When you purchase a rental property, you are ordinarily treated for tax purposes as having bought a building, plus various separate items of 'Plant'. Items of plant are depreciating assets, such as air conditioners, stoves and other items. The purchase price accordingly needs to be allocated between the 'building' and various depreciating assets.
You can deduct an amount equal to the decline in value for an income year of a depreciating asset that you held at any time during the year. However, your deduction is reduced to the extent your use of the asset is for a purpose other than a taxable purpose. Since 1 July 2017, your deduction is also reduced to the extent you installed or used the asset in your residential rental property to derive rental income and the asset was a second-hand depreciating asset (unless an exception applies). For more information see Limit on deduction for decline in value of second-hand depreciating assets.
Some items found in a rental property are regarded as part of the setting for the rent-producing activity and are not treated as separate assets in their own right. If your depreciating asset is not plant, and it is fixed to, or otherwise part of, a building or structural improvement, your expenditure will generally be construction expenditure for capital works and only a capital works deduction may be available for those items. For more information, see Capital works deductions.
You can work out your deductions using the Depreciation and capital allowances tool or see Rental properties.
Limit on deductions for decline in value of second-hand depreciating assets
From 1 July 2017, there are new rules for deductions for decline in value of certain second-hand depreciating assets in your residential rental property. If you use these assets to produce rental income from your residential rental property, you cannot claim a deduction for their decline in value unless you are using the property in carrying on a business (including a rental property business), or you are an excluded entity.
Second-hand depreciating assets are depreciating assets previously installed ready for use or used:
- by another entity (except as trading stock)
- in your private residence or
- for a non-taxable purpose, unless that use was occasional (for example, staying at the property for one evening while carrying out maintenance activities would be considered an occasional use).
This change generally applies to the depreciating assets that you:
- entered into a contract to acquire or otherwise acquired at or after 7.30 pm on 9 May 2017, or
- used or had installed ready for use for any private purpose in 2016-17 or earlier income years, for which you were not entitled to a deduction for a decline in value in 2016-17 (for example, depreciating assets in a property that was your home in 2016-17 that you turned into your residential rental property in 2017-18).
There are no changes to the rules about deductions for decline in value of new depreciating assets in your residential rental property. Similarly, there are no changes to the rules about deductions for decline in value of depreciating assets in your residential rental property that you installed or used for a taxable purpose other than the purpose of deriving rental income.
Note: If you previously used the Depreciation and capital allowances tool and you purchased a residential rental property on or after 7.30pm on 9 May 2017, you must review and adjust any assets impacted by this law change in the tool. To review this information in the tool, select Work it out.
Assets in new residential rental properties
If you acquire a newly built residential property from a developer, or buy a residential property that has been substantially renovated, you can claim a deduction for a decline in value of a depreciating asset in the property (or its common area) if:
- no one was previously entitled to a deduction for the asset, and:
- either
- no one resided in the property before you acquired it, or
- the asset was installed for use or used at this property and you acquired the property within six months of it being built or substantially renovated.
Substantial renovations of a building are renovations in which all, or substantially all, of a building is removed or is replaced. The renovations may, but do not necessarily have to, involve the removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases. For more information, see Goods and Services Tax Ruling: GSTR 2003/3 Goods and services tax: when is a sale of real property a sale of new residential premises?
Immediate deduction for certain non-business depreciating assets costing $300 or less
The decline in value of certain depreciating assets costing $300 or less is their cost. This means you get an immediate deduction for the cost of the asset to the extent that you use it to produce assessable income, including rental income, during the income year in which the deduction is available.
The immediate deduction is available if all of the following tests are met in relation to the asset:
- it cost $300 or less
- you used it mainly for the purpose of producing assessable income that was not income from carrying on a business (for example, rental income where your rental activities did not amount to the carrying on of a business)
- it was not part of a set of assets costing more than $300 that you started to hold in the income year
- it was not one of a number of identical, or substantially identical, assets that you started to hold in the income year that together cost more than $300.
If you hold an asset jointly with others and the cost of your interest in the asset is $300 or less, you can claim the immediate deduction even though the total cost of the asset was more than $300; see Partners carrying on a rental property business.
The amount of the immediate deduction may need to be reduced if the changes which limit deductions for decline in value of certain second-hand depreciating assets in residential rental properties apply to the asset. See Limit on deduction for decline in value of second-hand depreciating assets.
For more information about immediate deductions for depreciating assets costing $300 or less, see Guide to depreciating assets 2018.