Changes To Plant And Equipment Deductions - The Four Exemptions

The draft legislation on changes to plant and equipment depreciation has been out for a few weeks now and almost certainly will become ratified taxation law. Rather than comment on the efficacy of the legislation, I’d like to get down to the nuts and bolts.

To avoid loopholes or grey areas, the Treasury has worded the draft legislation to say that all depreciation on plant and equipment is gone, as a blanket statement. Unless, it falls under the four exceptions;

• The entity is a corporate tax entity, a superannuation plan that is not a self managed superannuation fund or a large unit trust (300+ members).

This means that commercial property is unaffected, which was not a surprise. Some questions have arisen about investors owning a large portfolio and trying to assert that they are running a business. It’s unlikely that if you’re owning residential properties you’ll be able to get past the legislation here, unless you’re owning a hotel or some obvious commercial business.
Don’t be confused either, if your family trust has a corporate trustee as a Pty Ltd entity. This does not mean you’ll be exempt.
Some commentators have suggested that investors will start purchasing properties under company structures, but I cannot see the logic given the impediments to capital gains tax exemptions.

• The deduction arises in the course of carrying on a business.

Again, we’re talking about something like a hotel. The units it is operating may be residential in nature, indeed you could have some managed units in a development alongside other investors and owner occupiers, but the fact that the hotel is a company provides them with an exemption. Anecdotally, if you’re an individual with 50 investment property units within the same development, you’ll not be entitled to the same exemption.

• The entity: Held the asset at the first time it was first used or installed by any entity; and has been able to deduct amounts for the decline in value of the asset in all prior income years in which it has held the asset. An asset will be previously used if there has been any prior use of the asset for which the entity that now holds the asset was not entitled to a tax deduction, with the exception of use as trading stock.

Yes, sorry about that one, it was a bit of a mouthful but it’s the reason why I prefer a good Wodehouse to say, an ATO interpretive decision as Sunday morning reading.

Exemption three really just means you cannot claim any deductions on the plant and equipment assets unless you were the first owner of the asset. If you buy a new oven and install it in your investment property, you’re fine to claim deductions on it. If you bought it while you were living in the property and subsequently made the property an investment in later years, you’re out of luck. Similarly, if you buy a second hand fridge, the tax office isn’t going to countenance any claims there either.
Probably the most important thing to note is that if you’re going to renovate an investment property, don’t be living in it at the time! This will likely mean you’ll have no division 40 claim on the plant assets as you’re occupying the property and the new tenant will have ‘previously used assets’.

• The entity first came to hold the asset when it was used in new residential premises; prior to this time, no entity had either resided in premises or been entitled to deduct any amount; and the entity has been able to deduct in all prior income years in which it has held the asset.

Exemption four just speaks to new property. If you buy a brand-new unit off the plan, or a house and land package, you’ll be entitled to claim depreciation deductions on the plant and equipment assets.

So new property is fine. Others doubted it, but I had your back all along. New property was never going to be a problem for obvious supply reasons. Be careful though, just today I heard of a developer renting out some units prior to settlement. The same is true with display homes. If the property is tenanted in any way, it will wipe out the plant deductions for the new purchaser. Any individual residing in the premises is considered to be using the premises.

So, the blanket statement is that all plant deductions are gone, but if you fall into one of the four exceptions you’re on velvet. Another important point is that if you exchanged, not settled, but exchanged on your property prior to the 9th of May you’re grandfathered under the old system. This is true even if the property was lived in until after that date and then became an investment property. On top of this, division 43 or building deductions remain unaffected, so according to our analysis, the vast majority of investors will still need a depreciation schedule. This is especially the case when it comes to the decline in value of un-qualifying plant and its affect on your capital gains tax. That’s a whole other story though, and makes a relationship with a depreciation specialist quantity surveyor all the more important, if you can get past the tweed jacket and elbow pads.

Original article here:
http://www.apimagazine.com.au/property-investment/changes-to-plant-and-equipment-deductions-exemptions