New low asset write of rules
“Can investors deduct building expenses under $5000, under the new low asset write off rules?”
A deep dive this month into a question that comes up often, a seemingly small matter but one that impacts many investors decision making.
It strikes me as a missed opportunity that the Government would use a heavy stick like the Healthy Homes legislation to force investors to making sensible upgrades to properties that are in the interests of tenants well-being when making a clear statement that certain types of expenditure can be deducted for tax purposes would be positive added motivation for many investors to undertake such work willingly.
The Covid relief measures contained precious little for property investors despite them being expected to make rent concessions and limit rent increases to struggling tenants. One initiative the Govt did allow though was a deduction for “low value asset expenditure of less than $5000” where that expenditure is incurred between 17 March 2020 and 16 march 2021.
So, lets look at a two-pronged example and see if it reveals any opportunities for investors?
An investor owns a residential property. They have added an internal wall to split a large room to create another bedroom and have added insulation to the property where none had existed previously.
The cost of each work item was less than $5000 and was incurred within the one-year window for write off of low value asset expenditure.
Is a full deduction allowed?
One of the requirements for an immediate deduction under section EE 48 is that “the item has not been and will not become part of any other property that is depreciable property”.
The new wall is part of the depreciable property that already existed, specifically, the building itself and is accordingly capitalised to the building cost. No immediate deduction is permitted because the new wall forms part of the building that now carries a Nil depreciation rate. Surprisingly, the fact that the depreciation rate is nil does not mean that the building falls outside the definition of depreciable property.
The new insulation is also considered to form part of the building asset as it has no context as an asset unless it becomes part of the building. The commissioner has published Interpretation statement 10/01, “Residential rental properties – depreciation of items of depreciable property”, which states that insulation is considered to be part of the building and therefore not able to be depreciated separately. As with the new wall addition, the insulation is capitalised as part of the building cost. No immediate deduction is permitted and the residential building depreciation rate of nil will apply.
Interestingly, had the deduction proven allowable, a resulting loss on the property for the tax year would also be “Ring fenced” and unable to be offset against other forms of income as a result of the labour governments initiative to single out the property sector with rules specific to only them, all in the mad hope of reducing demand for residential property.
It certainly seems ironic that the same government that has promoted the healthy homes initiative to improve rental stock has failed so miserably to align the tax legislation to achieve their goal of better quality property for tenants and has again failed to deliver any meaningful Covid relief for small investors who are assisting their Covid impacted tenants.
