From 1/7/17 new rules came into effect to limit the types of rental property assets on which depreciation can be claimed as a tax deduction. The new rules apply to properties purchased after 9/5/17 OR properties that were not eligible to claim any rental deductions during the 2017 Financial Year. If neither of those conditions apply you can continue to claim depreciation on your rental property under the old rules.
Under the old rules, landlords could claim depreciation on rental property assets by either having documentation proving the cost (eg an invoice from a store purchase) or they could engage a quantity surveyor to prepare a depreciation report. The report details an estimated cost for all plant & equipment within the building as well as building costs to allow an annual tax deduction. The new rules do not affect deductions in relation to building costs but limit what can be claimed on plant & equipment.
The new rules prevent landlords who either purchased their properties after 9/5/17 OR could not claim any rental deductions during the 2017 Financial Year from claiming a tax deduction for depreciation of a depreciable asset if any of the following apply:
- you were not the first entity to use the asset other than as trading stock (if you are buying from a developer they should have only used the asset as trading stock)
- you used or installed the asset in your residence at any time
- you used or installed the asset for a purpose other than earning rental income, eg if you stayed in your holiday rental property, you will no longer be able to claim depreciation on the assets in that property as they have been used for a private purpose. There is an exception if this use is merely incidental or occasional but it appears from the ATO's examples that this exception doesn't extend very far, eg one day while carrying out repairs.
A depreciation report can still be beneficial but it will depend on your individual circumstances. Generally, under the new rules, the tax deduction available by obtaining the depreciation report will be about half of it what it would have been under the old rules. Therefore it will take longer to recover the cost of the report. Please contact us if you would like to determine if a depreciation report would likely be beneficial for you.