Government changes affecting Division 40 depreciation claims for residential rental properties

Based on recent Government changes, an individual investor who acquires a residential rental property after 7.30pm AEST on 9 May 2017 from a previous owner (‘second-hand property’) will not be entitled to claim Division 40 depreciation from 1 July 2017 for existing depreciable assets in that property. 

Instead, a capital loss (equal to the difference between an asset’s original cost/value and its termination value) may be available (to be offset against capital gains) when such assets are eventually disposed of (e.g., scrapped or sold as part of the sale of the property) for less than their original cost.

However, any qualifying (i.e., new) depreciable assets acquired for a second-hand property can be depreciated as normal to the extent they are used for income-earning purposes.

Investors who acquire new residential properties will generally not be affected by the recent changes and, therefore, will generally be able to claim depreciation deductions for assets within such a property (to the extent such assets are used for income-earning purposes). 

Where an individual investor acquired a second-hand residential rental property before 7.30pm on 9 May 2017, the investor can generally continue to claim depreciation for existing depreciable assets in that property.  However, second-hand residential properties acquired before this date, but not used for income-earning purposes at all during the 2017 income year (e.g., they were used solely for private purposes) will be affected by the changes if the property becomes income-producing from 1 July 2017.

Furthermore, the recent Government changes do not restrict the ability of an investor to claim Division 43 building write-off deductions (where applicable) for a residential rental property acquired after 7.30pm on 9 May 2017.  Depreciation claims in respect of commercial properties and properties used in the course of carrying on a business will also not be affected by the recent depreciation changes.

In light of the recent changes, where a Rental Property Depreciation Report (‘RPDR’) is ordered from 1 July 2017 (particularly for a residential property acquired after 7.30pm on 9 May 2017), BMT Tax Depreciation will closely review the order to determine and advise whether a report is appropriate for that property.

In summary, the changes affect:

1. Second-hand residential properties purchased after 7:30pm on 9 May 2017, and depreciation deductions for assets in existence at the date of purchase only.
2. Residential properties purchased before 7.30pm on 9 May 2017 and not used for income-earning purposes at all during the 2017 income year.

The changes do not affect:

1. New residential rental properties.
2. Residential properties used in the course of carrying on a business.
3. Division 40 depreciation claims for new assets (e.g., furniture, chattels, etc.) subsequently purchased (for any residential rental property) by the current owner of the property.
4. Division 43 building write-off deductions.
5. Commercial properties.