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.
However, 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.
This 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:
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.
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.
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.
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.
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 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.
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;
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.
There are many myths floating around when it comes to tax depreciation. Especially regarding what property investors are entitled to claim.
Below are some of the most common myths I have heard during my time as a qualified Quantity Surveyor.
NOTE: Information below regarding plant and equipment items may only apply to properties purchased prior to May 9, 2017 – Read about the Budget changes here).
Myth 1: The Commissioner’s effective life ruling must be used for all assets, no exceptions.
Truth: The Commissioner of Taxation’s ruling only applies to new depreciable assets.
For example;
In 2015, the commissioner wrote in the ruling that the effective life for new internal window blinds is 10 years. He does not mention that the effective life for second hand internal window blinds is 10 years also. So, if you have purchased a 5-year-old building with 5-year-old internal window blinds, you are not able to depreciate the blinds using a 10-year effective life.
A quantity surveyors role is to maximise depreciation deductions for the client. In order to do this, they must assess the effective life of second hand assets. And not just assume all of the assets in the property are brand new assets.
Also, it is important to note that if an asset is not listed in the depreciation schedule, it does not mean you are not able to claim for that asset. If it is a depreciable asset, you are able to claim it!
If an asset is purchased after the completion of the report, or you did not provide the information to the quantity surveyor, your accountant is able to include the asset for you.
Myth 2: If the assets in the property are destroyed I am able to claim the balance of the depreciation.
Truth: Some of this myth is partly true. The Division 43 capital works states that where a taxpayer’s capital works are destroyed, a deduction is permitted under the Undeducted Construction Expenditure rule.
However, if they receive an amount under a different insurance policy for the destruction of the assets, they are required by law to reduce the Undeducted Construction Expenditure by that amount.
Under Division 40, if a taxpayer ceases to own a depreciating asset (either sold or destroyed the item), or does not use a depreciating asset (no use for it any longer), a balancing adjustment will occur.
A balancing adjustment amount can be calculated by comparing the asset’s termination value (sale proceeds) and its adjustable value (written down value). If the termination value is greater, you include the excess in your assessable income. However, if the termination value is less, you deduct the difference.
Myth 3: Once the depreciable asset is found, you can claim depreciation on it.
Truth: Through past experiences, I have learnt that most investment home owners use their properties at some point during the year. This, however, creates incorrect figures in their tax depreciation schedule.
The purpose of a depreciation schedule is to inform a taxpayer on what they can include in their tax return. Without considering whether or not there has been private use of the property, or figuring out how to adjust the depreciation amounts to the correct sum, is at best misleading and at worse illegal.
Myth 4: All costs in acquiring a rental property should be able to be depreciated in one way or another.
Truth: This has mostly been covered by Myth 1 already. But this is the most common myth so I am going to explain it in more depth.
I have found that QSs are continually finding any asset to attach any and all costs to in order to claim a deduction, without properly following the laws.
For example, an investment property owner’s fence is damaged and the owner spends money on the repairs. The QS sees the cost the owner has spent and includes that whole sum in their depreciation schedule, depreciating it over 40 years at 2.5%. This is wrong.
A repair should be claimed at 100% in the year in which it was incurred.
Myth 5: Once I have spent money on a asset or a capital work I am able to claim it.
Truth: Under Division 40, you are only able to start depreciating an asset once it has been “used or installed ready for use”. Not as soon as you have paid for the asset.
For capital works under Division 43, you can claim deductions only once construction has been completed.
Myth 6: If I am unable to find the depreciable asset in the Commissioner’s yearly ruling, I cannot depreciate it.
Truth: The intention for the Comissioner’s ruling is to estimate the effective lives of assets. Not to decide what is a depreciable asset.
A depreciable asset is defined as an asset with a limited effective life. Therefore they are expected to decline in value over time.
Myth 7: Your assets are always deducted at 2.5%.
Truth: The rate at which assets are deducted is almost always 2.5%. However, there is one time you can get 4%.
