The Depreciation Party Is Over

The depreciation party is over…

Well, kind of!

In an attempt to “reduce pressure on housing affordability” the Government has announced dramatic changes to the way depreciation is claimed on property.

Let’s start with the good news:

1.  Any existing investment properties purchased (contract exchange date) prior to May 9 2017 are not affected (unless they were not income producing in the 2016/2017 financial year).

2. Commercial, industrial and other non-residential properties are not affected.

3. Capital works deductions have not been affected. This means you will still be able to claim depreciation on the structure of the building provided it was built after the 16th of September 1987. And you will still need a Quantity Surveyor’s depreciation schedule to do so.

Now that we know what isn’t affected, let’s look at what has changed…

The government will limit plant and equipment depreciation deductions to outlays actually incurred by investors. In essence, unless you as the buyer had physically purchased the items – you can no longer depreciate them. This is a massive change to what you can claim – there by reducing investors’ cash flow.

Originally I thought a quick fix would be to structure the sales contract so that the plant and equipment is separated. But I suspect that the legislation will be worded such that if the plant and equipment was in situ at the time of purchase, you can no longer claim it.

You see, under the recent changes, I suspect the developer will be deemed to have bought the plant and equipment – not you.

budget depreciation changesHowever, the acquisition of existing plant and equipment will form part of the cost base, thus reducing your capital gains liability. So investors who hang on to their properties long term, will no longer reap the benefits of depreciating plant and equipment.

So in summary: if a residential property was built prior 1987,and has not been renovated – there will be no depreciation claim.

Depreciation CalculatorThis is very rare as most pre-1987 built properties we inspect have had some renovation carried out.

If built after 1987 – only the construction costs can be claimed.

Whilst there is still much uncertainty regarding the specifics of this budget’s depreciation-related changes, one thing is crystal clear: If you own a residential investment property and haven’t had a depreciation schedule prepared, now would be a good time to get a quote!

Developers, Project Marketers and Property Sales Agents – If you are selling property and using depreciation numbers that include plant and equipment: STOP NOW! This element needs to be removed from the selling equation, at least until the legislation is finalised.

Here is why I think this is dumb policy.

The proposed changes are being made to “reduce pressure on housing affordability.” In my opinion, it will have the opposite effect for 3 reasons:

  1. Property investors may now feel the need to hang onto their existing properties to continue claiming depreciation because if they sell that property they won’t be able to get as many deductions on the next one.
  2. Developers rely on high depreciation figures in the early years to show investors how affordable an investment property can be. If the allowances are taken away, they will struggle to get pre-sales which are required by banks to fund the deal.
  3. These budget measure are forecast to save $260 million over a 3 year period. I suspect far more will be lost if developers can no longer get new projects off the ground.

Whilst I believe housing affordability is a major issues, this appears to be policy on the run…so the Government can be seen to be targeting property investors, when changes to negative gearing could have been more effective.

I will provide a further update once the legislation is finalised.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation Quote Schedule

Staying Under the ATO’s Radar

Compiling the report properly

A depreciation schedule on your investment property can generate significant tax savings – as long as it has been complied correctly.

In my experience there are three main areas the Australian Tax Office tends to target come tax time.

1. Repairs and maintenance

One of them is whether you’ve claimed repairs and maintenance correctly. Now this can be tricky…

2. Income producing

Your property must also be income producing in order to claim depreciation.

For instance, if you make a repair while living in the property, then move out 2 months later, you can’t claim it.

ATO

3. Building allowance

The third area of concern is in relation to the building allowance.

The building allowance refers to the wear and tear on the actual building – things like bricks and concrete. You have to make sure they’re being claimed in the right Depreciation Calculatorcategory and not alongside items like carpets and blinds, which are considered plant and equipment.

The building depreciation allowance must also be claimed on construction costs – NOT the purchase price of your property. A mistake I see time and time again.

That’s where we can help! The Australian Tax Office (ATO) recognises Quantity Surveyors as the right people to estimate these costs. NOT valuers nor real estate agents.

Follow these rules

So there you have it. Make sure you follow these simple rules to stay under the ATO’s radar;

If you need a depreciation schedule for your investment property – get a quote here or work out how much you can save using our free calculator.

