Every week, Mansion Global poses a tax question to real estate tax attorneys. Here is this week’s question.
Q: I own a home in Sydney, and I’m confused about the recently passed law regarding depreciation, the Treasury Laws Amendment (Housing Tax Integrity) Act 2017. How will it affect my tax bill and what else should I know about the act?
A: The law applies only to income-producing properties, such as rentals, in which used depreciating assets, such as curtains, carpeting, air-conditioner and appliances, are installed, said Geoff Stein, partner at Brown Wright Stein Lawyers in Sydney.
It “won’t affect your tax bill and won’t cost you anything” if you owned a residential investment property before 7:30 p.m. on May 9, 2017, said Mark Mathews, legal practitioner director of Mathews Tax Lawyers in Brisbane, Australia.
That’s when the Australian government handed down the 2017-18 budget.
However, if you bought an investment property after that date, and unless it was a new property, “you won’t be able to claim a deduction for depreciation on depreciable assets in the property. That could cost you thousands of dollars in depreciation claims, reduce your overall rental property deductions and thereby increase your tax bill,” he continued.
The law aims to minimize “the widespread practice” of rental property owners buying old properties and then “obtaining depreciation or quantity surveyor reports that provide a high, often generous, valuation” of the property’s assets for deduction purposes, Mr. Stein said. This practice “has probably created a leakage to tax revenue.”
If you acquire a property, live in it and then later rent it out, the new law prohibits you from claiming a deduction on depreciating assets, Mr. Stein said. Similarly, owners aren’t allowed to deduct any depreciation of assets they used—such as furnishings from their own residence—and then installing them into the rental property. For example, you can’t take the washing machine and dryer from your own residence, install them into the rental and then claim a deduction.
Many residential property investors will be disadvantaged because the law reduces their deductions for “negative gearing” purposes, said Paul Sokolowski, partner at Arnold Bloch Leibler law firm in Melbourne. Negative gearing is the practice of investing borrowed money in a manner in which a loss can be claimed as a tax deduction. The law “replaces those deductions with a capital loss they can only offset against their current year or future capital gains,” he said.
“However, it may not be all doom and gloom,” Mr. Sokolowski said, pointing out there has been no change to capital works deductions. These capital works deductions are expected “to continue to make up a large portion of an investor’s total deductions, often over 80%,” he said.
The law also denies deductions for travel expenses relating to residential investment properties, Mr. Mathews said.
In addition, foreign owners of residential properties purchased after May 9, 2017, will have to pay an annual vacancy fee (a so-called “ghost tax”) “when the property is not occupied or genuinely available on the rental market for at least six months in a 12-month period,” Mr. Sokolowski said.
The fee starts at $5,500 (US$4,315) for properties valued at less than $1 million (US$785,000) and increases based on property value. “There will also be onerous reporting requirements for affected taxpayers and penalties for failing to do so,” he said.
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