In this article, we explore the impact the changes to the depreciation schedule will have on your property investments.
Changes to existing depreciation provisions for rental property investors
The effective return on property investment is largely determined by three key factors:
- Capital growth
- Net rental yield
- Tax advantages
With regard to the latter, depreciation allowance has always played an important role. While the introduction of new tax laws has done little to diminish this role, it has changed the way depreciation can be claimed.
Put simply, the new depreciation schedule delays the depreciation tax benefits for property investors. The key changes to the schedule are as follows.
From 21 September 1999
- The removal of accelerated depreciation
- The ability to re-assess the effective life of an investment
- The ability to balance adjustments for capital gains or losses on disposal
- The removal of the balancing charge for roll-over
From 1 July 2000
- The introduction of a low value pool for items with a value less than $1,000
From 1 July 2001
- A review of capital allowances rates on buildings
Of all of the points above, the two with the greatest interest for property investors are the removal of accelerated depreciation rates and the introduction of a new ‘low value pool’ for items costing less than $1,000.
Let’s now explore some of these points in more detail.
Removal of accelerated depreciation
The loss of accelerated depreciation is a telling aspect of the new legislation.
Under the old system, depreciation rates were generally based on the effective life of an item – loaded by 20% – and lumped into one of seven broad categories. In a practical sense, this meant those items with an effective life of say, 30 years, would receive the same rate of depreciation (20% diminishing return) as say, an item with an effective life of 13 years.
Under the new system, depreciation rates for items acquired after September 21, 1999 are based solely on the effective life of that item, with no loading or broad-branding.
This means the annual depreciation deduction for an item under diminishing value will now be calculated as follows:
Depreciation deduction = undeducted cost x (150%/effective life).
The ATO is currently working on a revised schedule for the ‘effective life’ of common items. At this stage, the effective life of common depreciable items for rental properties is not expected to change. Accordingly, the table below remains a useful guide.
|Item of plant||Current rate (D.V.%)||Effective life (years)||New rate(D.V.%)|
|Curtain & Drapes||30||7||21|
|Furniture & Fittings||20||15||10|
|Hot Water System||20||20||7.5|
The introduction of a low value pool
Assets costing less than $1,000 are now eligible for inclusion in a low value pool, which, for tax purposes, will be written off at a diminishing value rate of 37.5%. Furthermore, such items will be written off in their year of acquisition at only half this rate (18.75%).
Full details regarding the ATO’s treatment of rental income and expenses visit www.ato.gov.au