The budget announcements contain a suite of tax and superannuation measures aimed at increasing housing stock and improving housing affordability. While the government has not gone close to clamping down on the political and social hot potato of negative gearing, it has taken some steps to restrict the travel expense and depreciation tax breaks enjoyed by investors.
Significantly, curtailing these deductions only applies to residential properties and not commercial properties.
Travel expenses relating to residential rental properties
The government will disallow deductions for travel expenses related to inspecting, maintaining or collecting rent for a residential rental property. The measure is to apply from 2017-18.
This seems to be an integrity measure put in place by the ATO to address concerns that many taxpayers have been claiming travel deductions without correctly apportioning costs, or have claimed travel costs that were for private travel purposes.
However, this will not prevent investors from engaging third parties such as real estate agents for property management services. These expenses will still be deductible.
Restricting rental property depreciation deductions
Currently, investors who purchase plant and equipment for a residential investment property are able to claim a deduction over the effective life of the asset. However under this measure subsequent owners of the property will be unable to claim deductions for the plant and equipment purchased by the previous owner.
Plant and equipment purchased on or before 9 May 2017 will continue to give rise to deductions for depreciation until either the investor (which may include a subsequent owner) no longer owns the asset, or the asset reaches the end of its effective life. But contracts entered into after budget night (specifically 7.30pm (AEST) on 9 May 2017) fall under the new rules.
This proposal is one of a suite of budget measures intended to improve housing affordability for owner-occupiers. While the government has stopped far short of restricting negative gearing, by limiting the ability of residential property investors to claim depreciation deductions for plant purchased by a former owner of the property, it is limiting the tax breaks enjoyed by investors.
Acquisitions of existing plant and equipment items will be reflected in the cost base for capital gains tax purposes for subsequent investors.