Negative Gearing Policy Changes Survey Results Report

With the proposed changes to Negative Gearing being such a “Hot Topic,” we asked our database to let us know their opinions. I was blown away by the number of respondents!

Below is an interesting summary of the survey results.

For a more detailed look at the proposed policy changes and my thoughts on the broader effect, click here

Question 1

Do you think that changes to Australia’s Negative Gearing Policy are necessary?

 

 

Observation: Of the nearly 3000 people surveyed, less than 20% thought that changes to Australia’s Negative Gearing Policy were needed.

With such a significant number of people responding, it’s pretty clear that the overwhelming majority feel that now is not the time to make wholesale changes to Negative Gearing. It would have been interesting to see what this survey would have looked like if it was carried out in the peak of the Sydney and Melbourne Market when Negative Gearing was being blamed for causing the Housing Affordability Crisis

 

Question 2

Did you know that if the Australian Labor Party abolish Negative Gearing, property investors may not be able to claim expenses such as Strata Fees, Property Management Fees as well as Repairs and Maintenance?

 

 

Observation: The results indicate that the majority of respondents were aware of the implications of the proposed policy changes in relation to investment property-related expenses.

This surprised me! Whilst most of the survey respondents knew about this, over a third of property investors surveyed didn’t realise that expenses such as these we included in the negative gearing deduction allowances.

 

 

Question 3

Did you know that the proposed Negative Gearing legislation changes will mean that income losses from newly acquired, second-hand rental properties will no longer be able to be offset against employment income?

 

 

Observation: From these results, it is evident that the vast majority of respondents understand the potential impact of the proposed policy on an investor’s ability to claim property-related deductions if purchasing a second-hand property.

In regards to differentiating between the impact of this policy on second-hand vs new properties, it seems Labor’s message has been clearly delivered!

 

Question 4

Would you still purchase a second-hand property if you could no longer claim Negative Gearing benefits?

 

 

Observation: One intention in implementing the proposed Negative Gearing policy changes is to encourage property investors to purchase a brand newly built property. The results suggest these changes would discourage investors from purchasing a second-hand property.

With the clear majority of respondents having second thoughts about purchasing a second-hand property if this proposed policy is implemented, any government should be considering the wider implications for both the property markets around Australia and the effect on the broader economy. Click here for a more in-depth look at this potential impact

 

Question 5

Will the Negative Gearing policy of either party influence your vote in the next Federal Election?

 

 

Observation: Whilst the responses here do not indicate which way the respondents will vote, they certainly suggest this policy will factor into voters’ decision making.

This is a hot and somewhat sensitive topic! It’s clear from these results that Negative Gearing will definitely be an influencing factor at the ballot box.

 

Question 6

Did you know that the proposed limitations to Negative Gearing Policy will not apply to property Investors who purchase brand new property?

 

Observation: Nearly a quarter of the respondents were not aware that the proposed policy changes and associated restrictions will not apply to investors who purchase brand new property.

Labor is clearly getting their message across regarding this policy and who it will affect. However, in my opinion, allowing Negative Gearing to continue on new property only, has far greater ramifications than those that the Labor party seem to have fully thought through. For more of my thoughts on this matter, click here

Should Negative Gearing Change?

Tyron with his book

Labor’s Negative Gearing Policy

I get it.

I get why a large proportion of Australians are against the tax deductions available to ‘negatively geared’ property investors.

And I agree (in some ways) – that the current policy of allowing property investors to deduct their property losses against their wages could be improved (some/most of you would be surprised to hear me say that – considering I own a business where all my clients are property investors and a large proportion of those are negatively geared).

You see, I don’t think negative gearing on property was ever designed to enable someone to own 50 properties, claim all the losses and reduce their taxable income down to zero dollars and pay no tax.

Further, I don’t think negative gearing should enable someone to buy a $20m house in Vaucluse and get rent of $3000 whilst claiming the massive losses on the $20m house as a tax deduction.

That was never part of the plan – but both are achievable under the current tax regime.

So I do get it.

BUT – the proposed Labor policy to limit negative gearing to brand new properties only could be improved in my opinion

Next month – I will outline one solution that could address the problems highlighted above and would also allow the Labor Party to “save face”, should they win the upcoming Federal Election.

First, a quick recap of Labor’s Negative Gearing & CGT policy…

  1. From a yet to be determined date – negative gearing will only be allowed on brand new properties moving forward.
  2. Existing negatively geared properties will be grandfathered and thus not affected.
  3. Moving forward you will no longer be able to deduct these losses against your personal income , you will be able to deduct them against other investment income (say share dividends or other positively geared property) or you can carry the losses forward to offset the final capital gain.
  4. Labor will reduce the capital gains tax discount for assets that are held longer than 12 months from the current 50 per cent to 25 per cent.

So that’s what’s currently on the table.

