In 2017, the Australian Government significantly changed how depreciation can be claimed on second-hand property.
And if you ask me, the new legislation is sloppy, at best!
You can no longer claim depreciation on “previously used” residential assets such as carpet, ovens, dishwashers, etc. You can learn more about the changes to the depreciation law for investment properties here.
But in my opinion, this rushed legislation has left some crazy anomalies.
Crazy Depreciation Fact Number 1 – Brand new property
When the Government made the surprising change to second-hand properties – they still allowed investors the ability to claim the plant and equipment in brand new property.
This made a lot of sense. Many developers rely on depreciation to sell these properties to investors.
And developers need investors to buy off-the-plan so the bank will fund the development.
It has been shown that a dollar spent on construction is magnified throughout the economy.
The primary test of whether a property is “Brand New” or not is whether the vendor (seller) has paid GST as part of the sale.
So what happens when a buyer purchases that unit 12 months before it’s finished but then on-sells it six months prior to completion? What happens when it comes to the day of settlement?
Consider the following situation: The developer settles the property with the original buyer, and then this original buyer immediately sells it to the second buyer on the same day.
For the Second Buyer in this scenario, this means that because I have purchased from the original investor, not the developer, my property is now treated as previously used. I cannot claim the depreciation on the “previously used” assets like the carpet and oven.
That’s right! I cannot claim the depreciation on the “previously used” Plant & Equipment items even though I now have the keys but have never opened the door to this new and unused property!
So if you are buying off the plan and want to claim the depreciation – make sure you are buying from the developer and that GST is being paid on the sale.
Crazy Fact Number 2 – Why pick on residential property owners?
The Government made these changes because they felt residential investors were overclaiming on these second-hand assets. I think there was some truth in that.
So now, you can only claim depreciation on plant & equipment in residential properties if they are brand new.
However, they never changed the law relating to commercial property. So, in theory, you can buy a 100-year-old warehouse, revalue the air conditioning equipment inside it, and start claiming the depreciation on this asset again.
Why pick on just residential?!
Please note that you can still claim depreciation on the structure of the building (which represents about 85% of the building) in second-hand residential properties. Hence, a rental property depreciation schedule is still worthwhile.
Crazy Fact Number 3 – What if it’s the same building?
When a residential and commercial property is combined, things get crazy.
You know the ones – you have a retail shop on the street level and a residential property upstairs.
You might have the same flooring running throughout the property.
Now, let’s say you buy this property and it’s two years old. You can claim the depreciation on the downstairs flooring but not the upstairs.
This is regardless of the fact it is the same flooring, installed at the same time and used for the same purpose of generating income. Go figure?!
Crazy Fact Number 4 – What happened to the “on” button?
When we depreciate ducted air-conditioning, we now have to break it into various components.
We have to separate the items, like controls, fans and pumps, from the ductwork as ducting is now considered part of the building.
When you buy a two-year-old house, you can still claim depreciation on the ductwork because it’s part of the structure – but you can’t claim the controls you push to turn on it!
Crazy Fact Number 5 – Big is better.
The Government’s changes only applied to the people like you and me. The same rules don’t apply to corporations, large super funds or a large trust fund with over 300 members.
So, in essence, Macquarie Bank or UniSuper could package up 1000 second-hand properties and claim the depreciation – but we can’t buy one second-hand house and do the same.
Does that seem fair to you?
Crazy Fact Number 6 – When it sold, it was not even new
Let’s say you own an investment property and have a tenant in place. The tenant decides to move out, and you choose to sell the property.
Before you sell it, you upgrade some items to get the maximum sales price. So you install new flooring, window coverings, kitchen appliances and a new hot water system to prepare the house for sale.
The new purchaser is not eligible to claim depreciation on these assets, even though they have never been ‘previously used’. This is because they were not the property owners when the assets were first installed.
A section of the Income Tax Assessment Act would enable the new owner to claim the depreciation – whereby you as the owner would deem the property to be “Substantially Renovated” and thus create a new supply of the property.
However, that would mean you would have to pay GST on the sale, and not many property owners want to do that!
So, in summary, strictly according to the ATO, if no GST is paid on the sale – no depreciation can be claimed on the plant and equipment assets in a “substantially renovated” property.
Crazy fact number 7 – Living in the past
When the Government changed the laws around depreciation, it changed the game for the quantity surveying industry – mainly whether your property now requires an inspection.
Some companies still advise that every property needs an inspection for depreciation purposes.
This is not true, and I would argue it is in their interest to say this, not yours.
Of course, there are many reasons why some properties do require an inspection and others don’t.
Washington Brown will only inspect your property if it is necessary. We will pass on those savings if it doesn’t need an inspection.
Do you need a property depreciation inspection?
About Tyron Hyde
Tyron Hyde is the CEO of Washington Brown Quantity Surveyors. He is regarded as one of the industry's leading experts in property tax depreciation, is regularly quoted in the media & asked to speak at conferences.
Learn why more Property Investors Choose Washington Brown to prepare their depreciation reports.