• Housing affordability

Removal of expensive deductions for rental properties

As part of the Government’s agenda to facilitate affordable housing, the Budget proposes removal of a number of deductions in relation to investment properties, which have allegedly been exploited. 

Travel expenses for residential rental property

From 1 July 2017, the Government will disallow deductions for travel expenses relating to inspecting, maintaining, or collecting rent for a residential rental property.

The Budget papers describe this as an integrity measure to address concerns that many taxpayers have been claiming travel deductions without correctly apportioning costs, or have claimed travel costs that were for private travel purposes. This measure will not prevent investors from engaging third parties such as real estate agents for property management services. These expenses will remain deductible. The Treasurer’s related press release describes this as a deductible expense that is seen as being ‘abused’. 

The Government also makes the point that inspection costs undertaken by third parties will be permissible, meaning that inspection costs are seen as legitimate, but only if genuinely incurred for pure inspection purposes.  

Travel expense deductions will still be permitted for non-residential investment property, so presumably investments in more ‘active’ property assets such business facilities, farming, factories and so on should still be claimable.

Restriction on depreciation deductions

From 1 July 2017, the Government will also limit ‘plant and equipment’ depreciation deductions to outlays actually incurred by investors in residential real estate properties.

The Budget papers state that these plant and equipment items are usually mechanical fixtures or those which can be ‘easily’ removed from a property such as dishwashers and ceiling fans. The associated Treasurer’s press release also includes carpet as an item that will be affected by this measure. 

This is described as an integrity measure to address concerns that some ‘plant and equipment’ items are being depreciated by successive investors in excess of their actual value.

Investors who purchase plant and equipment for their residential investment property after 9 May 2017 will be able to claim a deduction over the effective life of the asset. However, subsequent owners of a property will be unable to claim deductions for plant and equipment purchased by a previous owner of that property.

The net result of this measure is that only the person who actually pays for the asset will be able to claim a depreciation deduction for it. Subsequent owners will not be able to inherit the written-down value of any such assets, nor presumably will taxpayers be entitled to a depreciation deduction for assets for which they have not provided any consideration. 

Once again, this measure only applies to residential property, and not other forms of business related property investment. 

CGT implications

However, there will still be some tax benefit with these asset items, but investors will need to be patient to benefit from them. Acquisitions of existing plant and equipment items will be reflected in the cost base for CGT purposes for subsequent investors. Therefore, the cost of these items will have some tax benefit when the property is ultimately disposed of. However, there will not be an immediate tax benefit claimed each year until the end of the assets’ effective life.   

Grandfathering

These changes will apply on a prospective basis, with existing investments grandfathered.

Plant and equipment forming part of residential investment properties as of 9 May 2017 (including contracts already entered into at 7.30 pm on 9 May 2017) will continue to give rise to deductions for depreciation until either the investor no longer owns the asset, or the asset reaches the end of its effective life. 

BDO Comment

The Government has been true to its word and not removed negative gearing.  However, it has curtailed some of the large discretionary expenditure deductions which can add to negative gearing losses. By announcing these as integrity measures designed to ‘improve taxpayer confidence in the negative gearing system’ the Government has managed to stay true to its word while reducing the cost of negative gearing to the Budget.