Given these proposed changes, there’s no better time than now to make sure you’re claiming every depreciation deduction you’re currently entitled to.

Click here to get a free quote on a depreciation schedule for your investment property.

Here are 7 factors that you, I and the Labor Party need to think about when it comes to abolishing negative gearing as we know it and halving the CGT discount:

1. Labor’s policy will open a can of spruiker worms

The current proposal by Labor will abolish negative gearing on future purchases of 2nd hand residential property but will still allow negative gearing for brand new property.

I get the reasoning behind this line of thinking. No one wants to stop new development and construction – because construction has a massive flow-on effect through the broader economy.

However, it also opens a door already ajar for property spruikers to further push overpriced property off the plan to potential investors.

Next thing you know investors are flying off to the Gold Coast and being shown the red carpet!

Of all the material I have read when researching this article – I haven’t seen many written by people who understand how the New Property selling market works – only by economists who look at numbers.

2. Creation of a two-tiered property market

By creating a property market where you allow far greater deductions on brand new property in comparison to a similar 2nd hand property, it makes it very hard to sell almost new property.

Why would you buy a property that is, say, one year old when you can buy the one that is brand new next door and get significantly better tax benefits?

Having one rule for new properties and another for 2nd hand property was already implemented by the Turnbull Govt in May 2017

As you probably know by now – you can only claim depreciation on the plant and equipment in brand new buildings or if it was purchased brand new for a second hand property.

So I crunched the numbers, using the new depreciation laws and the current negative gearing regime.

Property depreciation comparison with legislation changes
Brand New Property Property Age 1987 – 2019 Property Built Before 1987
Rent Received @ $700 Per Week $36,400 $36,400 $36,400
Interest @ 5.5% of 80% Borrowing $33,000 $33,000 $33,000
Other Expenses @ 1.5% (Rates levies) $11,250 $11,250 $11,250
Cash Outlay Before Depreciation -$7,850 -$7,850 -$7,850
Year 1 Depreciation Deduction – Building -$4,000 -$4,000 $0
Year 1 Depreciation Deduction – Plant & Equip -$11,000 $0 $0
Total Taxation loss -$22,850 -$11,850 -$7,850
Tax Refund @ 37% $8,455 $4,385 $2,905
Annual Cost (Net Outlay + Tax Refund) $605 -$3,466 -$4,946
Cash Outlay Per Week (If Positive the Property Pays you) $11 -$66 -$95

In the above table, I have compared the purchase of a brand new property, a property built between 1987-2019 and a property built before 1987 if purchased after the May 2017 legislation changes.

If a property is built before 1987, you cannot claim the building allowance or structure of the building (this is why I have chosen this date).

I have assumed that rent, interest and other costs are the same across the board for illustrative purposes.

As you can see – there is already a significant benefit in buying a brand new property in comparison to buying a second hand property.

Labor’s policy will just increase this bias towards new property.

3. Labor’s policy may actually favour the wealthy

I’m going to declare something here – I actually grew up in a strong Labor household. Gough Whitlam even came to my house back in the day, as my father ran for Labor in the seat of Lowe in 1975 against Billy McMahon.

Why do I tell you this? Well, two reasons, a. so readers don’t think I’m a Liberal Party stooge and b. because I’m not sure the following scenario reflects the Labor values from yesteryear

Consider the following two examples assuming the proposed changes are implemented:

Scenario 1. Jill Jones has 8 positively geared properties and a range of shares all owned in her own name.

Jill buys a negatively geared property – Jill can now use the benefit of the tax losses from her negative gearing and claim those losses against her investment income.

Jill can utilise her property tax losses now.

Scenario 2. Jill’s sister – Mary – has no properties or shares. Mary buys a negatively geared, two-year old property.

Mary, because she doesn’t have any other assets, may only be able to use the losses, if she sells the property and it makes a profit.

Mary cannot utilise her property losses now and possibly ever.

4. The cost benefit analysis

In researching this article, I couldn’t find much information relating to the impact on revenue lost by the implementation of abolishing negative gearing on second-hand properties.

Recently, however, PIPA has released a statement that the proposed changes will cost the Labor Party between $10bn to $32bn over a 10-year period.

Now some of you might say that PIPA is a property organisation with an agenda to push – but what if they are even half right?

One thing I certainly agree with from their media release is I have no doubt that limiting negative gearing and reducing capital gains tax concessions by the Federal Labor Party will discourage property investors from buying property Mr Koulizos said.

So what impact will less transactions have:

  1. It will mean less Stamp Duty collection for the states.
  2. It will mean less sales commission paid to real estate agents and less mortgage commissions, buyers agents fees etc. which could have a knock-on effect throughout the economy.
  3. It could mean people with existing investment properties that are grandfathered will hold onto them – thus reducing the CGT collection.
  4. It could mean less Land Tax collection – because lower property prices will in turn reduce the overall land values of property, and the land value is used to determine the amount of land tax payable.
  5. Oh and the big one – It will mean less work for Quantity Surveyors and I will have to play more golf. Well in that case – knock your socks off Labor and go for it. (I’m allowed one joke if you have read this far – right!?)

