With so much going on in the Property and Finance space currently, I thought that now would be a great time to catch up with my friend and leading property analytics researcher Terry Ryder (Owner and Creator of Hotspotting).
I was able to speak with Terry recently to ask his opinion on investment and the current climate. I wanted to share the content of our discussion with you all and hope you find it both interesting and insightful.
Terry – in your opinion is it a good time to invest in property now?
It’s time for investors to get off the fence and start taking action in real estate markets.
The revival in major city markets since May has been largely driven by owner-occupier buyers, with investors sitting on the fence and watching events unfold.
Investors exited the Sydney and Melbourne markets in droves last year as it became evident that the boom in those cities had expired.
The first half of 2019 was a perfect storm of negative factors for real estate – the lead-up to the Federal Election put a brake on decision-making, finance was hard to obtain, big city prices were trending south and media was largely pessimistic.
There’s certainly been a turnaround since then hasn’t there?
The turnaround since May has been profound. The Federal Election result led “a series of fortunate events” which unfolded in rapid succession: an easing of lending restrictions, a series of interest rate reductions, lower taxes for many Australians and a change in the tone of media coverage.
Initially, we saw an improvement in sentiment. Then, as that translated into action at street level, the real estate data started to improve. Sales activity picked up, auction clearance rates improved and price trends improved.
Terry – have you got any data to back up this improvement in sentiment?
Real estate data is now positive for most markets. Here’s what the indicators are telling us:-
Vacancy rates: Vacancies are low in most cities. Sydney is the only capital with a vacancy rate above 3%. Vacancies are much lower than last year in Brisbane, Perth, Adelaide, Darwin and Hobart. Melbourne is a little higher but still only 2%. Canberra vacancies are up but remain just 1.2%.
Rentals: Residential rents have risen in all capital cities except Sydney in the past year. Figures from Domain and SQM Research confirm the biggest growth has been in Hobart, which has the lowest vacancies. Rents are up 3-4-5% in Canberra, Adelaide and Perth, while Brisbane and Melbourne are up slightly.
Clearance rates: Throughout August, September and October, Sydney and Melbourne have been recording auction clearance rates above 70%, compared to 45-50% a year earlier. Buyers are competing for good properties and listings are relatively low.
Prices: August and September both delivered positive price data in most cities, notably in Sydney and Melbourne. SQM’s Prices Index early in October recorded monthly price rises in Sydney, Melbourne, Brisbane, Adelaide, Canberra and Hobart. In annual terms, there’s evidence of price uplift in Brisbane, Adelaide, Canberra, Hobart and even in Darwin. Sydney and Melbourne remained down in annual terms, but only by 1-2%, much better than six months earlier. There have been strong rises in many regional markets also.
Investors drifted away from real estate in 2018 and early 2019 because it seemed the growth party was over. Now, all the evidence points to recovery.
The latest lending figures showed the first signs of investors returning to the market. I expect subsequent months to show investors coming back in greater numbers.
Thanks Terry I look forward to chatting with you more in the upcoming months.
It’s no secret that there are different strategies when it comes to investing in property. Some people prefer to invest in brand-new properties, while others opt for older property that they can renovate and resell for profit. Whilst depreciation should never be the reason behind an investment decision, recent legislative changes have altered which types of properties are eligible for depreciation deductions.
When announcing the Legislative Changes in 2017, the government stated that moving forward, they will “Deny income tax deductions for the decline in value of ‘previously used’ depreciating assets.”
What does this mean for investors? Let’s look at this in context. If you look at the table below, you’ll see a simplified net effect of the cost of owning an investment property broken down into three generalised scenarios:
- A brand-new property;
- A second-hand property built between 1987 and 2018; and
- A property built before 1987.
1987 – 2018
@ $700 Per Week
|Interest @ 4% of
@ 1.5% (Rates, levies)
|Cash Surplus/Outlay Before
|Year 1 Depreciation Deduction – Building
|Year 1 Depreciation
Deduction – Plant & Equipment
|Total Taxation Position
|Tax Refund @ 37%
(Net Outlay + Tax Refund)
|Cash income Per Week
(If a Positive Number, the Property is paying you)
The assumptions are the same for each scenario: each property will generate a weekly rental income of $700 over a 52-week period, which works out at $36,400 per property.