However, there are times when a 4% deduction is applicable.
For example, a 4% rate will apply on an income-producing use of a building regarding an industrial manner.
There are a myriad of reasons as to why I have been drawn to property
Below are the six main reasons:
Reason # 1 – You can add value
One of the principal advantages of investing in property is that you can buy a rundown old property and increase the value of your investment by getting your hands dirty, or paying someone to get theirs dirty instead!
In comparison, it would be hard to add value to the Commonwealth Bank shares I own. Sure, I bank with the Commonwealth, but I don’t think my day-to-day savings account is going to add much value to the bank’s profits and in turn increase the value of my stock portfolio.
Admittedly, I can vote when it comes to the company’s annual general meeting, but are the voting rights attached to my 1,000 shares really going to make a difference?
For example, installing new carpet, painting and adding new blinds to an investment property will make an immediate difference to the tax returns available to an investor.
Reason # 2 – There is limited supply
A builder once said to me, “You can’t make property from a plastic mould”. I like the fact that property takes a while to plan and build because, in my opinion, the demand and supply equation has a lot to do with the price of property.
A development across the road from where I live in Bondi has been ‘in council’ for three years now. This means, it has taken three years for all the planning approvals to be passed – before construction has even started. And it will probably take two more years to build.
That’s five long years for the developer.
With shares, however, the company can make a capital raising at any time or issue options to directors or employees. This type of activity can dilute your shareholding making your piece of the pie smaller.
In contrast, you or the government can’t just issue another house and lot or land package in Bondi or any suburb you happen to like.
Reason # 3 – There are some capital gains tax exemptions
Unlike any shares I currently own, the home I live in does not attract capital gains tax (CGT) when I decide to sell it. The sale of your principal place of residence is one of the only assets that you won’t pay capital gains tax on. This has proved lucrative for many Australians, and I can’t see the law changing in this regard for a long time.
Reason # 4 – It’s easy to KISS (Keep it Simple, Stupid)
I like property because it’s easier for me to understand compared to shares or other types of investment. Granted I work in the property industry, but I know if I buy a property for $500,000, I can get $600 a week rent. There will be expenses that I can work out and I can use the Washington Brown depreciation calculator to work out my depreciation claim. It’s simple, really! Have you ever read a share prospectus or company annual report and completely understood it?
Reason # 5 – I am the master of my own domain
I like property because I can be the master of my own domain. I can be the CEO of my property portfolio, the CFO of my investment and answerable to the board directors that I care about – my wife.
I don’t know about you, but I’m pretty sick and tired of golden handshakes to CEOs who have done the wrong thing to their staff or shareholders. I’m over self-interested company directors who pretend they have shareholder company value at heart. Do they really? As the CEO of my property portfolio I can guarantee I’m looking out for number one- myself!
Reason # 6 – It’s not a constant reminder
I like property because I’m not reminded of how much I have lost or made every day. Regular share market updates in the media mean you are constantly aware of the gyrations of the market and the value of your shares. And it’s really not necessary. I personally don’t wake up and wonder what the Nasdaq did overnight and I don’t want to worry about how that’s going to affect my share portfolio – if at all. If I need to have my property valued for any particular reason, for example if I plan to sell it or borrow against it, I will employ the services of a valuer. At all other times, as long as it’s not causing me any problems and the tenants are paying their rent, then I’d prefer to let it appreciate in value in the background without being a constant reminder.
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!
I often get asked, “Can I claim depreciation on my very old investment property?”
The simple answer is yes, but this is where a lot of investors make a mistake.
There are two components to a depreciation schedule Quantity Surveyors prepare on your investment property.
The Building Allowance
The first component involves claiming what’s called the “Building Allowance”.
The Building Allowance relates to the structure of the building. It includes things like brickwork, concrete, windows and even the kitchen sink!
Unfortunately, this part of the claim is date dependent.
