Property Depreciation Schedules - The New reality

Will property boom in 2021?

AS WE reach the end of the year it seems Australia’s property market has been heating up, with greater sentiment, activity and price growth.

The latest CoreLogic figures show the market continued its recovery in November, with prices rising for the second month in a row. Dwelling values rose by 0.8% over November and 0.4% in October, following five months of falls resulting in a total 2.1% drop in values between April and September.

The question is now, what will happen in 2021? Will the market strengthen, or will it resume a downward trajectory when some of the COVID assistance packages come to an end?

All signs point towards growth

CoreLogic’s Head of Research, Tim Lawless, says Australian home values could surpass pre-COVID levels early next year if the current growth rate continues.

Housing values already hit record levels in Brisbane, Adelaide, Hobart and Canberra in November.

While some commentators are still hesitant, many experts believe the price growth we have seen at the end of 2020 is predicted to continue into next year.

Some forecasts for growth rates are more bullish than others, but Hotspotting.com.au founder Terry Ryder predicts a national property boom next year.

He says Australia’s real estate market has “done brilliantly” this year considering COVID-19, and has completely defied earlier forecasts of price falls.

“In March and April, economists and media headlines were telling us to expect a collapse in property prices,” he says.

“Some were forecasting a 15 to 20 per cent fall, and the worst case scenario was a 30 per cent drop, but we haven’t seen that, and I don’t think we were ever going to see that.

“Most locations across Australia have continued to show price growth month by month, with Sydney and Melbourne the exception, but they are often the exception to the national rule.

“Even those markets are now starting to get positive numbers, but most other capital cities and regions have had growth right through.

“I think we’re coming into a national property boom. I think next year is going to be incredibly strong economically and in real estate.

“We’re really going to be having the first genuine nationwide property boom since the start of the century.

The market hasn’t had double digit growth since the start of the 2000s, he says, and in 2017 Sydney and Melbourne were really the only cities to boom.

“But next year we’re going to see all the capital cities and most of the majority regional centres having strong growth,” adds Ryder.

SQM Research is also forecasting strong annual growth of up to 12% in most capital cities next year, with Perth leading the forecast with predicted growth of between 8% and 12%.

Meanwhile many of the banks have backflipped on their doomsday predictions for price falls, and revised their house price forecasts for 2021 upwards.

Westpac, for instance, predicted a 10% fall in prices between April 2020 and June 2021, but is now forecasting a 5% fall, with prices to rise by 15% in the two years from June 2021.

NAB, which predicted falls of between 10% and 15%, is expecting prices to rise by 5% and 6% respectively across the board in 2021 and 2022, while ANZ predicts price rises of around 9% across the capital cities next year, revised upwards from a fall of 10%.

All signs point towards growth

So what’s underpinning Australian real estate prices now and moving forward into 2021?

There are many factors, including a shortage of stock, with the resulting buyer competition for available properties pushing prices up.

“Properties are selling so quickly; what’s available is getting snapped up,” says Ryder. “People are offering strong prices to snap property up in the face of competition.

“It’s a vendor’s market but there are relatively few taking the opportunity, which is one of the factors keeping prices strong, but not the only one.”

Low interest rates is another factor, as well as the economy. Ryder explains that Australia was in and out of recession quickly, and the economy is strong, with unemployment failing to reach the highs predicted, and currently sitting at around 7 per cent.

Many have predicted the market may feel the worst pain when government and lender assistance packages come to an end, but Ryder says that’s not going to come to fruition – if it was going to happen, it would have already, he says.

It’s business as usual in most parts of Australia, notes Ryder, with the majority of the country getting the virus under control very quickly.

People are now confident and spending, and there has been no massive economic hit. In fact, he says some parts of the economy have thrived because of COVID-19 and some property markets were directly pumped up because of it, with some regional economies turbocharged by it.

Recent data has found consumer confidence in Australia has hit a 10-year high, with the most recent Westpac-Melbourne Institute Index of Consumer Sentiment lifting by 4.1% to 112 in December, up from 107.7 in November.

Some forecasts of property price crashes pointed to falling overseas migration in Australia, but Ryder says this demand is now being replaced by expats coming home in “droves”.

