Changes were announced at 2:25pm on Thursday 19th May 2005 as part of the Budget.

How bad were they? No where near as bad as had been anticipated.

The following is a copy of a paper that was released by Dr Cullen in conjunction with the announcements made in his budget speech.

Changes to the tax depreciation rules will see new depreciation rates that better reflect how assets decline in value and reduce compliance costs for businesses. Current tax depreciation rates are likely to be too fast for buildings and too slow for short-lived plant and equipment, which can create tax biases that distort the structure of capital investment away from the best investment opportunities. To deal with any biases, depreciation rates for short-lived plant and equipment will increase and depreciation rates on buildings will reduce.
More neutral tax depreciation rules will mean that businesses have incentives to invest in assets that provide the best commercial returns. The changes will help businesses make better decisions about capital investments.

How will it work?

Improved tax depreciation rates to better reflect how assets decline in value

• Tax depreciation rates for short-lived plant and equipment will be made more consistent with those applying to long-lived plant and equipment. Rates for short-lived equipment will increase.

• Tax depreciation rates for buildings will reduce for buildings acquired from today. The new rates will not apply to existing building investments

Examples

Reducing compliance costs for businesses

• To reduce some of the compliance costs to business from having to maintain fixed asset registers, the low value asset threshold will rise from $200 to $500. This will reduce the number of assets that businesses must annually account for on their fixed asset registers and the number of tax adjustments required when disposing of assets.

Example
A company buys a facsimile machine for $450 for use in its office. Under the current rules, the machine would be placed on the company's fixed asset register and tracked and depreciated over its five-year estimated useful life. Under the new rules, the company will be able to claim an immediate tax deduction for the entire purchase price of the machine. This will mean it will not have to track the asset on its tax fixed asset register.

Where to from here?

The changes are included in the Taxation (Depreciation, Payment Dates Alignment, FBT, and Miscellaneous Provisions) Bill, introduced today. Changes to the depreciation rate for buildings will apply to buildings acquired from today, while changes to the other depreciation rates will apply to assets acquired from 1 April 2005. The increase in the low value asset threshold will apply to assets acquired after today.

So what exactly does this all mean for Residential Property Investors?

• Building Depreciation Rates to reduce
From 4% Diminishing Value
To 3% Diminishing Value

Effective for buildings purchase from 19 May 2005
(Not current properties)

• Rates for other assets to be calculated on the double declining balance method

This will mean that rates for all other assets will change, the great news is that they will go up!

This means anything purchased for under $500 can be claimed as an expense rather than having to claim depreciation.

Effective for items purchased from 19 May 2005

We have worked through an example to show the comparison using rates from prior to the budget and the new rates.

Less depreciation claimed after budget - $656 or at 39% tax rate $255 more tax to pay

This is not bad considering the proposed changes could have hit investors with $800 - $1,800 more tax to pay on a similar property.