Property Depreciation Schedules - The New reality

Australian expats lose capital gains tax exemptions

THE FEDERAL Government has made a very significant change to capital gains tax (CGT) affecting ex pats, but it’s likely there are many Australians living overseas who are still completely in the dark about it.

Put simply, the change entails the CGT exemption for the Australian family home, which has been in existence for 35 years, being taken away from expat – or non-resident – Australians if they sell the property while living overseas.

Currently the exemption applies so long as the home was rented out for no more than six years at a time, but from July 1 this year the new changes will take effect.
Depreciation - Houses

What are the changes?

The change to CGT means expats seeking a principal place of residence exemption must sell before June 30 or hold the property and wait until they return home to live in it again before selling. If they don’t, they risk paying a potentially hefty CGT bill on their home.

If the property was purchased before May 9, 2017 expats can sell before June 30 this year and avoid CGT, but if the property was purchased after May 9, 2017 and sold while living overseas CGT will still have to be paid, as there is no principal residence exemption.

The legislation, which seems to have been rushed through after both political parties previously promised they would exclude expats from the changes as it was unfair, will also apply retrospectively.

That means capital gains will be taxed for the entire time the property has been owned, rather than just for the time the occupant has lived overseas, which could become very expensive for those that bought their properties as far back as 1985, with property prices having risen very significantly.

The changes to CGT will also affect migrants who buy a home in Australia to live in while they are here, and then sell after returning home.
Depreciation - Houses

What impact will the change to CGT have on expats?

The change will only affect expats who sell a home in Australia they have previously lived in while they are living overseas.

It’s difficult to determine exactly how many expats will be impacted, but it could be tens of thousands to hundreds of thousands.

And then there is not only current expats to consider, but those moving overseas in the years to come, particularly in an increasingly global economy where many people are going abroad to work.

Those that are affected will be significantly disadvantaged. Experts agree it’s an unfair tax to drop on Australians who have purchased in good faith, believing their home would be exempt from CGT, and continued to contribute to the Australian economy through taxes on their homes if they are rented out.

It should be noted that there are some concessions for the application of CGT to the homes of expats selling while overseas, with an exemption applying for life events such as a terminal medical condition, death or divorce.

What should expats do?

It appears this change to CGT has been brought in without much fanfare to even alert expats of its existence.

There will likely be many people caught unawares and potentially sell while overseas without realising the tax laws have changed, incurring a significant CGT bill.

If you’re an expat, the first thing you need to do is get educated on the change in the CGT rules, and then determine the best course of action for your circumstances.

You’ll need to do so quickly, with the deadline to sell (the contract date) being June 30 this year.

It’s a good idea to seek professional advice on the costs involved in your circumstances and whether you’re better off holding or selling.

Impediments to waiting until you return home include that your move may be permanent, you may be unable to hold the property financially, or you may be returning to a different city than the one which you left.

For those returning, you must be genuinely returning to Australia and can prove that you have quit your overseas job, cancelled a property lease and taken your children out of their overseas school, for example.

For those who do have to pay CGT, there could be issues in determining the correct tax liability because those who have purchased up to 35 years ago may not have kept proper records.

Capital gain is calculated using the original cost base, which includes expenses related to the property purchase such as buying costs, holding costs and renovations, as well as the cost of the property itself.

This may lead to expats selling their home while overseas being charged more CGT than they would have, if the proper records had been retained.

Your Guide to Claiming Depreciation on Granny Flats

Many see granny flats as an easy property investment. For beginners, they offer the opportunity to start investing, without spending too much money. As with any investment property, you must remember to claim for the depreciation of your assets.

Tons of people like the idea of buying an investment property. Australia offers plenty of opportunities, but many struggle to get over the initial financial barrier.

You may find yourself asking how to invest in property with little money. A granny flat may be the answer. They cost less than most other types of investment property. Plus, you still get to claim for the depreciation of the property’s assets.

So, what are granny flats, and how can you claim for their depreciation? This article will help you to answer those questions.

What is a Granny Flat?

You can think of a granny flat as a secondary home on your property. They’re usually self-contained extensions that come with a lot of the features you would expect in an apartment.
The difference is that the granny flat is on your land. As a result, you have far more control over it.

Most people build their granny flats behind their properties. After all, the back yard is a perfect space to extend into. The flat itself will usually contain the following:

This makes them ideal for all sorts of tenants. The name “granny flat” should tell you that they’re perfect for elderly tenants. However, that’s not the only use for this type of investment property.

Australia is full of young people who view granny flats as an affordable way of achieving their independence. Your own children may find the idea of moving into a granny flat more appealing than staying at home.

