Negatively geared rental properties are an incredibly popular investment option in Australia. For taxpayers who have a combined household income well above average the benefits of negative gearing can be significant. Especially during periods which see the rental property itself increasing in value at a significant rate.
As we approach the end of the 2017-18 financial year property investors should be aware of a couple of key changes to the deductions available for this year’s tax return. These changes could reduce the tax benefits offered by the investment depending on when the property was purchased.
Depreciation – Rental Property Equipment
Deductions for Depreciation of Fixtures and Equipment in residential rental properties are now limited to outlays actually incurred by the investor.
What were investors doing prior to this change?
Before 1 July 2017 investors who purchased a residential rental property would engage the services of a Quantity Surveyor. The result of this service was a ‘Depreciation Report’ that detailed all the existing Fixtures and Equipment in the property (Oven, Blinds, Carpet etc). A portion of the cost price of these assets could be claimed as a tax deduction each financial year. The depreciation amount would help to increase the total loss made on the investment for the year. This, in turn, would increase the tax benefit available.
How will the change impact investors?
Depreciation deductions for previously used fixtures and equipment in residential rental properties will no longer be available if:
* The item was purchased on or after 9 May 2017 – based on contract date;
* The item was acquired before 1 July 2017 but were not used to earn income in either the current or previous year.
Investors who purchase new fixtures and equipment will still be able to claim a deduction for depreciation in the normal manner.
Deductions for Travel Expenses
From 1 July 2017, travel expenses that relate to inspecting, maintaining, or collecting rent for a residential rental property can no longer be claimed as a tax deduction. The change applies to all properties regardless of when they were purchased.
What were investors doing prior to this change?
Traditionally, investors who travelled to their rental property to inspect the dwelling, undertake repairs or to collect rent would claim the costs associated with these activities. These costs typically related to transportation (motor vehicle costs, air fares) and accommodation.
How will the change impact investors?
Investors who own residential rental properties can no longer claim a deduction for travel costs relating to these investments. The change applies to every residential rental property.
The travel expenses should not be recognised in the cost base of the property either.
Are you exempt from these changes?
The changes to rental property deductions will not apply to the following taxpayers:
* Individuals or entities that incur these costs in the course of carrying on a business;
* Corporate tax entities;
* Superannuation plans other than self-managed superannuation funds;
* Public unit trusts;
* Managed investment trusts, and
* Unit trusts or partnerships whose members are the above listed entities.
Conclusion
The combined impact of these new rules will not result in a mass exit from the property market. Investors buy property, or seek to do so, because they love that investment option. However, if you were looking at purchasing a property and claiming expensive travel costs to ‘inspect’ your investment you may want to reconsider.