The fast-tracking of infrastructure in Australia to aid the economic recovery will also be a big boost for the property market by boosting economic activity and jobs, as well as improving the appeal of specific locations, adds Ryder.

“Nothing bumps up property markets like infrastructure spending; it’s going to be huge for the property market,” he says.

“That factor is almost going to guarantee that across Australia there is going to be a real estate boom in 2021.”

Common Sense with Paul Clitheroe

With so many varying forecasts about the future direction of the property market, I thought I would ask Paul Clitheroe of Money Magazine fame for his view.

Here’s his response below:

Hi Tyron,

It is indeed an unusual time. Hope you and family are well.

My view is pretty common sense, in short form below:

Cheers

Paul Clitheroe
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The future of office buildings…

Is the office as we know it dead?

MUCH has been said about the future of workplaces since COVID-19 forced some major changes to office life as we know it,  kicking flexible work practices into gear.

At this stage, no one really knows how offices will look in the future as uncertainty still abounds, but we do know that workplaces will undergo (potentially lasting) change.

Health and safety will be a huge factor, with social distancing requirements and even temperature testing being introduced in some buildings, but flexible working arrangements will also determine how future offices will look.

I look into my crystal ball at the end of this blog

COVID-19 Handshake

How will workplaces change?

COVID-19 has necessitated the most transformational shift for work in perhaps a century, says McCrindle Communications Director Ashley Fell, who just released a new book about this topic in conjunction with Mark McCrindle called Work Wellbeing: Leading thriving teams in rapidly changing times.

“The most notable was when almost overnight the office-bound workforce globally relocated to their homes,” she says.

“The digital transformation of our organisations was achieved not through management strategy or a new technology solution, by the realities of this virus.

“For the first time in modern history working from home became the norm and even ushered in the three-letter acronym to describe it: WFH. And it is here to stay.”

In the future it is likely we will see our office spaces change to accommodate more flexible working styles and less people in them all the time, says Fell, with most workers in this knowledge economy having more of a regular opportunity to work a day or two from home.

“Our national survey amid the COVID-19 crisis showed that 69% said they were as, if not more, productive when working from home than they were at their office.

“It also showed that far from being a temporary response to a global pandemic, 78% said that working from home will become the new normal.”

Workplaces will also change to become COVID-safe, enabling social distancing and safety and health measures.

Property Council Chief Executive Ken Morrison says the Property Council has worked closely with Safe Work Australia on guidelines for office buildings, including how to manage lifts, common areas of buildings and change room facilities for cyclists and people running or walking to work.

“There is now comprehensive advice available to help building managers and businesses to make their workplaces COVID-safe. Our members have been proactively addressing these issues to provide a COVID-safe environment for their tenants and their workers.

“As people are able to return to their offices, we believe they will do so in increasing numbers depending on their local public health restrictions.”

Offices are here to stay

With more people working from home it is likely we will see less demand for full utilisation of office spaces that has been the norm over the last few decades, says Fell. But that doesn’t mean offices will be gone entirely.

“The office will still be important in the future, but likely for collaboration, creativity and social interaction – the parts of work that are harder to achieve when workers work remotely.”

While there are some who say COVID-19 is the death of the CBD or the office building, says Morrison, and we may see some tenants provide more of their people with flexible working arrangements, at the same time they may also need more space in their offices to accommodate physical distancing.

“There may be some changes to the way we configure our offices, but they will still be a very important part of our working lives.”

While Australians have shown great versatility in making the shift to working from home, many are keen to get back to their workplace and reconnect with their work colleagues in person, adds Morrison.

According to an ABS survey recently, 86% of working Australians were somewhat comfortable in resuming attendance at their usual workplace, he says.

“There are lots of positive benefits to working in an office including the opportunities they present for critical ingredients for business success, including collaboration, creativity, innovation, learning, mentoring and developing and sustaining team culture.

“Many businesses have been able to manage remote working so well because of the close internal and external networks that their people developed in the pre-pandemic. Businesses have been surfing off the previous benefits of working in offices.

“It’s also a practical issue – not everyone can do their jobs as safely or efficiently from home, so we need to make sure that our CBDs and offices are open and working again to support those businesses which need a physical premises for their staff.”