They’re also a cheap way to enter the investment sector. On average, a granny flat costs about $120,000 to build. In return, you could enjoy a yield of up to 15% on the property.

If you have recently purchased or constructed a granny flat, make sure your claiming the deductions you’re entitled to! Request your free quote for a fully comprehensive, ATO-compliant depreciation schedule.

Do I Face Construction Restrictions?

You do, and they depend on the state you build the granny flat in. Each has its own rules with regard to size. For example, a granny flat cannot exceed 60 metres squared in New South Wales. However, you can build up to 90 Depreciation Quote Schedulemetres squared in the Australian Capital Territory.

Exceeding these limitations changes the status of the granny flat. This could have an effect on how you claim tax deductions. Australia has several states, so you need to get informed before you start building.

Claiming Depreciation on Granny Flats

There’s one key question you must ask when buying an investment property: what can I claim? Granny flats are no different. Just because you’ve built the property on your land, doesn’t mean that you can’t claim depreciation.

As a secondary dwelling, a granny flat must produce an income before you can claim depreciation. Assuming that’s the case, you can claim depreciation for capital works. These include the wear and tear the structure undergoes during its lifetime.

You can also claim for plant & equipment depreciation. In a typical granny flat, this means you can claim depreciation for the following assets:

Depreciation CalculatorYou can also claim depreciation on the areas the granny flat shares with your home. For example, you could claim for a pool or a patio, assuming the tenant uses these assets.

As you can see, that covers a lot of ground. In fact, research suggests that you could claim over $5,000 in depreciation on a granny flat for the first year of ownership. This figure increases to almost $24,000 over the first five years. That’s about one-fifth of the value of the average granny flat, in just five years.

The Final Word

As you can see, granny flats offer high yields and plenty of opportunities to claim for depreciation. That’s why they’re considered one of the best options when it comes to property investment for beginners. Manage the flat correctly, and it could generate thousands of dollars in income in a short time.

However, you need help to create a full depreciation schedule. Without the help of a Quantity Surveyor, you may end up failing to claim for the full depreciation of your assets. Contact Washington Brown today to get a quote for a granny flat depreciation schedule.

When do you need a Quantity Surveyor?

Unless your property is very unusual, there would generally be no reason to speak to a quantity surveyor before purchasing a property.

While you’re hunting for potential investments, you can work out the estimated depreciation for a property by using Washington Brown’s free online depreciation calculator.

Once you have committed to purchasing the property, it is time to start thinking about contacting a quantity surveyor.

The ideal time for a QS to do an inspection is straight after settlement and just prior to the tenant moving in. This is to make sure that we don’t disturb the tenant and we also get to see exactly what you have purchased and the condition that it is in.

Why is that important?

quantity surveyor

Case Study

Jenny Jones owned a unit in a complex at Hastings Parade, North Bondi. This property had substantial damage to the structure due to the surrounding elements (rain, wind, ocean spray, etc.). To fix the problem, the strata body raised a special levy of $80,000 from each of the six unit-holders and engaged a builder to carry out the work.

Once the building work was completed the strata manager engaged Washington Brown to differentiate between work that was capital in nature and work that was considered to be repairs.

The Result

In general, special levies raised are not deductible, but Washington Brown was able to break down the construction costs into repairs and capital works (i.e. eligible for building allowance depreciation). In the end, we estimated approximately $57,000 of the client’s $80,000 expenditure, or close to 80% of the overall spend, could be Depreciation Quote Scheduleconsidered as an immediate deduction.

The client’s accountant thought this figure was too high and asked for a private ruling from the ATO.

The ATO ruling read as follows:

“The Tax Commissioner accepts the classification of the work carried out as per the report prepared by Washington Brown”.

I can proudly say that the $57,350 deduction was approved in full, as opposed to claiming the work over 40 years at 2.5%.

The Australian Institute of Quantity Surveyor’s (AIQS) website www.aiqs.com.au gives a detailed description of the major works and services of quantity surveyors. The list is quite detailed and informative, so you may find this helpful when you’re considering whether to consult a quantity surveyor.

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!

Why do I need a Quantity Surveyor?

quantity surveyorYes, builders are good at building. However, that doesn’t necessarily make them good at maximising the depreciation allowances you, the
developer or investor, are entitled to.

That’s why if you have contracted a builder to construct your investment property, it definitely pays to have a quantity surveyor prepare a depreciation report for you.

In my two decades of being a quantity surveyor, I’ve never seen a builder’s depreciation schedule that I could not improve upon and thus, significantly increase the claim for the investor.

