Tax Changes impacting Property Investors from 1 July 2017

Property investors have been hit with a string of cutbacks in the budget as parallel measures try to aid first home buyers entering the residential market. Separately, a minor move to assist seniors in downsizing their family homes has been announced. Residential investors, especially those who have purchased interstate property, have been hit hardest.

Travel to inspect rental property – no longer deductible

Until June 2017, investors could claim a tax deduction on travel costs when visiting a property, they owned — moreover, there has been no limit to the number of times an owner could visit each year. From 1/7/2017 the costs of travel to inspect, maintain or collect rent on your residential investment property are not deductible.

It seems that policing this area to ensure taxpayers apportion expenses correctly (and don’t claim a deduction for their holidays), just got too hard. While emotionally disappointing, this will not have a major effect in practice.

As the there is no ownership, travel expenses incurred before taking possession of the property e.g. to inspect before purchase have never been deductible. Also, they do not form part of the cost base for CGT purposes.

The scale of the deductions which have been written off in relation to property is indicated by the extraordinary estimate of $540m the government expects to claw back from the measure — one of the biggest revenue gains itemized in Treasury’s budget measures.

Depreciation Deductions Limited for P&E

There will also be a tightening of depreciation deductions for investment properties — including a plan to no longer allow subsequent owners of a property to claim deductions on items purchased by the previous owners of the property — this is another significant item expected to bring in $260m.

The Government is concerned that some plant and equipment items in residential rental properties are being depreciated by successive investors more than their actual value. This integrity measure will limit plant and equipment depreciation deductions to outlays incurred by residential rental property owners. Acquisitions of existing plant and equipment items will be reflected in the cost base for CGT purposes for subsequent investors.

Investors who directly purchase plant and equipment for their residential investment property after 9 May 2017 will be able to claim depreciation deductions over the effective life of the asset. However, subsequent owners of a property will be unable to claim deductions for plant and equipment purchased by a previous owner of that property. The portion of the purchase price that reflects the value of these items will simply form part of the cost base of the property and will reduce capital gains made on future disposal of the property.

Plant and equipment items are usually mechanical fixtures or those that can be ‘easily’ removed from a property such as dishwashers and ceiling fans.

An ’empty home’ tax on foreign investors

Foreign investors who keep properties vacant for more than six months will be faced with a vacancy tax. This is described as a charge on “underutilised residential property”.

The cost of this tax will be the equivalent of their foreign investment application fee – some several thousand dollars – and will be charged annually. This change is intended to get more vacant homes onto the rental market.

Other key changes from the Federal Budget 2017 affecting property buyers

1. First Home Buyers

There’s good news for first home buyers looking to save up a deposit for their first home. The new 2017 budget states that they will be able to use their superannuation towards buying a home from 1 July 2017.

What this means is that savers will be able to salary sacrifice up to a maximum of $30,000 or $15,000 per year from their pre-tax income over the compulsory superannuation contribution. You can then withdraw this cash plus any earnings a year later from 1 July 2018 to use towards a house deposit. By putting savings in your superannuation, the funds are taxed at just 15 per cent, whilst withdrawals will be taxed at 30 per cent below the marginal tax rate. This is thought to help accelerate savings by at least 30 per cent, compared to using a normal savings account. The measure is also likely to boost demand in the housing market, whilst put upward pressure on property prices.

2. Rising interest rates

With Australia’s five biggest banks being hit by a new multi-billion-dollar levy as well as a suite of stepped-up controls and penalties, this means that home loan interest rates are expected to rise. Westpac, ANZ, Commonwealth Bank, National Australia Bank and Macquarie Group will be hit with a new levy of 0.06 per cent that is expected to reap $6.2 billion in revenue for the government over the next four years. It is expected that although homeowners will be hit with an increase in home loan interest rates, property investors will be hit the hardest. Now might be the time to start thinking about fixing your interest rate before these rises occur.

3. Foreign investors

Under the new federal budget, foreign investors will be hit by a new annual $5,000 levy if their property is left vacant for more than six months. There are also new rules that will mean foreign investors in Australian property will no longer be able to claim primary residence exemption for capital gains tax purposes. This is expected to bring in an extra $581 million over the next four years. To give Australian buyers a greater opportunity to purchase property, developers of new property are not allowed to sell more than 50 per cent of their stock to foreign investors.

4. Downsizing

For those living in a large house, now might be the time to sell. From 1 July 2018, people aged 65 years or over will be able to make a non-concessional superannuation contribution of up to $300,000 from the proceeds of their primary residence, provided they have lived there for at least 10 years.

If you are a couple then both members can take full advantage of this contribution, which is in addition to the current contribution rules and caps. You will also be exempt from the existing age test, work test and the $1.6 million balance test for making non-concessional contributions. However, it’s unlikely that many four or five bedroom houses will be coming on the market straight away, with this new initiative starting from July 2018.


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