by retaining records for five years of:

  • documents verifying the deductions claimed have been incurred.
  • expenditure relating to a rental property that was either tenanted or genuinely available for rent by way of advertisement or in the hands of an agent.
  • how you have apportioned expenses between the proportion of the year the property was used for private purposes or not available for rent and the proportion of the year the property was rented or available for rent.

The tax office has issued a number of warnings to taxpayers with rental properties that they will be scrutinising returns for over claiming of deductions particularly for periods when the property was either untenanted, unavailable for rental or subject to private use. This will particularly be the case where the rental property is also used as a family holiday home.

The content of this article is not intended to be relied upon as professional advice and should not be used as such. If you have any questions you should consult a registered tax agent.
Brian Spurrell FCPA, CTA, Registered Tax Agent.
Director, Personalised Taxation & Accounting Services Pty Ltd
PO Box 143 Warrandyte 3113. Ph: 0412 011 946
Web: www.ptasaccountants .com.au