Some of the common mistakes I see in builder-prepared depreciation schedules are:

The last mistake is by far the worst, as this can cost you considerably.

(NOTE: Deductions for these plant and equipment items may only apply if you bought the property prior to May 9, 2017 – Read about the Budget changes here).

Let me give you an example;

Depreciation Quote ScheduleYou see, when a builder buys an oven for $800, that’s not what you pay for it. By the time the investor pays for this item, a range of other fees would have been included,
such as the architect’s design, transportation, installation and supervision. Next thing you know the real cost of this oven to you is $1,100, and it’s the real cost we’re after, not what the builder paid.

Now, that extra $300 on the oven depreciates at 20% per annum, rather than at the 2.5% building allowance rate. This means you can claim the depreciation much faster.

So at the end of the day, let builders build and let quantity surveyors save you money.

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!

When is a Good Time to Buy an Investment Property?

Building Insurance Valuation Report

A lot of people buy property when interest rates go right down. Like now, there are a lot of people buying because interest rates are low. Everyone goes out and buys and that creates more demand as well. And who would not want to buy if you can lock in interest rates and borrow at 5% for five years?

Depreciation Quote ScheduleBut for me, I don’t want to rush. Sometimes I tend to sit back and wait when the market is hot. I’ve learned that sometimes being patient with your money is good. You don’t have to buy something every year. It might be better to save up for 10 years and then come and pounce when other people are not in the market.

Sometimes when the rate goes up to 9% and no one can afford to buy, I’d rather buy then and have enough money and not have to worry about having a big debt or fighting with other investors. You don’t want to be in so much debt when rates go up again.

I don’t want to buy when there are 100 people going to auction against me. I’d rather buy when there are not a lot of buyers.

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

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

Depreciation: Where to From Here?

(NOTE: The laws regarding depreciation have changed – Read about the Budget changes here).

depreciation: where to from here

Depreciation: Where to from here? – The property depreciation formula.

Whilst the depreciation laws in this country are quite complex, as a whole, I believe they are balanced and offer property investors realistic benefits. But there is always room for improvement.

As mentioned in my previous posts, I disagree with the rates at which certain items can be claimed, along with their effective life. Depreciation Calculator

For instance, I would rather property investors claim 4% building allowance over a 25-year life span 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 scrapping the building allowance all together.

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 kicks in could 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

depreciation: where to from here

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

Table 13.2: Proposed building depreciation regime

depreciation: where to from here

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

The flow-on effects of increased construction to the wider community could be huge. Depreciation Quote Schedule

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, giving rise to nine jobs in the construction industry (the initial employment effect) and 37 jobs in the economy as a whole from all the flow-on effects.

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 an obligation free quote for a depreciation schedule now.

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

Schedule of Condition Report

Schedule of Condition Report

A schedule of condition Report details the existing condition of a building at a specific point in time, which is usually used when leasing, purchasing or updating property assets or when there is a change of ownership.

It is an item-by-item account describing the elements of the building and their condition and it is recorded in a written report with photographic evidence.

Schedule of condition reports are particularly important to commercial and industrial tenants as usually commercial and industrial leases will stipulate that the tenant is responsible for repairs at the end of the lease. Depreciation Quote Schedule

A schedule of condition report, signed and incorporated into the lease prior to signature, will help to reduce your legal liabilities and minimise make good risk at lease termination.

The main purpose of a schedule of condition is to:

CASE STUDY

Property Type: Industrial/ Storage
Property Size: 4,000m2
Location: Western Sydney

Depreciation Calculator A private landlord contracted Washington Brown to undertake an ingoing schedule of condition of an existing industrial and storage facility located in Western Sydney.

The client required a professional ingoing schedule of condition be carried out prior to him signing the lease, to record the existing condition of the building. It would then form part of the lease agreement and be used in the make good at lease termination, in the event of any dispute. The inspection was carried out within five days of us receiving instructions and the report was issued within the client’s timeframe of five days.

In consultation with the client, we identified their requirements and the extent of the schedule of condition. We did a thorough internal and external inspection of the premises and identified all existing defects/damages within the building. Then we produced a detailed report which outlined the element description and condition of the building. The report also included photographs to identify and support the issues raised.

The client was very satisfied with our reports and findings. They were able to negotiate that our report be included in the lease agreement, therefore minimising their risk in case of any dispute.
Our independent assessment gave the client a solid foundation and the peace of mind that in the event of any future dispute, they have a legally-sound document that will make the settlement quicker.

Learn more about a schedule of condition report here.