Furthermore, the interest rate is 4 per cent for each property. Each scenario incorporates an LVR of 80 per cent of the purchase price ($750,000) – This equates to an annual interest expense of $24,000.
Each property will have other expenses – Assumed at 1.5 per cent of the purchase price, which is $11,250 annually. Granted, you could argue that property built before 1987 could have higher expenses, but for ease of comparison, we’ve kept the same rate.
So, it’s the same scenario for each property with the net outlay before depreciation of $1,150.
Now, here’s where things get interesting! What about the depreciation?
- In a brand-new property, the total depreciation deduction in year one is $15,000 (Building Allowance + Plant & Equipment).
- For the second-hand property built between 1987 and 2018, the total depreciation deduction is $4,000. This is due to the fact that the property is not brand new and the Plant and Equipment component is seen as previously used and cannot be claimed on. The only deduction available here are against the original structure and the structural component of any previous owners’ improvements/renovations.
- For a property built before 1987, the depreciation is $0. It is important to note here that, if the property has had improvements/renovations done by a previous owner, you are eligible to claim on the structural component of this. As accredited Quantity Surveyors, it is our job to estimate the date and costs of these previous works.
Note: Recipients of this email are entitled to a FREE estimate of the depreciation deductions available. If you own an investment property, new or second-hand, and haven’t had a depreciation schedule prepared, click here to request an estimate.
Depreciation on a brand-new property
You can see that the total tax loss on the brand-new property is quite high at $13,850. If you are an investor who is paying tax at a marginal tax rate of 37 per cent and you’re making a loss of $13,850, you will receive a tax cheque back from the ATO to the tune of $5,125 – and that’s cash in hand.
This amount, plus the $1,150 (Cash Surplus Before Depreciation) is $6,275. In this example, the property has been paying you $6,275 a year to own that property – so the net return is $120 a week positive cash flow.
Depreciation on an old property
Next, let’s look at the property built before 1987. Again, there is a $1,150 cash surplus before depreciation. In this example, you cannot claim depreciation on the previously used Plant and Equipment or on the original structure. So, here, you’ve actually increased your taxable income by $1,150. If you are in the 37 per cent income tax bracket, this equates to you paying an additional $426 in tax.
Given that you’ve made $1,150 and have then paid the additional $426 in tax for this, you are roughly $724 up per year. That’s around $14 per week you are making to own a property built before 1987.
Depreciation on a second-hand property built between 1987 and 2017
Using the same variables, if you bought a second-hand property built between 1987 and 2018, your annual tax loss would be $2,850, so you would receive a tax refund of $1,055 (providing you are in the 37 per cent bracket). Your cash surplus before depreciation was $1,150, so your annual surplus for owning the property is $2,205. That means your weekly cash flow a positive $42.
As you can see, from a depreciation perspective, there are pros and cons of buying brand-new vs older or almost-new properties. Again, whilst a property’s likely depreciation deductions shouldnt be the main reason for a purchase decision, depreciation certainly has a significant impact on an investor’s cashflow equation.
Remember: To receive a FREE estimate of the likely deductions available to you on your investment property, whether new or old, click here!
At Washington Brown, we are always happy to provide updates to your report – usually free of charge.
If your schedule has recently been completed, and you realise you forgot to provide certain information, such as an additional owner inclusion, post-contract variation, etc., let us know and we’ll amend your schedule to make sure it’s all included.
If later down the track, you purchase a new item or do a minor renovation, such as internal painting, you can certainly send it over to us to add into your report. However, if these few minor items will not drastically change the figures of the original report, it is often easier to just provide the costs to your accountant, and they can include them in your future tax returns.
If you’ve performed a major renovation, generally upwards of $10,000, it is best to have your schedule updated by the original Quantity Surveyor, rather than your accountant, to maximise the returns. The original Quantity Surveyor will often be able to scrap certain items and building components that were removed during the renovation, providing you with a large, immediate deductions. For these larger updates, an inspection may be required, and a fee will often apply.
Contact email@example.com if you’d like to have your depreciation schedule or have any queries.
If you provided us with your accountant’s details at any point during your job, then they should have everything they need to submit your claim!
If you didn’t, however, it won’t take long to supply them with the right documents.
There are four main files they may need:
- Excel file: shows the detailed calculations of both Plant and Equipment values and Building Allowance totals. Includes a yearly breakdown of each asset’s claimable amount.