5. Negative Gearing as a concept is misunderstood

Most people probably understand that property is negatively geared when the money you pay out to own the property is higher than your rent.

BUT if I asked the average person on the street if they realised that by abolishing negative gearing on newly acquired, second-hand properties – you would no longer necessarily be able to immediately claim property management fees, strata levies and even Land tax – would they think that’s fair?

Interestingly, of the 2,202 people surveyed in our own poll, when asked this, almost 38% said they were not aware of this.

So let’s imagine this scenario – you rent out your newly acquired second-hand property for $500 per week and you pay interest costs of $500 per week, which is fairly reasonable.

Here’s a list of “losses” that you will no longer be able to deduct immediately if Labor’s policy becomes law:

And finally, one that makes me really laugh, you might not even be able to claim LAND TAX as a deduction.

These losses may be carried forward and utilised in the event you sell your property for a profit or you can offset these losses against investment income from other positively geared property or your vast array of shares that you own!

6. It is the wrong time to tinker with Negative Gearing

Labor’s policy on negative gearing was launched at a time when property in Sydney and Melbourne were, quite simply, inflated. As we all know, things have changed.

Labor was looking for an alternate policy to the status quo and something that would help the housing affordability crisis.

A Treasury document released under the Freedom of Information Act acknowledged that the ALP policies could introduce some downward pressure on property prices in the short term particularly if the commencement of the policy coincides with a weaker housing market.

7. I’m actually ok with the CGT changes

That may shock some of you, but provided the halving of the CGT discount applies to both shares and property I don’t think it will have a big impact on whether property investors buy or not. And of course it will generate significant revenue for the government.

You see, from my experience, most investors (rightly or wrongly) focus on the cashflow requirements of the property investment in the early years to ensure they can afford the property.

And there’s also one great way to avoid paying CGT on property – don’t sell it!

The solution

Well if the polls and betting agencies are correct – it looks like the Labor Party will win the next election.

So we are going to need a solution that will enable the Labor Party to keep its election promise in a way that will not disrupt the property market and will still increase the Government’s revenue.

No easy task! Stay tuned… Next month I’ll be publishing a possible alternative solution that could potentially achieve the above!

Also, if you’re interested in claiming the maximum deductions on your own investment property, click here to get a free quote on a depreciation schedule today.

Please leave your thoughts in the comment section below.

What is a Depreciation Schedule?

What is a depreciation schedule?

Property depreciation is a legal tax deduction related to the ‘wear and tear’ of an investment property over time. A tax depreciation schedule outlines the deductions you may be entitled to claim each year of ownership on the Building Allowance (the structure itself including bricks, concrete, etc.) and, if eligible, on the Plant and Equipment items (internal items like ovens, carpets, blinds, etc).  

As with any tax deduction, claiming property depreciation reduces your taxable income. That means more money in your pocket to reinvest or to spend on yourself or on your family.

A depreciation schedule from Washington Brown is a fully-comprehensive, ATO-compliant report that helps you pay less in tax. The amount the depreciation schedule says you can claim effectively reduces your taxable income because it’s taking into account how much it costs you to own and maintain the property.

While you may be used to claiming on such items as council rates or property management fees where you have paid money towards an item or service, depreciation is a “non-cash deduction.” This is because it’s the ONLY deduction that you don’t have to pay for on an ongoing basis – its already ‘built’ into the purchase price of the property.

If you’ve purchased an investment property, request a free quote for a fully comprehensive, ATO-compliant depreciation schedule today and save.

The CGT Saver Report

   

Let me introduce you to our new product, the CGT Saver™ Report – A report specifically created to prevent our clients from paying too much in Capital Gains Tax.

Although you can no longer claim depreciation on second-hand Plant & Equipment Items (ovens, dishwashers, etc.), with Washington Brown’s CGT Saver™, you can claim the applicable and documented value as a capital loss if you remove or replace any of these in the future.

This report lists and values all those included items that you have purchased at settlement. It then allows you to claim a capital loss straight away if any of these items are removed.

The best bit.. This loss can offset other share &/or property gains that you might make.

This report is exclusive to Washington Brown, so ask for it by name and contact us to find out more.

If you have purchased an investment property after May 9, 2017 – request a free quote here and one of our tax depreciation specialists will review your property and let you know if a depreciation schedule is worthwhile for you.

Take advantage of our ‘Double The Fee Guarantee’!

Building Allowance Maximiser

Let’s talk about bricks and mortar. Or what the Government calls the Building Allowance.

Whilst you can no longer claim depreciation on plant and equipment in second-hand investment properties, that’s the things like ovens, dishwasher etc.

