What Is Depreciation? Depreciation is the natural wear and tear that occurs to a building and the assets within it over time. It is one of the three key tools property investors use to make holding investment property more affordable and tax-effective. The 2017 Budget Changes The Federal Government introduced new laws that reduced depreciation […]
What Is Depreciation?
Depreciation is the natural wear and tear that occurs to a building and the assets within it over time. It is one of the three key tools property investors use to make holding investment property more affordable and tax-effective.
The 2017 Budget Changes
The Federal Government introduced new laws that reduced depreciation benefits for plant and equipment assets in new residential investment properties. Commercial properties remain exempt from these rules.
The critical date is 9 May 2017. For contracts exchanged on or after this date, investors can only claim building write-offs (capital works depreciation), which cover the wear and tear of the building itself.
Before and After Comparison of Budget depreciation
The table below compares depreciation savings for a $550,000 apartment in NSW before and after the 2017 law changes.
| Year | Before | After |
|---|---|---|
| 1 | $15,812.50 | $7,562.50 |
| 2 | $12,375 | $7,562.50 |
| 3 | $11,000 | $7,562.50 |
| 4 | $9,625 | $7,562.50 |
| 5 | $8,937.50 | $7,562.50 |
| 6 | $8,250 | $7,562.50 |
| 7 | $8,250 | $7,562.50 |
| 8 | $7,562.50 | $7,562.50 |
| 9 | $7,562.50 | $7,562.50 |
| 10 | $6,875 | $7,562.50 |
Impact on Residential Property Investors
Residential property investors can still claim depreciation on plant and equipment fittings if they personally purchase these items. While this adds extra cost, it also allows them to depreciate the fittings.
Because of this, developers may start selling apartments without appliances such as microwaves, dryers, washing machines, and ovens. This lowers the purchase price, but investors who buy the items separately can claim depreciation.
Budget depreciation – Key Changes Summarised
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Properties purchased before 9 May 2017 retain plant and fittings depreciation benefits.
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Brand-new properties provide the greatest depreciation benefits compared to existing properties.
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Existing investment properties still provide depreciation benefits, but they are smaller than before May 2017.
Broader Effects on Property Investors
These changes make property investing outside super more challenging for many average-income investors. Inside super, employer contributions and rental income are concessionally taxed at 15%. Outside super, investors often rely on tax deductions to reduce holding costs.
In the first three to five years, acquisition costs are higher. During this period, deductions help investors manage cash flow and keep their property cost-neutral. With reduced depreciation benefits and limits on travel expense claims, investors now need to calculate their holding costs in net dollar terms to understand the true expense of property ownership.
The government passed these changes on 15 November 2017, confirming they apply to contracts exchanged on or after 9 May 2017.
Final Note
This is general information only and does not replace professional advice. Always obtain a depreciation schedule for all investment property purchases, whether inside an SMSF or outside super.
Related: SMSF property investment | SMSF administration
