The May 2017 Federal Budget introduced significant changes to the way plant and equipment depreciation can be claimed on residential investment properties. These changes, which were enacted through the Treasury Laws Amendment (Housing Tax Integrity) Act 2017, took effect from 1 July 2017 and have had a lasting impact on the depreciation entitlements of residential property investors who purchase second-hand properties.
What Changed?
Prior to 9 May 2017, any investor who purchased a residential property — new or second-hand — could claim depreciation on all the plant and equipment items within that property, valued at the time of purchase. This allowed investors who bought established homes and apartments to claim depreciation on items such as carpets, dishwashers, air conditioners and other fittings that may have originally been installed years earlier.
After 9 May 2017, the rules changed for second-hand residential properties. Under the new rules, depreciation deductions on plant and equipment (Division 40) are only available for:
- Assets that are new at the time they are acquired (i.e. the investor purchases and installs new items)
- Assets in new residential buildings (the property has not previously been used as a residential premises)
Importantly, investors who replace existing items in an established property with new ones can still claim depreciation on those newly purchased assets. Only the pre-existing second-hand items are excluded.
Who Is Affected?
The changes affect individuals, trusts and SMSFs that purchase second-hand residential properties after 9 May 2017. They do not affect:
- Investors who purchased their property before 9 May 2017 — they continue to claim under the old rules for as long as they hold the property
- New residential construction — investors purchasing new properties off-the-plan or newly completed homes are unaffected
- Commercial, retail and industrial properties — the changes apply only to residential premises
- Corporate entities (companies) — the restriction applies to individuals, trusts and SMSFs but not companies
What Still Applies?
The changes to plant and equipment (Division 40) do not affect the Division 43 building write-off, which is available to all investors in residential properties constructed after 18 July 1985, regardless of when the property was purchased or whether it is new or second-hand.
Division 43 — which covers the building structure, common areas and permanently fixed items — remains a substantial and valuable deduction. For a property constructed in the 1990s, the building write-off alone can easily amount to $3,000–$8,000 per year, depending on the original construction cost.
Additionally, investors in second-hand residential properties who install new plant and equipment items — such as replacing a broken dishwasher, installing new carpet, or adding air conditioning — can still depreciate those new assets under Division 40.
Is a Tax Depreciation Schedule Still Worth It for Second-Hand Properties?
Emphatically yes. The Division 43 building write-off alone justifies a Tax Depreciation Schedule in most cases. An MTD schedule will:
- Calculate the correct Division 43 deduction based on the estimated original construction cost
- Identify any new plant and equipment items you have installed that can be depreciated
- Document any improvements or capital works you have carried out, which may have their own deduction entitlements
- Provide a 40-year schedule for your accountant to use year-on-year
Many investors with second-hand properties assume the 2017 changes mean depreciation schedules are no longer useful. This is incorrect, and can result in thousands of dollars in legitimate deductions being missed each year.
Grandfathering for Pre-Budget Contracts
Properties where a contract of purchase was exchanged before 9 May 2017 are grandfathered under the old rules, regardless of when settlement occurred. If you exchanged contracts before that date, you should still be able to claim Division 40 depreciation on the pre-existing plant and equipment in the property.