You can still claim the structure of the building, that’s the bricks, concrete, windows, tiling, etc. provided the residential property was built after 1987.

And these costs typically represent about 85% of the construction cost of the property.

And that’s good news, but I want to turn it into great news!

Up until now, when you ordered a depreciation report, quantity surveyors give you a lump sum total for your building allowance, based on the government’s guidelines that these items last approximately 40 years.

But in our experience, that’s not true.

Investors tend to update things like kitchens and bathrooms every 20 years.

So Washington Brown has come up with the Building Allowance Maximiser report, and it’s the only one of its kind.

What it does, it splits the building allowance into different categories, based upon our research of what items wear and tear more quickly.

Which means, if you use our report, when you replace those items or update them, you’ll be able to claim the full amount as an immediate tax deduction.

Let’s say I bought a property 20 years ago, with a kitchen that cost $10,000 to build.

Now, because it’s halfway through its 40-year life, I’ve only claimed 50% of its depreciation, which is $5000.

When I remove it today, using Washington Brown’s new report, I’ll be able to claim the remaining 50% as an immediate tax deduction.

Not bad!

So, if you want to claim the maximum building allowance that you’re entitled to, order a report today.

We are pretty proud of it, and my expensive lawyer thinks it’s a patentable system so we have a patent pending.

 

Holiday Home Depreciation New Laws

Can I still claim depreciation on plant and equipment on my holiday home if I use it twice a year?

This is the biggest grey area of all the legislative changes in my view and one that will require further clarification moving forward.

The Government in the Housing Tax Bill Explanatory Memorandum states that if a property is used in an “incidental way” or “occasionally used” then your depreciation eligibility on the Plant & Equipment does not stop if you acquired the plant & equipment prior to The Budget in May 2017.

Incidental Use is described as:

“Use is incidental if it is minor in the context of the overall use and arises in connection with another non-incidental use – for example staying at the property for one evening while carrying out maintenance activities would generally be incidental use.”

Occasionally Used is described as:

Spending a weekend in a holiday home or allowing relatives to stay for one weekend in the holiday home free of charge that is usually used for rent would generally be occasional use.

It’s a bit vague, isn’t it?

Does one week a year over Christmas nullify your claim? What about if you stay for Easter and Christmas?

What does this mean for all the Airbnb landlords out there that claim depreciation but move in when times are quiet but acquired the property prior to the budget? They went into that investment doing the maths on being able to claim the depreciation on a pro-rata basis based on the tax laws at the time?

Now if they use the apartment for an unknown time they may be disallowed the depreciation deduction.

Strangely, this Memorandum, differs from the ATO’s website which was updated on the 15th of December 2017 which indicates that “Gail and Craig” who use their property for 4 weeks a year can claim the depreciation? “Kelly and Dean” would appear to be ok as well!

Whilst the Memorandum doesn’t give a time frame… it indicates that a weekend is OK…I would’ve thought 4 weeks would’ve been stretching it?! Who knows – pick a number????

This is at a time when the ATO wants to target Airbnb hosts and pro-rata any capital gain tax exemption that may be applicable.

Go figure.

Hopefully, sense will prevail and if the holiday home is clearly available for rent – like 11 months of the years – it’s still an investment property.

The Top 14 Depreciation Law Questions Arising from the Budget Changes

Well, the dust has finally settled on the new legislation regarding the Budget changes to depreciation that will apply to second-hand residential properties.

In this article we will dig deep into some of the questions we have commonly been asked since the 9th of May 2017, when the changes were announced in the Federal Budget.

Before we get into the nitty gritty let’s begin with a quick recap:

Property investors who acquire a second-hand residential property after May 10, 2017, that contain “previously used” depreciating assets, will no longer be able to claim depreciation on those assets. Depreciating assets, in this case, refers to things like ovens, dishwashers, blinds, etc.

As you already know, in 2017, the rule book on depreciation changed massively.

The Federal Government successfully voted on new legislation to change the way depreciation works, representing the biggest move in the industry that I’ve ever seen – and I’ve been a quantity surveyor for over 25 years!

The changes were effective as at 9 May 2017 at 7.30pm, when the federal budget was handed down. As you can imagine, they have huge implications for property investors and more importantly, the property equation, which we’ll go into later.

So, how have things changed exactly?

The best way to understand it is to break the changes down into nine simple key points:

1. If you acquire a second-hand residential property from 10 May 2017, which contains ‘previously used’ depreciating assets, you will no longer be able to claim depreciation on those assets. This refers to the plant and equipment portion of a depreciation schedule, including:
• Ovens
• Dishwashers
• Lights
• Air-conditioners
• Televisions
• Carpets
• Lounge suites
• Blinds
• Common property plant and equipment items.

2. However, the building allowance, or claims on the structure of the building, has not changed at all. You will still need a depreciation schedule to calculate these deductions, which typically accounts for 85 per cent of the overall construction cost. The structure includes things like brickwork and concrete so there’s no change to that.

