What new depreciation tax rules mean for property investors? Article fyi

What new depreciation tax rules mean for property investors

By Mike Mortlock
Friday, 13 July 2012

On June 27, 2012, the ATO withdrew the taxation ruling TR 2011/2. This outlined the effective life of all qualifying plant and equipment depreciating assets. The new and excitingly named TR 2012/2 ruling is in effect from July 1, 2012 and includes some changes to existing depreciating assets and the addition of some new assets. The new legislation applies to all assets acquired individually or through the purchase of a property from the July 1, 2012 onward. If you’ve previously had a tax depreciation schedule prepared, there’s no need to worry about updating any effective lives. In the ATO’s words:

“If, for a particular asset, you were using an effective life from the determination as in force before the latest amendment (for example, as contained in the Schedule to TR 2011/2), you should continue to use that life for that asset.”

The legislation has been updated due to an ongoing review of the commissioner’s effective life determinations, which is being undertaken by the ATO. Specifically, there have been changes to assets under the following descriptions;

• Animal feed manufacturing assets;
• Coffee manufacturing assets;
• Concrete product manufacturing - concrete roof tile manufacturing;
• Concrete product manufacturing - fibre cement building board manufacturing assets;
• Edible oil or fat (blended) manufacturing assets;
• Ethanol manufacturing assets;
• Frozen pre-prepared meals and selected snacks manufacturing assets;
• Health and fitness centre operation assets;
• Motor vehicle manufacturing - automotive metal stamping and blanking assets;
• Motor vehicle manufacturing - motor car engine manufacturing and assembly assets;
• Radio broadcasting assets;
• Steel coil roll forming, slitting, blanking and sheet metal forming assets;
• Sheet metal tank manufacturing assets; and
• Tea manufacturing assets. 

This will of course change the depreciation deductions for commercial properties operating under those descriptions, but will not affect residential property investors.

The effective lives affect depreciation deductions by changing the depreciation rates. For example, under the diminishing method, the rate of depreciation for an asset is calculated by 200 divided by the effective life of the asset. So if we take a dishwasher in a residential property as an example, the calculation would be 200 divided by 10 years, giving us a depreciation rate of 20%. If the effective life was to be changed to the same as an oven, the depreciation rate would reduce to 16.7%.

We can expect an updated taxation ruling on effective lives around the end of June each year, due to the ongoing review of effective lives. Hopefully we’ll see the addition of some new assets under the residential property operators’ subsection such as water tanks. We’ll keep you abreast of all legislation changes.

Mike is a director of MCG Quantity Surveyors specializing in tax depreciation deductions for property investors.

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