LJ Hooker Commercial Managing Director Mathew Tiller says while there will be some businesses that see COVID-19 workplaces changes as a way to reduce costs and move some work online, many businesses will be unable to reduce their office space as they will need to ensure social distancing requirements are maintained.

He says those in the former category are also unlikely to do away with the office entirely.

“They will still need a central point to meet; a place where employees can catch up and engage with others.

“Working from home is great in terms of not having to commute to the office, but human interaction is also still very important for culture of work and mental health of employees. It also cultivates ideas and strategy.

“There will always be a need for office space; it will just be used differently and for different purposes.”

Tiller says the location of offices may also change, with many businesses likely to consider moving from the CBD to a suburban office closer to where employees live.

What do I see when I look into my crystal ball?

From an Investor Viewpoint:

In my view office buildings will become more spread out over time. We may find more suburban co-work spaces in the future. People will still want to physically interact, albeit less often.

I can see some CBD Offices being converted to residential over time.

I can’t see too many new office buildings being given the green light in the future.

Smaller office spaces may become more in demand as companies downsize to reflect the new working from home reality.

If you don’t own an office and are thinking of having a small hub where workers can get together and share space, now might be a good time to start looking.

From a Tenant Perspective:

If you are a tenant with a lease that’s about to expire, now could be a good time to negotiate.

You may have a clause that allows you to “re-set” the rent based upon an independent market valuation, rather than an automatic increase or linked to CPI.

I expect to see a lot of sub-leasing space coming onto the market over time.

As a rule of thumb, businesses require roughly between 8 and 12 square metres of gross space per employee. With more employees working from home, companies could in effect get two employees in that space on a co-sharing basis, thus reducing the need for office space in the future.

Whether you’re an investor of office space, or a tenant, you can get a depreciation schedule quote with our quantity surveyors

Depreciation Schedules – The New Reality

The COVID-19 pandemic has forced many businesses to reflect on “industry norms” and the way they operate. We are no exception.

At Washington Brown we believe in researching each property and advising clients on the best way to approach achieving the maximum depreciation in the most cost-effective way.

Not EVERY property needs to be inspected in order for the maximum claim to be achieved.

This USED to be the case – but the tax legislation recently changed and property investors can no longer claim depreciation on items like ovens or dishwashers that are not brand new.

So NOW you can only claim depreciation on the structure of the building like concrete and bricks for 2nd hand properties.

If you BUY brand new items like carpet and blinds, you can still claim depreciation but it must be based upon the purchase price (not an estimate).

In the OLD days, we used to visit the property so we can value these items individually, the ATO put a stop to that.

Our Commitment to Property Investors Moving Forward

If we determine that an inspection is NOT required to ensure the maximum depreciation claim – this will reduce our fee AND you’ll receive the report sooner. Let Washington Brown work out the best depreciation plan for your property here.

Here are 5 reasons why SOME properties do not require an inspection:

  1. Extensive Database – In 40 years we have amassed an extensive database of construction costs for the majority of residential and commercial buildings around Australia.
  2. We have the costs – We are familiar with your building and as such, we already have the construction costs on file.
  3. Plant & Equipment no more – You have purchased a second-hand property so you cannot claim on the existing plant and equipment components.
  4. Online data – There is an abundance of detailed information and pictures of your specific property available online (both publicly and via subscription-based industry databases).
  5. You have the costs – Your property is a brand new build and you have access to the construction cost, plans and inclusions list.

Here are 5 reasons why SOME properties STILL NEED an inspection:

  1. Your property is unique – Your property is classed as High Spec/Luxury/Non-Standard and therefore not typical. An inspection will ensure the maximum deductions by ensuing all facets of your property are assessed and included.
  2. Non-residential – This means you can still claim the full benefits of depreciation including the Plant & Equipment (carpets, blinds, etc.)
  3. Renovated – Your property has been substantially renovated. There is insufficient information online and as such an inspection is necessary to maximise the depreciation.
  4. More information required  – We do not have access to sufficient information specific to your property. We, therefore, need to acquire this via an onsite assessment.
  5. Plant & Equipment – Your property qualifies to claim Plant & Equipment deductions, an inspection ensures no assets are missed, which means your deductions are maximised.