3. Acquirers of brand-new property will carry on claiming depreciation in exactly the same way as they have done so to-date – for both plant and equipment and structure. This is great news for the property industry, because a lot of developers rely on depreciation as part of their marketing strategy to attract investors. The government resisted making changes to depreciation on brand-new property because it did not want to halt construction, which would have impacted upon the supply of new property. A downturn in the construction industry would also have a knock-on effect – if tradies are out of work, they aren’t paying tax!

4. If you renovate a house while living in it, then sell the property to an investor, the assets will be deemed to have been previously used and the new owner cannot claim depreciation on the plant and equipment.

5. The proposed changes do not apply if you buy the property in a corporate tax entity, super fund (note self-managed super funds do not apply here) or a large unit trust. In other words, you can still buy a second-hand property in a company name and claim depreciation on it. You can buy a second-hand property in a super fund – as long as it’s a large one – and a large trust can buy a property as long as it has 300 members
or more, and claim depreciation on that property.

6. The proposed changes only relate to residential property. Commercial, industrial, retail and other non-residential properties are not affected, so you can still buy a second-hand office or similar and continue to claim the second-hand carpet, exactly as you could before. You can’t do this for residential property, as I’ve explained above.

7. If you engage a builder to build a brand-new house, or do the work yourself and it remains an investment property, you will still be able to claim depreciation on both the structure and the plant and equipment items. This is because it’s brand new, and was brand new when you put in that oven. Therefore, you can still claim it because the costs are known.

8. If you engage a builder to renovate a property – or you do the work yourself – and it is also being used as an investment property, you will still be able to claim depreciation on it when you have finished the renovations. As above, this is because the assets you install are brand new, therefore you can still claim. But if you bought a property renovated by someone else and they lived in it for six months or a year and then sold it – you can’t claim depreciation on the oven and dishwasher, etc. in the future, because they have now been previously used. See the difference?

9. While investors purchasing second-hand property can now no longer claim depreciation on the existing plant and equipment, they will have the benefit of paying less capital gains tax when they sell the property. How? Well, when they replace or remove an item of plant & equipment they would have been able to claim in depreciation under the previous legislation, the opening value of the asset can be claimed as a capital loss.

In my opinion, it seems like a lot of work to get the same result. The new rules have just moved depreciation from one line of the budget to another!

The good news is that the new legislation is ‘grandfathered’. That means that for everyone out there with an existing depreciation schedule, you can continue to claim exactly as you have been doing. So, if you bought a property prior to the budget – 9 May 2017 – nothing has changed. And if you have bought an investment prior to this date, and you don’t have a depreciation schedule, there’s never been a better time to get one! You might not get these allowances again.

One final point on grandfathering; if you bought a property prior to the budget and it is owner-occupied, and then you move out after 1 July 2017 – you will not be able to claim depreciation on the plant and equipment in that property.

Those items will be deemed to be previously used and caught in the net of the changing legislation – even though you acquired the property prior to the budget. So, these changes are kind of ‘half grandfathered’ if you ask me.

You will, however, still be able to claim the building allowance in this scenario if the property was built after 1987.

So let’s start with some of the easy questions we’ve been asked.


1. Do these new rules apply to brand new investment properties as well?

No, they don’t,  if you buy a brand new property you will be able to carry on claim claiming depreciation exactly the way you have done so to date. That means you can claim both the plant & equipment and structure of the building. That is unless you live in the property as an owner occupier at any time after its completion, this would then mean the plant and equipment assets are deemed ‘previously used’.

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2. How do these new changes affect purchasers of non-residential property like offices and industrial suites?

The proposed changes only relate to residential property. Commercial, industrial, retail and other non-residential properties are not affected in the slightest.

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3. Can I still claim depreciation on things like the bricks, concrete & windows etc?

Yes you can, provided the residential property was built after 1987 when the building allowance kicked in.
You will still need a depreciation schedule to calculate these deductions. This component typically represents approximately between 80 to 85 percent of the construction cost of a property.

Now would be a good time to get a quote for your depreciation schedule.

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4. Can I still claim depreciation on plant and equipment items if I buy them and have them installed?

Yes, you can, provided they are brand new or from 2nds World or the like.
However, if you buy a second-hand item off Gumtree, for instance, you cannot claim the depreciation.
There is now no other depreciable asset class where this occurs.
The new laws state that the item cannot be “previously used” in order for you to claim the depreciation on it.
However, if you buy a “previously used” lounge off Gumtree and put it in your office – you can claim it.
Go figure!

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5. If I buy a property in a trust or company will I get around these laws?

The proposed changes do not apply if you buy the property in a corporate tax entity, super fund (note Self-Managed Super Funds do not apply here) or a large unit trust.

This is interesting and I suspect a lot more people will start buying properties in company tax structures.

