New depreciation rules affect property investors

Changes to the way landlords can claim tax-deductible expenses related to their investment property were introduced on 1 July.

The changes mean property investors can no longer claim a tax deduction by depreciating plant and equipment assets – which are the easily-removable and mechanical fixtures and fittings on the asset – for properties that exchanged contracts after budget night, 9 May this year. This includes depreciation related to items such as hot water systems and dishwashers in residential real estate properties.

According to a note published by professional services firm PwC, “this means that when an investor purchases residential property which includes items of depreciable plant and equipment, they will not be able to claim depreciation deductions.  Instead the cost of items of existing plant and equipment will be reflected in the cost base for CGT purposes”. PwC notes that depreciation arrangements as they relate to existing investments will be grandfathered.

This means investors will still be able to claim a deduction for plant and equipment located on residential investment properties for properties settled before 9 May 2017, until the investor sells the property or until the asset reaches the end of its life.

Changes to travel claims

Another change to the way property investors claim deductions relates to travel undertaken to inspect or invest in properties.

From the start of the 2017/2018 financial year, investors can no longer claim tax deductions for costs related to trips to maintain or collect the rent on residential rental properties.

Costs you can claim

While restrictions have been introduced around deductions related to investment properties, a large number of deductions are still allowable. In general, expenses related to the ongoing repair and maintenance of the property may be immediately claimed as a tax deduction.

The Australian Taxation Office confirms the following deductions can be claimed against a rental property:

• Advertising for tenants
• Body corporate fees and charges
• Council rates
• Water charges
• Land tax
• Cleaning
• Gardening and lawn mowing
• Pest control
• Insurance (building, contents, public liability)
• Interest expenses
• Property agent’s fees and commission
• Repairs and maintenance
• Some legal expenses

Property investors can also claim tax deductions related to their cost of borrowing against the property. This includes fees to establish the mortgage associated with the investment, and other costs related to the property such as title searches and legal fees related to the purchase of the property.

Interest related to the investment can also be immediately claimed as a tax deduction.

The ATO notes on its site that, “if your total borrowing expenses are more than $100, the deduction is spread over five years or the term of the loan, whichever is less”. Investors can claim an immediate tax deduction for borrowing costs under $100 or less in the same tax year they were incurred.

It’s important for property investors to stay within the rules when it comes to claiming deductions. It’s an idea to work with advisers who are experienced in this area to ensure only allowable deductions are made against the property.