Changes to residential rental property deductions

Overview 

Changes to rental property deductions announced in the 2017-18 Budget on 9 May 2017 are now law and will apply from 1 July 2017. The changes affect deductions available for travel expenses, and the decline in value of depreciating assets and are part of a package of changes introduced by the Government concerning housing affordability.

Importantly, the changes apply the use of residential premises to provide residential accommodation. The term “residential premises” takes its meaning from the GST Act and means land or a building that provides, at a minimum, shelter and basic living facilities and is either occupied by a person or designed for occupation. For example, a hotel room suitable for short-term accommodation will satisfy the definition, but a caravan will not.

Changes in travel expense claims

From 1 July 2017, travel expenses relating to inspecting, maintaining or collecting rent for a residential rental property are no longer deductible to the investor unless either:

  • the losses or outgoings are necessarily incurred in carrying on a business for the purposes of gaining or producing assessable income (e.g. provider of student accommodation); or
  • you are an exclude class of entity (e.g. institutional investors such as superannuation funds but not SMSFs).

Amendments to the capital gains tax (CGT) provisions ensure that the non-deductible travel costs will not be included in an asset’s cost base.

Changes in allowable depreciation claims

Income tax deductions for the decline in value of “previously used” or “second hand” depreciating assets are no longer allowable. The changes apply from 1 July 2017 unless either:

  • the previously used asset was acquired under a contract entered into prior to 7.30 pm on 9 May 2017; or
  • the asset was acquired prior to 1 July 2017 and the entity was not entitled to a deduction e.g. it was not used to earn income.

As such, the effect of the amendments is the investor will only be allowed to deduct the decline in value of depreciating assets if the asset is acquired new.

Example

Mr Smith acquires a new townhouse and uses it as his main residence in the first year of ownership. At the start of the second year, it is rented out. As the assets in the first year are used for personal enjoyment, Mr Smith is not entitled to a deduction for the decline in value of those assets while the townhouse is rented out.

For assets that an investor transfers to a low value pool, the amendments ensure that the taxable proportion of such assets transferred is reduced resulting in the same treatment as other assets subject to the new rules.

Like the changes to travel expenses, these changes do not apply to deductions arising in the course of carrying on a business or to institutional investors.

Finally, where an is sold or ceases to be used by the investor, the balancing adjustment is reduced to account for the deductions no longer allowed under the new rules. Consequential changes to the CGT Rules (CGT event K7) ensures that, where a balancing adjustment occurs to an asset where there has been no deduction for the decline in value of an asset under the amendments, a capital gain or loss will arise under CGT event K7 (generally the difference between the cost of the asset and its sale price).

2018 income tax returns

These changes will need to be taken into account in preparing 2018 income tax returns.