NSW On The Ball For Infrastructure

When Mike Baird announced he was resigning as Premier of New South Wales in January there was a lot of commentary around his legacy. Most of this focused on infrastructure in the state.

Contrary to his predecessor, Bob Carr, who once said Sydney was full and couldn’t cater for any more growth. Baird believed building was very important for NSW to forge ahead. He knew it was the key to facilitating further growth.

In fact, one of the reasons the former investment banker entered politics was to remedy how far the state has fallen behind in infrastructure, making it a less attractive place to live.

He says infrastructure investment is a crucial way in which state governments can not only create better services, but drive economic growth.

So after years of inaction Baird took action, funding many projects through public asset sales. Now, NSW has plenty of infrastructure both under way and planned.

Upon announcing his resignation, Baird himself said he had “unleashed an infrastructure boom in Sydney and the regions”.

Infrastructure in the pipeline

Infrastructure basically refers to the structures enabling the effective operation of a society. This includes transport and communications systems, water supply, sewers and power plants. It also includes services such as schools and hospitals, and facilities including public parks.

When it comes to property, one of the most important types of infrastructure is transport. The majority of projects in the NSW pipeline fit into this category.

While more are mooted, here’s a quick rundown of some of the projects in the current infrastructure pipeline for NSW:

infrastructure

Why is infrastructure needed?

Building enables cities to cope with population growth. It’s needed for citizens to have access to services and amenities, and employment.

If there isn’t adequate provision of building there can be major disruptions affecting productivity and day-to-day life, such as traffic gridlock. People will flock to areas with infrastructure, choking them up and putting pressure on existing services and amenities, while shying away from other areas.

Sydney has already experienced strong growth in population. It surpassed 5 million people last year, and there’s no sign of growth slowing. Recent projections show 6.42 million people are expected to call Sydney home in 20 years. And the NSW population is expected to hit nearly 10 million by 2036.Depreciation Calculator

Infrastructure is needed to cater for this growth to prevent putting further pressure on already-stretched resources.

Since Baird left the Premier’s office and the new Premier Gladys Berejiklian has been installed there have been calls for the focus on infrastructure to continue to provide adequately for future growth.

Chris Johnson, chief executive officer of the Urban Taskforce, said: “Sydney is Australia’s global city, and as a result, it must develop into a well-connected metropolis, with additional density, housing and services located around a metro rail network. It is crucial the new Premier continue this approach to ensure Sydney’s continued success as a growing, prosperous global city with a high standard of living.”

The Urban Taskforce also stressed the importance of providing infrastructure in growing regional areas of NSW, in addition to Sydney.

Infrastructure provision isn’t just something NSW should be concerned with. All state and territory governments – and the Federal Government – should be looking to provide both new infrastructure and update existing infrastructure to ‘future proof’ their cities.

Unfortunately though, many governments – especially in the modern day, where they seem to turn over so quickly – focus only on the short term rather than looking to provide long-term infrastructure solutions.

Australia’s population is set to rise from 24 million to 30 million in 2031. So if governments are not planning for this growth now they are going to run into significant problems down the track.

How does infrastructure impact upon property?

Building is a key growth driver of property, and specifically prices and rents.

Depreciation Quote ScheduleAs an investor you want your property to be in close proximity to existing infrastructure so people want to live there. People want to be close to schools, major public transport routes and other amenity.

If it’s not close to existing infrastructure, you want your investment property to be in an area where major building projects are underway. That is, you buy in an area knowing there’ll be growth when the planned infrastructure is completed. This is because there will be higher demand to live in the area from both buyers and renters.

In these areas growth can actually explode, along with property prices and rents, meaning you have a great investment on your hands.

New transport projects in particular can have a huge impact on the appeal of a location.

While upgraded or new infrastructure is a great indicator of capital growth. On the other hand a lack of infrastructure can prevent an area from reaching its full potential.

Is the Future of Depreciation Near?

How does depreciation affect your future?

(UPDATE – Read about the 2017 Budget changes to depreciation here).