If construction of your residential property began after the 16th of September 1987 – yes you can claim the Building Allowance. If construction started prior to this date – I’m sorry – you miss out on the claim.
Plant & Equipment
However, ALL properties are eligible to have the Plant and Equipment component of the building depreciated.
(UPDATE: 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).
Claiming depreciation on Plant and Equipment relates to the wear and tear of items within your investment property, like carpet, ovens, dishwasher etc.
These items actually wear out more quickly and therefore can be claimed at a higher rate, over a quicker amount of time.
If you need a quote for depreciation on your old property – click here.
Here’s a video in relation to claiming depreciation on an old house.
Claiming depreciation is one of the most important steps in an investor’s journey. Here’s my Top 5 Tax Depreciation tips to maximise the return on your investment property.
Number 1: Use an Experienced Quantity Surveyor
You’ve just paid hundreds of thousands of dollars for a property. Do you really want to risk missing out on tens of thousands of dollars in deductions just to save a couple of hundred tax deductible dollars on the ONLY tax break available to you that can be open to interpretation and skill?
The ATO has identified quantity surveyors such as Washington Brown as appropriately qualified to estimate the original construction costs in cases where that figure is unknown. The laws have also changed frequently over the years and each building is unique, so it pays to get expert advice. The ATO requires all companies who prepare Tax Depreciation Schedules to be registered Tax Agents.
Number 2: Claiming the Residual Value Write Off
I believe millions of dollars will be missed over the coming years in tax depreciation claims due to changes in what can be defined as ‘plant and equipment’.
If you are renovating a kitchen or bathroom in a property built after 1985 – get a quantity surveyor in before you demolish so they can assess what the residual value of the existing items are. This residual value can be claimed as an outright deduction and can generate huge savings in the first year (The plant and equipment component of this may now be considered a capital loss rather than deduction from your personal income taxes due to recent Budget changes).
For instance, a rental property with a 20 year-old kitchen could possibly attract an immediate deduction of around $5,000 if removed.
The added bonus is that you get to claim depreciation on the new work once it is complete too!
Number 3: Small Items and Low Value Pooling
(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).
A dollar today is worth more than a dollar tomorrow so deduct items as quickly as possible.
Individual items under $300 can be written off immediately. An important thing to remember here is that provided your portion is under $300 you can still write it off.
For instance, say an electric motor to the garage door cost an apartment block $2000. If there are 50 units in the block, your portion is $40. You can claim that $40 outright – as your portion is under $300. You can also try to buy items that depreciate faster such as purchasing a microwave that costs $295 as opposed to one that costs $320.
Items between $300 and $1000 fall into the Low Pool Category and attract a higher depreciation rate. So for instance, a $1200 television attracts a 20% deduction whilst a $950 television deducts at 37.5% per annum.
Number 4: Old Properties Depreciate too
Even properties built before 1985 (when the building allowance kicked in) are worth depreciating.
The purchase price of your property includes the Land, Building and the Plant and Equipment. As a quantity surveyor we help you apportion or break down the purchase price into those categories.
In about 99% of cases we find enough plant and equipment items to justify the expense of engaging our firm (for ‘Pre-Budget’ properties). At Washington Brown we guarantee to save you twice the fee of engagement or your report will be free!
The saying goes “if only I knew then what I know now!” When it comes to depreciation, you can. Investors can use our website, free of charge, and get an instant estimate of the likely tax depreciation deductions on a property before they buy it.
This calculator uses real life data collated from every inspection we do on behalf of our clients. So the data gets more accurate with time.
For more information on depreciation or to discuss your specific investment property, call us on 1300 990 612 or email sales@washingtonbrown.com.au. Tyron Hyde is a director of Washington Brown – The Property Depreciation Experts. He has a degree in construction economics and is an associate of the Australian Institute of Quantity Surveyors.
You run marathons all over the world and still run a solid business, how do you do it?
Not sure how I do the marathons…42 Km’s is a long haul! But in terms of juggling the training and the work it all comes down to a great team of people around me.