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6. What if I bought a property prior to the budget and lived in the property until now – can I claim the depreciation?

If you bought a property prior to the budget and it is owner-occupied, and then you move out after 1 July 2017 – you will not be able to claim depreciation on the plant and equipment in that property.

The property needed to be income producing in the 2016/17 financial year.

Those items will be deemed to be previously used and caught in the net of the new legislation – even though you acquired the property prior to the budget. So, these changes are kind of ‘half-grandfathered’, if you ask me. If you did buy an investment property prior to the budget, I would recommend getting a depreciation quote now, more then ever.

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7. What happens If I inherit a property – can I claim the depreciation on the plant and equipment as well as the building?

Well, you will certainly be able to claim the depreciation on the residential structure of the building, provided it’s built after 1987. So there’s no change there – and this covers most properties.

Whilst there is no specific ruling on the plant and equipment it seems to me that if you inherit a property with plant and equipment items contained within, they will be deemed to be “previously used” and you won’t be able to claim them.

This would, in my opinion, even occur if the person that you inherited the property from, bought the property brand new.

As I mentioned, there is little guidance on this topic so it might be best to check this with the ATO if this question is relevant to you.

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8. What happens if I buy a unit that’s 3 months old where the developer has already found a tenant and is selling it “as new”. Can I claim both the plant and equipment and the building allowance?

In this case, the answer is yes. The new legislation allows a developer 6 months to find a tenant and sell it as a leased investment without nullifying the depreciation claim to the incoming buyer.

This was a late change to the legislation and occurred after industry consultation between the treasury department and the property industry (including myself).

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9. Can I still claim depreciation on a property that I bought overseas?

The answer is yes, you can depreciate an overseas investment property… but there are a few key differences.

The first main difference is with regard to claiming the building allowance. With Australian properties, you’re entitled to claim 2.5 per-cent of these construction costs per annum, as long as the property was built after July 1985. The rate for overseas properties is the same – but the date is different.

Construction of an overseas property must have commenced after 22 August 1990.

So, if you want to maximise your depreciation benefits on an overseas property, look for a newer property built in the last decade or two.

The plant and equipment, such as carpets, ovens, lights, and blinds, can also be depreciated as they would be in an Australian investment property but now they will have to be brand new or not previously used.

If you own an overseas investment property, start claiming the deductions, we do many reports worldwide.

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10. What happens if I engage a builder to renovate my investment property can I still claim depreciation?

In simple terms yes – provided all the plant & equipment items that were installed were brand new. You will also be able to claim all the structural items installed such as kitchen cupboards, tiling windows etc.

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11. What happens when you sell the property that you bought after the 2017 budget?

The Budget statement words it like this: ‘Acquisitions of existing plant and equipment items will be reflected in the cost base for capital gains tax purposes for subsequent Investors.’

This video explains the changes and also outlines our new report offering:

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12. Show me the numbers?! How much will these changes actually mean in terms of how much depreciation I will be able to claim moving forward?

Well in order to understand this – it’s best to examine 3 different scenarios:

Scenario 1:

An investor buys a brand new unit or house for $850,000.
Depreciation Budget Changes

As you can see from the above chart the depreciation amount you can claim if you bought the same property pre-budget or post-budget hasn’t changed.

That’s because a brand new property is exempt from these changes.

Scenario 2:

An investor buys a residential house or unit for $850,000 that was built in the year 2000.

Depreciation Budget Changes

As you can see from the above the depreciation allowances available have dramatically reduced in the early years now.

Towards about year 8 they level out and aren’t that different. This is because the pre-budget chart on the left-hand side still shows that you can claim the plant and equipment. Whereas the chart on the right-hand side shows how you can only claim the building allowance moving forward.

The key takeaway from this is: That the depreciation allowances on second-hand property built after 1987 are affected most in the first 5 years. After that – there’s not much difference.

Scenario 3:

An investor buys a residential house or unit for $850,000 that was built prior to 1987 – that hasn’t been renovated.

Rental Property Depreciation Budget Changes

Well in this scenario it’s all or nothing! Pre-budget we, as quantity surveyors, would visit a property, regardless of its age, and re-value the plant and equipment items like carpet, oven etc. In essence, starting the depreciation process again.

The Government wanted to stop this continual revaluation of plant & equipment and this will be achieved by the new legislation.

As you can see from the chart above if you buy a property that was built prior to 1987, there will be no claim at all if the property is still in its original state.

Why? Well, the plant & equipment will be deemed as previously used, thus no claim applies and in order to claim the building allowance, the property has to be built after 1987.

However, this is very rare, as most properties built prior to 1987 have had some renovation to them, whether that be a new bathroom or kitchen and those costs are claimable.

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13. Can I still claim depreciation on plant and equipment on my holiday home if I use it twice a year?

This is the biggest grey area of all the legislative changes in my view and one that will require further clarification moving forward.