Whilst the depreciation laws in this country are quite complex, I believe they are well-balanced and offer property investors realistic benefits. Depreciation Calculator

However, there is always room for improvement on the current property depreciation formulas.

As a quantity surveyor, I disagree with the rates at which certain items can be claimed, along with their effective life.

For instance, I would prefer property investors be able to claim 4% building allowance over a 25-year life span rather than the current 2.5% over 40 years.

In fact, I made that exact submission to the government as part of their Business Tax Working Group in 2013. At the time, the government was considering cutting the building allowance all together.

Thus, my recommendation was that only construction or contracts signed after the proposed date would be subject to a 4% building allowance regime, based upon the original construction cost. I also proposed that the original construction date at which the depreciation of building allowance begins, be pushed forward from the current 1985 to 1990 to help save the government money.

As the following table shows, by immediately making all purchases and contracts entered into for construction subject to a flat 4% building allowance, significant savings will be made and incentives to buy new property will increase.

Table 13.1: Current building depreciation regime

wheretofromhere

*First year deduction based on $250,000 = $6,250 (new property only)

Table 13.2: Proposed building depreciation regime

where2fromhere

*First year deduction based on $250,000 = $10,000 (new property only)

If this was implemented in future depreciation laws, the flow-on effects of increased construction to the wider community could be huge.

According to the Australia Bureau of Statistics (ABS) for every $1 million spent on construction output, a possible $2.9 million would be generated in the economy as a whole, consequently giving rise to nine jobs in the construction industry (the initial employment effect) and 37 jobs in the economy as a whole.

The government decided to uphold the status quo on depreciation laws instead of scrapping or significantly reducing the allowances. It recognised that this would have a significant impact on investment incentives.

Work out how much you save using our free property depreciation calculator or make it happen and get a free quote for a depreciation schedule now.

This blog is an extract from CLAIM IT! – grab your copy now!

What a load of Scrap!

Whenever I am delivering a presentation or conducting a webinar, I always make sure to leave time for a 30 min Q&A session at the end.

In most Q&A sessions, the topic that by-far receives the most queries has to do with the concept of “scrapping” in relation to property tax depreciation.

Claiming the Residual Value on items that are about to removed can significantly increase your tax depreciation deductions. The problem is that many investors who renovate miss out on this due to a lack of awareness.

It’s important to understand the basics of property depreciation before diving into the subject of scrapping so, let’s have a quick re-cap into what property depreciation is all about.

What is Property Depreciation?

Just like you claim wear and tear on a car purchased for income producing purposes, you can also claim the depreciation of your investment property against your taxable income. Depreciation Calculator

There are two types of depreciation allowances available: depreciation on Plant and Equipment Assets and the Capital Works deductions.

Whilst both of these costs can be offset against your assessable income, the property must be used for income-generating purposes. It is also important to note that to be eligible to claim on the Capital Works component, a residential property needs to have been built after the 18th of July 1985.

So what is scrapping and why is it a hot topic for property investors?

Put simply, scrapping is the ability to claim deductions on items within your investment property that you are about to throw away.

Engaging a qualified Quantity Surveying firm will ensure that you do not miss out on claiming any eligible residual value of these items as a depreciation deduction. This value can be claimed immediately in whole, once the items have been removed.

The reason it’s such a hot topic is due to the fact that these deductions can often add up to thousands of dollars.

There is one major caveat though. In order to claim the residual value on these items, your rental property must be producing an assessable income prior to the disposal.

There is no clear guideline on how long the property needs to be rented out for though, just that is was producing an assessable income.

scrapping schedule

There are two ways we can assess the scrapping allowances of an investment property.

Option 1 – Only depreciable assets can be scrapped

(This means the building was built before 1985 and no residual capital works deductions are available)

For Division 40 depreciable assets, if a taxpayer ceases to hold a depreciating asset (sold or destroyed) or ceases to use a depreciating asset (doesn’t need it anymore) a “balancing adjustment” will occur.

You work out the balancing adjustment amount by comparing the asset’s termination value (sales proceeds) and its adjustable value.

If the termination value is greater, you include the excess in your assessable income but if the termination value is less, you deduct the difference.