Most of my staff have been with me around 10 years…so they know the company better than I do in most cases!
In regards to the training – I’ve just got to get up and do it or I won’t get to the finish line. It’s as simple as that. And my family tend to get a holiday at the end of it…so that motivates them to motivate me!
What inspires you to keep on pushing your limits as a person/athlete and property professional?
I’m the type of person that if I say I’m going to do something – I do it at all costs – which some might call stubborn.
I got pretty sick before the last marathon in Berlin and wasn’t sure I was going to be able to finish. The on-course Doctor tried to ban me at the 10km mark when he heard me coughing. So when he wasn’t looking I hid in the bushes and waited for 5 minutes then ran out and kept going. I did a slower time than usual but at least I finished it!
I guess that same drive has also made Washington Brown be the successful company it is today.
If you had $500k to invest now, where and what would you buy?
There are always opportunities in the market. I just bought a small unit in Cairns that is yielding quite well.
I’m currently looking in Hobart for a house as well.
But investing in Washington Brown and myself has been my best investment to date.
Being a QS is Sexy!
What’s the coolest thing about being a kickass depreciation expert and investor?
In a recent survey Quantity Surveyor was ranked the number 4 sexiest occupation after Film Star, Media Baron and Soccer Superstar.
Hmmm maybe not!
In reality, it’s the people/developers I’ve met along the way who have taught and continue to inspire me.
What are the 5 little known things about you?
I was a state junior lawn bowler at the age of 14!
I married my high school sweetheart.
I first worked for Washington Brown as a cadet for a year – for free – Now I own the company!
I have a 6 year old daughter named Taylor who has daddy wrapped around her little finger.
I ran a marathon on the Great Wall of China a year ago and I’m still sore.
“I’m having a Rant” N.B. this is not me – he does it far better
Many, 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.
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.
So, I’ve just heard the news that James Packer sold his multi-million dollar home, and a property investor buys it!
Forgive my bit of journalistic license here as I’m not sure if Dr Chau Chak Wing has purchased the property as an investment, but he is a property investor and developer.
Now, based on the estimated $40m worth of renovations that James has spent on the property, I estimate that the good Dr. could claim around $2M in depreciation in Year 1 alone!
No small change.
In reality, if you are buying a mega mansion – depreciation probably doesn’t come into the picture.
And as an investor, you’d be better off spreading your risk; buying lots of different properties in various states to minimise land tax.
Or perhaps consider purchasing an industrial or commercial property – get rid of all those pesky tenants and only deal with one leaseholder!
Buying high-end property as an investor can pay off… However, depending on the stage of the market, you might have more success at one of James’ casinos!
But Dr Wing…if you do need a depreciation schedule – “I’m free Mr Humphreys” and you can get a quote here.
How to save THOUSANDS OF DOLLARS a year on your investment property taxes with these 7 Property Depreciation Tips!
Depreciation can still be a bit of a mystery to even the most experienced of property investors. To novice property investors it most certainly always is.
To simplify depreciation, basically, it allows you to claim the wear and tear of an investment property as a tax deduction against your income.
There are two components to this claim; Building Allowance (bricks, concrete, etc.) and Plant & Equipment (carpets, ovens, etc.).
(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).
As Quantity Surveyors, we categorise elements of the building into a “Depreciation Schedule” which allows you to legally claim the right deductions come tax time.
Simple right?
Well here are seven tips you may want to consider this tax year to increase the yield on your investment property:
Small Items and Low-Value Pooling – A dollar today is worth more than a dollar tomorrow so deduct items as quickly as possible.Individual items under $300 can be written-off immediately.So if you are buying a microwave for your property – pay $290 instead of $310 and get the full amount written off!You can also try to buy items that depreciate faster. Items between $300 and $1000 fall into the Low Pool Category and attract a higher depreciation rate.So for instance, a $1200 oven attracts a 20% deduction while a $950 TV deducts at 37.5% per annum.
