Personal Income Tax

Changes to Legislation Means Rental Property Owners Lose Some Deductions

With their effective date being July 1 2017, the measures will impact the current year. However, the date in which assets were purchased will determine the changes to depreciation and further details about this are provided below.

Why These Changes and Who Is Affected?

Travel expenditure that was incurred in the process of gaining assessable income from residential properties is affected by these changes. And in case you’re thinking such deductions can be claimed as part of the cost base for Capital Gains Tax purposes, forget it. Such travel expenditure will not be recognised for those purposes either.

Bear in mind that these changes relate to residential premises, meaning that if the travel expenses are incurred during business activity, such as the services provided by a property management business, then such deductions can be claimed by the tax payer.

In explaining the rationale for the rule changes, the ATO advises that the changes are meant to prevent further misuse by individuals who have been falsely claiming travel costs for private purposes or without apportioning costs correctly when claiming travel deductions. The aim of the exercise is therefore to improve the integrity of the tax system. It would appear that the ATO does not place institutional investors in residential property in the same integrity bracket as individual members of the populace, hence the fact that the measures are not intended to affect them.

Timeframe of the Depreciation Rules

There are no changes to investors who purchase new equipment and plant; They can still claim depreciation on the asset over the course of its effective life. In essence, this prevents investors who inherit assets as part of a property purchase from claiming deductions for depreciation. As mentioned previously, the rules came into effect on July 1 2017 and will affect assets bought after 7.30pm on May 9 2017.

As the rule is new however, there are prescribed timescales to determine its applicability to you.  The amendments apply to second‑hand plant and equipment acquired on or after 7.30 pm on  May 9 2017 unless it was acquired under a contract entered into before this time. It will also apply to plant and equipment which were acquired before July 1 2017, but which were not used for income earning purposes in either the current or previous year.

Exceptions to the Rules

As with every rule, there are exceptions to this new rule. Recognising that a blanket application is not practicable, the rules outline some exceptions which have been put in place. Taxpayers will be able to continue claiming travel expenditure deductions and plant and equipment depreciation if:

  • The losses or outgoings are necessarily incurred in carrying on a business for the purposes of gaining or producing assessable income; or
  • The taxpayer is an “excluded class of entity”. The ATO defines the excluded classes of entity as:
  • A corporate tax entity;
  • A superannuation plan that is not an SMSF;
  • A public unit trust;
  • A managed investment trust; or
  • A unit trust or a partnership, all members of which are entities of a type listed above.


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