These deductions can add up quickly. Even if only in relation to depreciable assets.

Let’s crunch some numbers:

Joan Smith settles on a property for $650,000 on Oct 15 2015, the property had a long term tenant in place, who had agreed to stay for another 6 months. The property was 19.5 years old when she settled on it. Depreciation Quote Schedule

Washington Brown inspected the property on Oct 15 2015 and assigned the following values to the depreciable assets listed

below:

Oven $  625, Carpets $ 1536, Blinds $  885, Range Hood $  475 & Dishwasher $  558

Joan decides, voluntarily, to upgrade the apartment so that she can attract a higher quality tenant. At the end of the lease, when the tenant moved out, Joan replaced the items above.

Joan can claim the full depreciable amount of $4079 in her 2015/2016 tax return for these items that she is removing.

In addition, Joan has spent $8,555 replacing the items above, she can now start to claim these new items based upon their individual depreciation rate.

Option 2 – Depreciable Assets and & Capital Works deduction can be scrapped.

If you start moving walls or replacing kitchens in buildings built after 1987: your claim has the potential to be huge!

And let’s face it, it’s not that unusual to want to update a 20 year old kitchen.

Now let’s crunch the numbers on a situation where Joan renovated the kitchen and bathroom as well:

Capital Work item Cost in  1995 Residual Value in 2015
Kitchen Cupboards $7,750 $3,875
Kitchen Benchtop $2,500 $1,250
Plumbing Bathroom & Kitchen $6,375 $3,188
Electrical Bathroom & Kitchen $4,750 $2,375
Tiling Kitchen & Bathroom $8,750 $4,375
Ceilings $850 $425
Render $655 $328

The items above have been depreciated at 2.5% per annum for 20 years. That equates to 50% left of the value that can be claimed as an immediate deduction when removed in 2016.

That’s the tidy sum of $15,816.00 as an immediate tax depreciation deduction!

One thing that needs to be considered when calculating the amount of deductions available, is whether you or another person was not allowed a deduction for capital works.

“It’s complicated” but here the method statement from the Income Tax Assessment ACT:

The amount of the balancing deduction

Method statement

Step 1.    Calculate the amount (if any) by which the * undeducted construction expenditure for the part of * your area that was destroyed exceeds the amounts you have received or have a right to receive for the destruction of that part.

Step 2.    Reduce the amount at Step 1 if one or more of these happened to that part of * your area:

           (a) Step 2 or 4 in section 43- 210, or Step 2 or 3 in section 43- 215, applied to you or another person for it;

          (b) you were, or another person was, not allowed a deduction for it under this Division;

           (c) a deduction for it was not allowed or was reduced (for you or another person) under former Division 10C or 10D of Part III of the Income Tax Assessment Act 1936 .

          The reduction under this step must be reasonable.”

So in simple terms, you need to take into account any periods where Capital Works deductions could not be claimed and reduce that amount from any residual value left.

The last line is interesting, “The reduction under this step must be reasonable”.

 

I say interesting, because there are so many variables and not a lot of rulings to go by. But in my opinions here are some reasonable examples:

 

  1. It would be reasonable to assume that if you purchased an industrial or commercial property, Capital Works deductions were available the whole time. So no allowance for non use would be required.
  2. It would be reasonable to assume that if you purchased a serviced apartment, Capital Works deductions were available the whole time. So no allowance for non use would be required.
  3. It would be reasonable to assume that if you purchased a unit in a ski resort, it was used, perhaps, for 2 weeks of the year for private use by the previous owner and you would need to factor that in.
  4. It would be reasonable to assume that if you purchased a holiday house, in area where holiday lettings are common and that you saw the property listed on AIRBNB prior to your purchase and the holiday period was blocked out – then you should factor 2 weeks of private use per year into the equation.
  5. Now the tricky one, you buy an average unit with a tenant in place. Who knows, it may have changed 5 times since it was new. I think it would be unreasonable for you to have to find out the full history of the unit. Privacy laws are very strict now, particularly in Victoria. So in that case, I would personally assume it was an investment property the whole time – but that’s me!!

One final thing you need to factor in, just to make life more complicated, is whether any amounts were received by way of insurance.