Depreciation reports are tax deductible – Book and pay for a depreciation report before the 30th of June, and you can claim the cost of the report as an outright deduction.On average, property investors can claim between $4,000 to $15,000 in depreciation in the first year alone. The age of the property has a lot to do with why that range is so great. The newer the property, generally, the more depreciation you get.
Renovated properties – You can buy a property that might be over 100 years old…and provided it’s been renovated after 1987 you can claim the costs of those renovations. So even if you didn’t do the renovation, the deductions are there for the taking!
Older properties – It’s true that new properties get the maximum depreciation allowance available to property investors, but don’t discount old properties. The minimum depreciation allowance on any property starts at around $2,000 in the first year alone.
Scrapping reports – If you buy a property and are going to renovate the property, it’s worth getting a Quantity Surveyor like Washington Brown to inspect the property BEFOREHAND. We will attribute values to those items that are about to be removed. This can add up to a substantial amount, especially if the property was built after September 1987. In order to do this, the property has to be income-producing prior to the commencement of the renovation.
Old properties depreciate too – In order to claim the Building Allowance the property needs to be built after September 1987. But, you could still claim depreciation on things likes carpets, ovens and blinds – regardless of the age (if unaffected by the 2017 Budget). Most Quantity Surveying firms guarantee to get you at least twice their fee as a tax deduction in the first year or give you the report for free.
Backdating reports – If you haven’t claimed depreciation because you didn’t know about it – there is good news. You can go back and amend your previous two tax returns and get the missing deductions backdated. It will cost you in accounting fees, but could well be worth it.
If you are a property investor and don’t have a depreciation schedule – get a free quote here.
Or use our free calculator to work out for yourself how much you could be saving!
Washington Brown
5 Stars - Based on 191 User Reviews
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Shaun D'Monte23/10/19
Dealing with Washington Brown has been a breeze. I'd originally inquired if there were depreciation benefits for a property and after providing some additional feedback, I got a positive response...read moreDealing with Washington Brown has been a breeze. I'd originally inquired if there were depreciation benefits for a property and after providing some additional feedback, I got a positive response that there were benefits available to be claimed and so I engaged them to produce a depreciation report.
Handled completely online, I was presented with a very simple process and the tracker allows one to know where things have progressed through each of the stages. They were able to engage with my property manager and have the inspection scheduled and the report completed, before being emailed to me. A professional and easy to use detailed report, Washington Brown have done an excellent job and were a pleasure to deal with.read less
Donald Robertson21/12/19
Very professional and fantastic customer service with quick responses. Fast turnaround on a depreciation schedule for my apartment which was comprehensive, clear and easy to understand. The report came in...read moreVery professional and fantastic customer service with quick responses. Fast turnaround on a depreciation schedule for my apartment which was comprehensive, clear and easy to understand. The report came in a number of handy formats. I am confident that my claimable depreciation costs are maximized. The cost of this represents excellent value for money. Very highly recommended.read less
John Williams21/11/19
We found Washington Brown very easy to deal with. Their website was clear and simple to use and they provided us prompt service at a good price. I would gladly...read moreWe found Washington Brown very easy to deal with. Their website was clear and simple to use and they provided us prompt service at a good price. I would gladly recommend Washington Brown to others.read less
Nick Whetham15/12/19
Washington Brown are the industry leaders offering residential property depreciation advice. For me personally the process for receiving the depreciation report for my property was hassle free & affordable. I...read moreWashington Brown are the industry leaders offering residential property depreciation advice. For me personally the process for receiving the depreciation report for my property was hassle free & affordable. I highly recommend Washington Brown to property investors seeking an ATO compliant reliable & professional service for arranging their depreciation schedule/s.read less
The depreciation party is over…
However, 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.
This is very rare as most pre-1987 built properties we inspect have had some renovation carried out.
Myth 1: The Commissioner’s effective life ruling must be used for all assets, no exceptions.
