In the 2017 Federal Budget, the Government proposed a number of measures to improve housing affordability.
As part of the housing affordability package, Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 was released. The proposed change will:
disallow travel expenditure for residential rental property; and
limit depreciation deductions for certain plant and equipment in residential premises.
Whilst these changes are being sold as a measure to improve housing affordability, the real winner here is the ATO and Government. This is because these rules will mean that the ATO will no longer be required to scrutinise the apportionment between private and deductible travel costs, as well as quantity surveyors purchase price allocations to depreciating assets.
Is this just the beginning?
The proposed rule changes signal a shift in the mind set of Government’s attitudes to residential property investments. This means property investors should watch this space very carefully as these changes might just be the thin edge of the wedge when it comes to axing rental property deductions. Is negative gearing next?
Travel deductions: Denied
Deductions for travel expenses related to inspecting, maintaining or collecting rent for residential premises used to provide residential accommodation will be disallowed from 1 July 2017. These expenses will not be able to be recognised in the cost base for CGT purposes either.
This proposed measure will not prevent investors from engaging third parties such as real estate agents for property management services. These expenses will remain deductible.
There is a carve out for travel expenditure incurred in carrying on a business or for institutional investors. This carve out is likely to provide some hope to certain property investors, particularly in the context of the ATO’s recent commentary on the threshold test for carrying on a business. Specifically, the ATO have indicated that if an entity is established or maintained to make profit or gain, it may be regarded as carrying on a business even where its activities merely consist of receiving rents or other investment returns. Nevertheless, whether a business is being carried on will always remain a subjective test.
Depreciation deductions for used plant and equipment: Denied
The proposed change will deny depreciation deduction for ‘previously used’ assets that are used in residential premises for the purposes of residential accommodation. The proportion of depreciation that cannot be deducted is recognised as a capital gain or loss when the asset ceases to be used.
Taxpayers who acquired second hand assets or enter into contracts to acquire second hand property after 7:30 pm AEST on 9 May 2017 will not be eligible to claim a deduction for depreciation on plant and equipment.
The reduction in depreciation deduction does not apply to asset used in carrying on a business and assets used by excluded entities, including companies and trusts that qualify as a managed investment trust.
At this stage, Treasury has estimated that these changes will have revenue impact off $800M over the forward estimated, which should marginally improve the budget deficit. However, it is too early to tell what if any impact these changes will have on housing affordability in Australia.
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