The termination value or residual value needs to include the amount received under an insurance policy.

So, if it is insured, there is often nothing to deduct when the asset is lost or destroyed.

As you have probably gathered by now, claiming the residual value on depreciating assets and capital works deductions “is complicated”.

 

I would recommend speaking with your accountant or financial advisor prior to engaging a Quantity Surveyor to carry out a scrapping schedule. If you are going to proceed with this type of report, it is advantageous to have the quantity surveyor visit the property prior to you starting renovations.

How to Stay Under the ATO’s Radar…

Learn how to stay under the ATO’s radar by watching this video

A depreciation schedule on your investment property can generate significant tax savings – as long as it has been complied correctly.
In my experience there are three areas the ATO tends to target come tax time.
One of them is whether you’ve claimed repairs and maintenance correctly. This can be tricky. Depreciation Calculator

Your property must also be income producing in order to claim depreciation.

For instance, if you make a repair while living in the property, then move out 2 months later, you can’t claim it.

The third area of concern is in relation to the building allowance.

The building allowance refers to the wear and tear on the actual building – things like bricks and concrete. You have to make sure they’re being claimed in the right category and not alongside items like carpets and blinds, which are considered plant and equipment.

The building depreciation allowance must also be claimed on construction costs – NOT the purchase price of your property. A mistake I see time and time again.

And that’s where we can help. Quantity Surveyors are recognised by the Australian Tax Office as the right people to estimate these costs. NOT valuers nor real estate agents.

So there you have it. To stay under the ATO’s radar, make sure:

Your repairs are being claimed correctly
The property is an income producing asset
The building allowance is based on the construction cost.
And most importantly, use a qualified quantity surveyor.

If you need a depreciation schedule for your investment property – get a quote here or work out how much you can save using our free calculator.

Who is Liable for Depreciation?

Who is Liable for Depreciation?

So, who is liable for depreciation?

We were recently asked by a client “Do you take responsibility for your reports?” and I wanted to share our response regarding who is actually liable for depreciation once the reports have been sent out to the clients.

To prepare a Tax Depreciation Report, we require clients to supply cost information pertaining to the construction or improvements of their property where this information is known.

But, of course, we cannot take responsibility if a client provides us with false or fraudulent information.

Depreciation Quote Schedule

I can happily confirm that we, Washington Brown, fully stand by our reports and estimates in the event of a client audit. We proudly take 100% responsibility for the estimated figures applied in the Tax Depreciation Schedules we produce for our clients.

Washington Brown has Professional Indemnity Insurance of $10,000,000. This far exceeds minimum requirements and the cover of other firms in our industry. Adding to this peace-of-mind is the fact that over the last 23 years, we have not once had our figures refused by the ATO.

That’s pretty cool if you ask me.

Wallabies Win affects Overseas Investment

overseas investment

After an early wake up on Sunday to watch the Wallabies have a brilliant victory over our old nemesis, England (commiserations guys) I was drinking my 3rd coffee of the morning and in a euphoric haze I starting to wonder to myself, how many teams are playing in this tournament?

It turns out there are 20 teams competing in England at the Rugby World Cup, however, as my mind rambled, counting which countries are included I dozed, and somehow drifted onto how many countries Washington Brown have prepared depreciation reports for over the last few years (because everything relates back to work, right?). It turns out, we have carried out property depreciation reports for a whopping 29 different countries to date, and by the end of the week that number will increase to 30! Go us!

overseas investment

Depreciation Quote Schedule The scope of work we are currently experiencing is really interesting from a Quantity Surveying perspective and is becoming increasingly varied, from apartments and houses in the UK and USA, multi million dollar villas in Monaco, ski chalets in Bulgaria, and even blocks of apartments in Iran.

Our clients also vary from new migrants renting out their former homes, Self-Managed Super Fund Trustees looking to spread risk, ex pats coming to work in Australia, or returning home from overseas posting, as well as mum and dad investors expanding their investment portfolio.

To me this really reinforces the global economy we now live in, and what a wonderful diverse melting pot of nationalities Australia is made up of.