The Australian Institute of Quantity Surveyors CEO, Grant Warner,  has confirmed the following in writing to Washington Brown:

“I would like to confirm that AIQS (or the legal advice we sought) makes no representations about:

Grant Warner, CEO, The Australian Institute of Quantity Surveyors.”

Let Washington Brown work out the best depreciation plan for your property by getting a quote here. Or work out much you can save by using our free Property Depreciation Calculator.

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’!

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

“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.

Five Secrets to Improving Investment Property Cashflow

Investment Property Cash Flow

Cashflow can become a major problem with yourproperty 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 theproperty 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 followedinvestment 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 yourinvestment 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

Theproperty 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 ofproperty 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 aboutrental 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.

The Five Things Your Tax Depreciation Schedule Must Contain

Why you shouldn't DIY depreciation schedule

An investment property tax deductions calculator won’t always show you everything you can claim. Many leave out the assets that go into a typical depreciation schedule. Here are the things that your tax depreciation schedule must contain.

When it comes to tax, there’s one question you must ask about your investment property: what can I claim?

There are the basics of course. Everybody looks into mortgage tax deduction. Australia is full of financial experts who can help with this issue. You may even find that an investment property tax deductions calculator can do the basics for you.

But what about property depreciation? It’s a type of deduction many investors miss, but it could save you thousands of dollars every year. Others make claims, but do so using the wrong schedule. Again, they end up missing out on thousands of dollars in savings.

You need to call in the experts. No, that doesn’t mean your accountant. Instead, a Quantity Surveyor is the professional you need to create a strong depreciation schedule.

The typical schedule will include the depreciation of capital works and equipment. However, some leave out other, less obvious, assets. Here’s what your depreciation schedule must contain if you’re to maximise your deductions.

Item #1 – Common Indoor Items

(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).

You may have chosen a unit or apartment as your first investment property. Australia has several cities, which can make such properties a wise investment choice.

Naturally, you’ll claim depreciation on your unit’s assets. But what about the assets that it shares with other units in the apartment complex? You can claim for your portion of those too, but many investors miss out on these deductions.

Common items include fire extinguishers, air conditioning units, and lifts. You can also claim for ventilation and hot water systems. You don’t get to claim depreciation on the full value of the asset, but even a little bit can help with your cashflow.

Item #2 – Scrapped Items

Depreciation CalculatorLet’s assume you’ve carried out some renovations on your property. Oftentimes, you’ll have a bunch of assets left over that you no longer have a use for. Many just throw such items away, without giving them a second thought.

That’s a mistake. Old items have what’s known as a scrapping, or residual, value. This is the item’s value once it’s reached the end of its use.

You can claim a final depreciation sum on any items you intend to throw away following renovations. Such items include old appliances or carpets. Have a Quantity Surveyor create a new depreciation schedule prior to your renovations. This will ensure you catch any assets with scrapping value.

Item #3 – Common Outdoor Items

Let’s come back to shared items. It’s not just the common indoor items you can claim depreciation on. Any common items outside the apartment block itself have value to you as well.

This includes pathways, fences, and various landscaping items, such as pergolas. You may even be able to make claims on a shared swimming pool.

However, you can’t claim for all common outdoor items. For example, turf and plants won’t find their way into your depreciation schedule.

Item #4 – The Fees You Pay to Design Professionals

Did you realise that you can include the fees you pay to design and construction professionals in your tax deductions? Australia offers plenty of opportunities to build your own property. Investors often go down this route, rather than buying an existing property.

Your depreciation schedule must account for the costs of such construction work. This includes the money you paid to any designers or architects who worked on the project.

Make sure you supply your Quantity Surveyor with accurate receipts for these services. This will allow you to maximise your claim for the fees you pay.

Item #5 –Money You Pay to the Council

You may have to pay fees to the council for various services. For example, there are costs involved with lodging application fees, or getting council permits. Depreciation Quote Schedule

If you’re building your own property, you may also have to spend money on infrastructure. This might include gutters and footpaths.

Your depreciation report should include all these items. Again, this is something that many investors miss out on because they don’t think the costs relate directly to their properties.

The Final Word

Check your depreciation report again. Does it include all the items on this list? If not, you’re missing out on several Australian Taxation Officer (ATO) tax incentives for homeowners.