The Government in the Housing Tax Bill Explanatory Memorandum states that if a property is used in an “incidental way” or “occasionally used” then your depreciation eligibility on the Plant & Equipment does not stop if you acquired the plant & equipment prior to The Budget in May 2017.

Incidental Use is described as:

“Use is incidental if it is minor in the context of the overall use and arises in connection with another non-incidental use – for example staying at the property for one evening while carrying out maintenance activities would generally be incidental use.”

Occasionally Used is described as:

Spending a weekend in a holiday home or allowing relatives to stay for one weekend in the holiday home free of charge that is usually used for rent would generally be occasional use.

It’s a bit vague, isn’t it?

Does one week a year over Christmas nullify your claim? What about if you stay for Easter and Christmas?

What does this mean for all the Airbnb landlords out there that claim depreciation but move in when times are quiet but acquired the property prior to the budget? They went into that investment doing the maths on being able to claim the depreciation on a pro-rata basis based on the tax laws at the time?

Now if they use the apartment for an unknown time they may be disallowed the depreciation deduction.

Strangely, this Memorandum, differs from the ATO’s website which was updated on the 15th of December 2017 which indicates that “Gail and Craig” who use their property for 4 weeks a year can claim the depreciation? “Kelly and Dean” would appear to be ok as well!

Whilst the Memorandum doesn’t give a time frame… it indicates that a weekend is OK…I would’ve thought 4 weeks would’ve been stretching it?! Who knows – pick a number????

This is at a time when the ATO wants to target Airbnb hosts and pro-rata any capital gain tax exemption that may be applicable.

Go figure.

Hopefully, sense will prevail and if the holiday home is clearly available for rent – like 11 months over the year – it’s still an investment property.

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14. I have been asked this many times: “Tyron, what do you think about the changes?”

I agree that the constant revaluing of plant & equipment items on very old properties made no sense and needed refinement.

However, I think the approach the Government has taken in disallowing depreciation on properties that are near new doesn’t make a lot of sense and could’ve been rolled out far more logically.

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The Budget Change And How It Affects Our Rental Property

Rental Property

Dealing with your rental property post-budget change

Before the budget change investors were entitled to claim plant and equipment and building allowance, so long as the property was built post-1987 and the property had settled within 10 years of getting the depreciation report, even if they had lived in the property prior, post or during the purchasing of their depreciation report.

A common question regarding the budget change:

The other day I received an email from one of my clients asking me for some personalised advice regarding his investment property and depreciation report. He told me he and his wife had purchased their first home in 2011. It was not a brand new property, and between 2014-2016 they rented out the property with a full depreciation schedule, claiming all they were entitled to. At the start of 2016 they Depreciation Quote Schedulemoved back in to their home, and are now looking to renting it out again.

He was wondering if they are still eligible to claim the original tax depreciation schedule they purchased in 2014, or do they have to adhere to the new government tax depreciation rules since the budget change concerning the plant and equipment on established properties.

I thought this was a great question, and wanted to ensure all of my clients and readers were aware of the significant changes to the way second-hand, previously used assets are now being treated moving forward from the budget change.

The changes outlined:

As of the Federal Budget Announcement on the 9th May 2017, the Government has disallowed depreciation deductions on items such as Ovens, Dishwasher etc. where they have been previously used.

Whilst these new laws are grandfathered and as such are only applicable to properties purchased after the May 9th announcement, one caveat exists: The property must be income-generating at some point between July 1st, 2016 and June 30th, 2017.

This meant, that even though my client had acquired the property before the budget, they were unfortunately ‘caught in the net’ because they were living in their property for the entirety of the 2016/2017 financial year. Due to this, those aforementioned items would now be considered ‘previously used’ and they wouldn’t be entitled to claim any further depreciation on them.

The explanatory memorandum issued by the Government is a bit ambiguous (if you ask me):

Depreciation Calculator“The amendments also apply to assets acquired before this time if the assets were first used or installed ready for use by an entity during or prior to the income year in which this measure was publicly announced (generally the 2016-17 income year), but the asset was not used at all for a taxable purpose in that income year. “

Note worthy:

It’s worth noting that these new rules only apply to residential properties. Commercial, industrial and other non-residential property are not included.

It’s also important to note that the way residential property investors claim depreciation on the building has not been altered. You can continue to claim the depreciation on the structure (all the bricks, concrete etc.) provided the building was built after 1987.

Your Guide to Commercial Property Investment

Commercial Property Investment

If you’re looking to invest in real estate, commercial properties present plenty of opportunities. However, you need to consider the risks and market drivers. This commercial property investment guide will help you.

You must think about more than the property investment basics when investing in commercial real estate. There are many complex market issues at work, which means you take on more risk.

Understanding these issues will play a role in the success of your investment in real estate. Commercial properties come in all shapes and sizes, which you must account for. This commercial property guide will equip you with the tools you need to succeed.