If you have bought an overseas investment property, or you migrated to Australia and are now having to declare your rental income on a property you still own in your home country to the ATO, you might be entitled to claim depreciation on any overseas property you still hold and reduce your taxable income.

When claiming on an overseas investment property you need to be aware that there are some differences to Australian investment properties in regards to ATO rulings.

Three of these differences are:

  1. The building allowance component is only applicable for residential properties built after 1990, not 1987 as it is for Australian residential investment properties. (NB.all investment properties qualify for plant and equipment component)
  2. Construction costs vary from country to country and in in our reports are estimated at the local rates, not Australian rates. We then convert into Australian currency at the prescribed ATO exchange rate
  3. Just like in Australia, overseas investment properties start depreciating from the date you take ownership. However you can only claim tax deduction from the time you became an Australian tax payer, so it’s important to provide this information before proceeding to ensure it is worthwhile for you to have a report completed.

If you’re unsure if your property qualifies for depreciation allowances, or whether you have owned it too long to be eligible to claim depreciation deductions, give one our tax depreciation specialists a call and we can talk through your investment scenario to see if there is a benefit in having a report prepared.

Click here to get a Property Depreciation Quote

Overseas Property Depreciation

Overseas PropertyFancy a villa in Tuscany, what about a Condo in LA or Loft apartment in New York? I do!

But can I claim depreciation on this property… The short answer is yes! 

The main difference, however, is in regards to claiming the building allowance – that’s the wear and tear on structural elements of the property like bricks and concrete. Depreciation Calculator

With Australian properties you’re entitled to claim 2.5% 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 1990.

So if you want to maximum your depreciation benefits on an overseas property, look for a newer property built in the last decade or two. Internal items like carpets, ovens, lights and blinds – can also be depreciated, as you would with an Australian property. This is often referred to as plant and equipment.

A good place to start your research is on the ATO’s website. You can download a publication called Tax Smart Investing: What Australians Investing in Overseas property needs to know.

Like any property investing, you’ll need to do your homework, research the local market, find out about rental yields and occupancy rates. but the best thing is – this can all be done on-line these days.

The main barrier to depreciating an overseas property is working out the constructions costs, along with the expense of flying a quantity surveyor overseas.

Washington Brown has a number of affiliations around the world. We regularly inspect properties in London… New Zealand… I even did an inspection in Koh Samui (Thailand) recently.

If you have an investment property located overseas, we can help you claim the maximum eligible deductions. Request a free quote here to get started.

Here’s a video I created about claiming depreciation on overseas property, I hope you enjoy.

So there you have it. You can still invest in overseas property and reap the benefits of the Australian Tax system’s depreciation laws. But remember, the property must have been built or renovated after 1990.

If you need a depreciation schedule for your investment property – get a quote here or let us prepare an estimate of the likely deductions available to you – just submit your property for a free review here. Start claiming depreciation on your overseas property today!

The ATO went Too Far and are in the Firing Line!

ATO Went Too Far

“I’m having a Rant” N.B. this is not me – he does it far better

Depreciation CalculatorMany, many moons ago all Quantity Surveyors interpreted the Tax Act differently when preparing depreciation reports.

For example, some of us would say that kitchens were part of the building and others considered them to be Plant & Equipment (P&E).

Generally speaking it’s better to have an item considered P&E because you can claim it at an accelerated rate of depreciation.

(UPDATE: Deductions for plant and equipment items may only apply to commercial properties, brand new properties, if you bought the property prior to May 9, 2017, or some other exceptions – Read about the Budget changes here).

The ATO saw the discrepancies and finally published a definitive list that we could all use.

The rant starts now- How the ATO went too far:

The ATO went too far! You see, they classified items such as kitchen cupboards, shower screens, vanity cupboards and many other items into the building allowance which means they have to be claimed over 40 years. Depreciation Quote Schedule

I don’t know about you – but I don’t want a shower surrounded by a 39 year-old shower screen, do you? Eeeww.

I see more & more properties that are 20 years old and have needed a serious makeover in order to get a tenant.

TIP: Don’t let the ATO get away with it – if you do remove things from your property consider a Scrapping Schedule.

If you do need a quote for a depreciation schedule, please click here.