Changes to rental property deductions in the 2017 budget

In the announcement of the Federal Budget on 9 May, the government announced some changes to residential rental property deductions that had the aim of improving housing affordability by making investing in a rental property a little less attractive. These changes relate to travel expenses, which will no longer be allowable deductions, and depreciation, which will be limited. These changes do not apply to commercial residential rental properties.

Travel expenses for a rental property are incurred when inspecting, maintaining or collecting rent. When preparing a taxpayer’s income tax return it is normal practice to work out how many trips they might have made to their rental property for any of these purposes and make a claim for those travel expenses based on the number of kilometers travelled. Taxpayers with rental properties that are interstate or in rural areas have been able to claim the cost of flights and accommodation, or a partial cost of those if travelling for private purposes also.

In his Budget papers, Treasurer Scott Morrison describes this change as an integrity measure which will address concerns that many taxpayers have been claiming travel deductions without correctly apportioning costs, or that travel costs for private purposes have been claimed incorrectly. The Treasurer calls this a deduction that is being abused in the related media release and claims that this change will improve taxpayer confidence in negative gearing¹.

I assume that he is referring to the confidence of taxpayers who don’t have negatively geared rental properties!

Another change that is being described as integrity measure is limiting depreciation of plant and equipment to outlays actually incurred by investors. The Budget papers raise the concern that mechanical fixtures and other fittings such as dishwashers and carpets, which can be ‘easily removed,’ are being depreciated by successive investors for more than their actual value.

Taxpayers who purchase plant and equipment for their rental property after 9 May 2017 can claim a deduction for depreciation over the effective life of the asset. The next owner of that property won’t be able to keep claiming the depreciation of that asset as a rental expense from its written down value.

Not all of the value of these plant and equipment items is lost to investors. Depreciating plant and equipment generally reduces the cost base of a property, which results in a larger capital gain. Without being able to claim that deduction from now on and achieving a tax benefit year upon year, the cost base of the property won’t be reduced by the depreciation claimed and will therefore have some tax benefit when the property is disposed of.

The plant and equipment of a residential investment property as of 9 May 2017 can continue to be depreciated and that expense deducted until either the item is no longer owned by the investor or it is fully depreciated.

The Liberal Government has kept its word and not removed negative gearing. The changes that have been made cut out some deductions that can be discretionary and large. These items add to negative gearing losses. Removing them allows the government to keep its word while reducing the cost of negative gearing to the budget.

If you would like to discuss in greater detail how these changes might affect you, please contact us at Optima Partners by calling us on 08 6267 2200.

DANIEL CAUSERANO – SNR ACCOUNTANT

¹ http://sjm.ministers.treasury.gov.au/media-release/046-2017/