The Market Drivers

Several drivers affect the state of the commercial real estate market. You must understand what these drivers are before you can invest successfully. They include the following:

The Risks

There are also several risk factors to consider when you invest in commercial property. Here are some of the most important:

The Lease

A poorly-constructed lease could lead to the failure of your commercial investment. These are the factors to consider when creating your leases:

What Else Should You Consider?

Depreciation CalculatorFurther to this, you need to arrange proper financing for your purchase. Many residential lenders can’t help you with commercial properties. As a result, you may have to locate a specialty lender. Furthermore, you may not be able to borrow more than 70% of the property’s value.

You’ll also deal with a commercial agent, rather than a real estate agent. These professionals specialise in attracting the right businesses to your property. They’ll also help you to create attractive deals for potential tenants.

The Final Word

As you can see, commercial investment is a complex subject. This commercial property guide will equip you with the tools you need to succeed.

The team at Washington Brown can also help you to claim depreciation on your commercial property. Contact us today to speak to a Quantity Surveyor.

Five Secrets to Improving Investment Property Cashflow

Investment Property Cash Flow

Cashflow can become a major problem with your property investment. For beginners, slow cashflow could prevent you from building your portfolio as quickly as you’d like. Happily, there are some tricks you can use to make improvements to your investment property cashflow.

So, you’ve got what you think is a great investment property. You’ve followed all the property investment basics, but your cashflow is tighter than you expected. At times, it can be a real struggle to pull together the money to pay for the property’s expenses.

This is a common problem, no matter how well you’ve followed investment property tips. Beginners, in particular, tend to struggle with getting their cashflow up to the level they’d hoped for.

All is not lost. There are a few tips you can follow to improve your investment property cashflow.

Tip #1 – Raise the Rent

It may seem like a simple tip, but it’s one that many beginners don’t think about when they’re dealing with cashflow issues. Raising the rent on your property can offer a short-term solution while you look at the bigger problems.

Of course, you can’t do this every time you face a cashflow issue. Constant rent increases will drive your tenants away. However, it becomes an option if you haven’t re-examined your rents for some time. In such cases, you may be charging less than other investors in the area.

You must also remember your tenancy agreement, along with the laws of your state. Either may prevent you from raising your rents. That’s why many investors wait until the end of a tenant’s lease period before increasing the rent. With some luck, you can secure the tenant on a longer fixed lease at the new rate.

Tip #2 – Take a Look at Your Home Loan

Depreciation CalculatorDo you still have the same home loan you applied for when you bought your investment property? Australia has dozens of lenders who offer hundreds of mortgage products between them. Take advantage of that fact to secure a better home loan.

Work with a mortgage broker to find out what other products are out there. You may find that switching your loan gives you access to lower interest rates and some useful new features.

Alternatively, you could use the information you find as leverage against your current lender. Most lenders want to keep reliable clients. If you’ve made on-time repayments, you may find that your existing lender offers a better deal when you threaten to leave.

Those are some long-term options. You could also switch your home loan to interest-only periods for a short while. This will help you to deal with more immediate cashflow concerns.

Tip #3 – Look at Other Income Streams

The property investment basics don’t always cover the other income streams your property may have to offer.

Take some time to think about how you could use your property to generate more than the rental income.

For example, you could lease the side of the building as advertising space if your property is near a busy road. Alternatively, you could lease out any unused parking spaces. Each offers a little extra income beyond your property’s rental income. Remember, that every little bit can help when you have cashflow problems.

Tip #4 – Examine Your Outgoings

Reducing costs is a crucial part of property investment. For beginners, this means taking a detailed look at your figures. You may find that you’re paying too much for your insurance. Or, you could negotiate a better deal with your property managers.

Many who encounter cashflow issues find that they’re paying too much for various services. You may also be paying for things you don’t need. For example, you could handle some basic maintenance issues yourself, rather than hiring somebody to do it for you.

Again, this frees up small amounts of cash. Nevertheless, you’ll improve your cashflow with each positive change to your outgoings.

Tip #5 – Get on Top of Depreciation

Depreciation Quote ScheduleIt’s amazing to think about how many new investors don’t think about rental property depreciation rates. They don’t investigate the claims they could make on their assets. Instead, they keep plugging away without a depreciation report. Alternatively, they assume their accountants have factored depreciation into their tax returns.

You need a depreciation schedule. If you don’t have one, you’re cheating yourself out of thousands of dollars.

Hire a quality Quantity Surveyor to draft a full depreciation schedule. Your surveyor will ensure you claim the maximum amount over the lifetime of each asset. Furthermore, you’ll learn more about tax compliance in your state.

Your Next Step

You’ll make both short and long-term improvements to your cashflow if you follow these tips. You can handle the first four with the help of an accountant and mortgage broker. However, you need additional help to create a depreciation schedule.

Washington Brown has the answer. Speak to one of our Quantity Surveyors today to get a quote.