Changes to Depreciation Deductions for Plant & Equipment Items

Budget Changes

The budget is only two hours old and I’m back in the office trying to come to terms with some pretty fundamental changes. To cut a long story short, from now on, property investors will only be able to claim depreciation deductions on plant and equipment items if they either;

a) purchased the asset directly themselves (i.e. added a new dishwasher) or;

b) bought a brand new property.

Up until now, when investors purchased an established home, quantity surveyors were charged with the task of estimating the residual or left over value of the plant and equipment assets. These are things like blinds, curtains, carpets, ovens, cooktops, dishwashers, hot water systems, light shades, security systems, air conditioners and the like. From now on, the only available claim will be on the construction component of the dwelling. This of course only applies to properties that had commenced construction after the 16th of September 1987 or properties renovated after 27 February 1992. To put that in perspective, a property built in the 1970s that was extended in 1998 for $50,000, will receive 2.5% of that value in depreciation each financial year for 40 years from the completion date of the works. Now the 50k of works cannot include those plant and equipment items mentioned above, it must be building works (division 43) only.

So 50k of division 43 only improvements would result in $1,250 worth of deductions per year. Plant and equipment items depreciate at much faster rates than standard building improvements, and would equate to roughly half of the total value of a depreciation schedule, though in this scenario it could certainly be double.

We were the first quantity surveyors to publish actual data on average residential depreciation deductions and our average total depreciation claim was $9,138 dollars. I’ll be pulling the exact plant figures out asap but it’s fair to say that between 40-50% of that value would be plant and equipment items.

This budget measure was supposedly designed to ensure that an asset could not be claimed multiple times by different owners. For example, you could purchase a new property with a $180 door closer and write it off as a 100% deduction. You could then sell the property to an investor two years later, who would then claim a 100% deductions for the residual value of the door closer, which might have dropped in value to say $140. So I think it’s fair to say that new properties will be safe from these changes. The ATO stated you did not need to consider or search for the depreciation claimed by the previous owner, so they created the problem in the beginning.

It’s a massive hit to property investors, but mostly to depreciation companies such as ours. We’re a small business employing a number of  people to prepare depreciation schedules. We’ve just been blindsided by a change that could cost hundreds and perhaps thousands of jobs within the next few years. The budget speech just promoted the role of investors in keeping rents down and providing accommodation to millions of Australians. This measure will increase the after tax cost of holding a residential property and that cost will either be passed onto renters, or the supply of affordable rental properties will drop placing upwards pressure on rents due to demand.

This is a disappointing  development and I urge the Government to consider the vast majority of investors that are simply holding one investment in the hope of self funding their retirement.

  • Mike Mortlock, Managing Director, MCG Quantity Surveyors