Do you own an investment property, or are you thinking of adding property to your investment portfolio? Here’s a heads up: tax savings will soon become more limited, as the government plans to reduce claims for travel expenses and depreciation related to residential investment properties.

Draft legislation titled Housing Tax Integrity – Disallowing travel deductions and limiting depreciation of assets was released for consultation on 14 July 2017 and the Federal Government has called for feedback submissions by 10 August 2017. The draft legislation forms part of the Government’s initiative to “improve the integrity of negative gearing”.

The Government announced in the 2017–2018 Federal Budget that it would stop travel expense deductions relating to residential investment properties and limit depreciation deductions for assets used in residential investment properties.

These claim limitations are set out in the draft legislation:

• Travel expenses: The draft legislation proposes a complete ban on claiming deductions for travel expenses that are incurred to visit, inspect or maintain residential rental properties. This is intended to apply from 1 July 2017.
• Asset depreciation: Under the proposed changes, depreciation claims will only be allowable for “plant and equipment” assets that have not been previously used, and that investors have installed (or have contracted to install) in their residential investment property on or before 9 May 2017. “Plant and equipment” refers to items that are easily removed from the property, such as ovens, carpet, dishwashers and ceiling fans. So, in other words, you cannot make depreciation claims for items installed in your property by its previous owners (such as new carpet that the previous owners installed as part of renovations before selling the property to you) or items that you install but have previously been used for a private purpose (such as a secondhand fridge that you buy and put into the property’s kitchen).

What can you still claim?

Expenses outlaid on third parties, such as real estate agents, for property management services will still be deductible, and other negative gearing deductions will still apply. Also, the property depreciation rules still apply to the “building” itself, including construction costs for items such as brickwork, concrete and common property if in a unit, such as stairways and gardens.

Selling your property?

Also on the table for property owners is a new compliance measure which, from 1 July 2017, requires those selling properties with the contract price of $750,000 or more to apply for and obtain a clearance certificate from the ATO.

The certificate is proof that the seller is an Australian resident, and the requirement for it is linked to changes in the capital gains withholding tax rules. Purchasers of property from foreign residents are obliged to withhold 12.5% of the purchase price and pay this to the ATO. However, where a valid clearance certificate is not provided by settlement, the purchaser is required to do the same even if the vendor is an Australian resident.

All real estate agents and conveyancers must comply by informing vendors and updating their standard contracts.

Want to know more?

We’ll keep you posted on the outcomes of the proposed changes to the tax deduction claiming rules, but you can also get in touch any time with questions about your own tax planning and investment property circumstances.