Lately there have been quite a few tax changes that affect property investors. Labor’s agenda behind all the changes has been made clear; to encourage the availability of more affordable housing, to slightly reduce the number of people buying property as an investment, and to help younger Australians enter the property market.
For example, you’re probably aware that the costs associated with travel to inspect rental properties are no longer deductible. Changes such as this limit the deductions that can be claimed from the investment in order to ‘level the field.’
TR 2019/5 Income tax: effective life of depreciating assets
As of July 1 2019, changes have also been made relating to the ‘effective life‘ of depreciating assets. These kinds of changes usually only impact owners of commercial property. However, for the first time in 14 years, the new legislation will also affect residential property investors. If you currently own investment property, or are preparing to do so in the future – this is big news for you!
What is the ‘effective life’ of an asset?
For accounting purposes, the effective life is the estimated number of years an asset is expected to remain in use for the purpose generating revenue. The effective life enables us to work out the asset’s decline in value, and affects how quickly the asset will depreciate.
Why is it important for property investors to know about the effective life of their depreciating assets? Because it determines how much each asset contributes to your annual tax deductions – and no investor wants to miss out on the deductions we have left!
What does the new legislation mean for property investors?
This new legislation impacts all new assets purchased from July 1 2019, for use in most industries and sectors, but let’s take a look at what the changes mean for property investors.
Freestanding bathroom accessories were the most common residential property depreciation schedules of the last financial year, appearing in 99.8% of all residential property depreciation schedules! Accordingly, these assets have had their effective life reduced from 5 years down to just 3 years.
In the last financial year, carpet is the most lucrative depreciating asset for property investors, with an average of $3,567 in deductions for each report. The effective life of carpet has been reduced from 10 years down to 8 years.
The Commissioner has also introduced a number of rental property assets that were not previously considered, such as home automation control sets, which have been designated an effective life of 10 years.
Other changes to effect life of property assets include:
- Clothes dryers (previously 10 years, now 7 years)
- Dishwashers (previously 10 years, now 8 years)
- Fixed evaporative coolers (previously 20 years, now 15 years)
- Solar garden lights (previously 8 years, now 5 years)
- Freestanding ironing boards (previously 7 years, now 5 years)
- Microwave ovens (previously 10 years, now 8 years)
- Telephone handsets (previously 10 years, now 6 years)
- Television sets (previously 10 years, now 8 years)
- Spas and spa parts (previously 12 years, now 10 years)
- Swimming pools (previously 12 years, now 10 years)
- Washing machines (previously 10 years, now 8 years)
These changes indicate that the ATO believes these assets are depreciating faster and will need replacing sooner. This will influence over when we, as property investors, choose to make improvements and replacements to the assets in our rental properties.
However, it’s important to remember that the date you acquired an asset will determine the effective life calculation used, because the previous legislation still applies to assets purchased before July 1 2019.
It’s up to you whether you use the Commissioner’s estimates of effective life or make your own estimate using the methodology provided by the ATO. Either way, this is an ideal time to get in touch with your investment property tax specialists to discuss the best options for your unique situation!