You need the help of Washington Brown to create an accurate tax depreciation schedule. Call us today to speak to one of our Quantity Surveyors about your property.

Things To Know Before Buying an Investment Property

Six Things To Know Before Buying an Investment Property:

You may be thinking about buying an investment property. Australia has a strong property market, which attracts a lot of buyers. However, there are some property investment basics to keep in mind.

The attractive Australian house market has many people investing in property. For beginners, this means learning the property investment basics that will lead them to success. After all, property isn’t a sure thing. It may offer more security than investing in stocks, but you have to put the work in to generate an income.

So what do you need to learn before you invest in a property? Here are some things you must know about property investment for beginners.

Issues #1 –How Much You Can Borrow

You need to know how much you have to spend before looking for an investment property. If you don’t, you run the risk of finding the perfect property, only to discover that you can’t afford it.

You can get a general idea for how much money you need when buying an investment property.

Calculator websites allow you to enter some figures to produce a rough estimate. They’ll ask about your income, in addition to any expenses you currently incur. These include everything from your debts, through to the dog food you buy each week.

However, you won’t know for certain until you speak to a lender. Most importantly, you must find out how much of the property value you can borrow. This will tell you how much money you must raise for your deposit.

Issue #2 – Your Investment Plan

Most people approach property investment with a simple end goal. They want to make enough money from their property to quit their jobs. However, many don’t really understand what this means. Enough money for one person may not be enough for another. Depreciation Calculator

So, you need to have a plan in place before you start investing. Work out how much income you need your investments to generate before you can live off the proceeds.

This is your real goal. A vague notion of early retirement won’t keep you focused. You need to know exactly what you’re shooting toward before you invest your money.

Issue #3 – The Different Types of Gearing

You may have heard of gearing, without really understanding the concept. You need to learn what gearing is to create a strong investment plan.

There are three types of gearing: positive, negative, and neutral. Positive gearing means that your property generates enough income to cover its expenses, with money left over. You have to pay tax on your income when you have a positively geared property.

Negative gearing means your property doesn’t generate enough money to cover its costs. This may sound like a bad thing. However, you can use negative gearing to your advantage. Many investors offset the losses their properties make against other income sources, such as their salaries.

As the name suggests, neutral gearing means the income covers the costs. You don’t make any profit, but you don’t lose money either.

Issue #4 – The Choice Between City and Rural

There’s a huge difference between city and rural properties. City properties give you access to more people, which makes it easier to fill vacancies. However, rural properties allow you to charge higher rents. You can also buy rural properties for less money.

So, which do you choose? It all comes down to what you want to achieve. City properties tend to enjoy higher capital growth than rural properties. However, it’s easier to positively gear a rural property.

You need to do your research before creating any property investment strategies. Australia offers all sorts of opportunities. Consider area population, local economies, as well as demand when choosing where to buy your property.

Issue #5 – Who Provides Legal Advice?

You’ll have a choice between conveyancers and solicitors when looking for legal advice. Both work in law, but they’re slightly different.

Conveyancers focus solely on property law. They’re highly specialised, but won’t be able to help you with any issues that aren’t directly related to the property. Solicitors offer well-rounded knowledge on a range of issues. However, they also cost more money.

Your choice depends on the property. If you anticipate a lot of legal issues, hire a solicitor. This usually costs between $2,000 and $3,000.

A conveyancer costs approximately $1,000. Use these professionals if you anticipate a simple transaction.

Issue #6 – Your Exit Strategy

Depreciation Quote ScheduleYou should achieve success with proper planning. However, that doesn’t mean that you don’t need an exit strategy.

Your exit strategy determines how you’ll generate a profit from your investment. For example, you could decide to sell after a set amount of years to take advantage of capital gains.

Alternatively, your exit plan may involve benefitting from the rental yield until you retire. Upon retirement, you could move into the property, rather than sell it.

The main point is that you need to know how you’ll exit the investment. If you don’t, you can’t take full advantage of the property during your ownership period.

The Final Word

Investing in property could help you to enjoy a greater level of financial comfort. However, poor preparation will lead to mistakes and potential losses. You need to know how to maximise your investment before you commit your money to a property.

Washington Brown can help you with that. Our Quantity Surveyors can help you to calculate how much you can claim in depreciation. Get in touch today to find out more.