- HTML file: shows the name, cost, effective life and depreciation rate of both Plant and Equipment and Building Allowance.
- PDF Report: includes all the above information in an easy to read format. Provides tables clearly showing the yearly available claims, and a graph to compare methods of depreciation.
- PDF Invoice: don’t forget to send them the invoice for our services, it’s 100% tax deductible too!
All of these files are available for download in the ‘Past Reports’ section of your WBme account.
The file types different accountants need varies, so if you supply each of the above, it should cover all bases.
On request, a 5th file type is available. Only some accountants require this and they will generally ask you for it or contact us to prepare it for them.
- CSV files: formats the calculations in a way that can be entered into accounting systems, such as HandiTax, without hassle.
So, you’ve received your depreciation schedule – now you have a choice to make. Should you choose to claim the Diminishing Value method, or the Prime Cost method?
Both methods are based upon the effective life of the asset – i.e. how long it will last.
Diminishing Value Method
The DV method depreciates items more quickly up front. This method recognises the fact that most plant and equipment items lose a higher portion of their value early on.
The decline in the value of the item gets progressively smaller over time on the way towards $0.
For example: if the carpet you bought has a value of $1000 and a 10 year effective life, you would calculate the depreciation as follows:
Year 1: $1,000 x 20% = $200
Year 2: ($1,000 – $200) = $800 x 20% = $160
Year 3: ($1,000 – $200 – $160) = $640 x 20% = $128
And so on and so on.
When should I use this method?
Property investors tend to use the DV method when they want their deductions up front. As they say, a dollar today is worth more than a dollar tomorrow.
A Washington Brown depreciation schedule provides property investors with an annual breakdown of all eligible deductions using both methods of depreciation. To request a free quote for a fully comprehensive report, click here.
Prime Cost Method
This method allows you to evenly spread out how much you can claim each year.
For instance, with the Prime Cost method, carpet purchased for $1000 (with an effective life of 10 years) can be claimed at 10% per annum, or $100 per year.
When should I use this method?
This may suit someone, for instance, who bought the property then lived in it for a few years before turning it into a rental property.
Or perhaps someone with little to no income in the next few financial years, and wants to have greater claims available when they start earning a higher income and enter a higher tax bracket.
By slowing down the claim, you will not miss out on as many deductions.
*Remember, once you choose your method of depreciation, you cannot alternate between the two.
That’s why we always recommend you talk to your financial advisor as to which method suits your individual circumstances.
To find out how much in depreciation deductions you’re entitled to, submit your property for a free review by one of our Quantity Surveyors.
If you’re not an accountant, or this is your first depreciation schedule, reading all those figures can be a little daunting.
Of course you could just give the report to your accountant and let them sort out your claims for you, but maybe you want to understand how you’ve saved all that money!
There are four main terms you must understand in order to read your report:
- Building Allowance: this is the deduction available to offset the hard construction costs of your property (including concrete, brickwork, etc.). Generally the Building Allowance will equal the total original construction cost plus any renovations, minus non-eligible costs and plant and equipment values. It can be claimed at 2.5% for properties built after 1987.
- Plant and Equipment: this refers to the fixtures and fittings within a building that are relatively easily removable (including ovens, light fittings, carpet, blinds, etc.). Plant and equipment is able to be claimed at a faster rate than Building Allowance – the rate is dependent on the item’s Effective Life.
(Note: your report may show low or no plant and equipment deductions if your property is affected by the 2017 Budget – read more about those changes here).
- Diminishing Value (DV): this is one of two methods you can choose to claim your depreciation. The DV method front loads your deductions, recognising that most Plant and Equipment items tend to lose a higher portion of their value early on.
- Prime Cost (PC): this is the other method you can choose. The PC method spreads out your Plant and Equipment deductions evenly.
(For more information on the differences between the two methods – click here.)
Now to the specific pages of your report:
In a sense, there are two copies of each type of page: one for the DV method and one for the PC method. For the most part, they are the same, although apply different rates to the plant and equipment assets.
The ‘Construction Summary’ pages for both DV and PC methods, show the calculations made to arrive at your total Building Allowance. The total figure for each method will be the same.
The next few pages for each method are the ‘Schedule of Depreciable Items’. These pages show the values and depreciation rates of individual plant and equipment items, owner included or previous owner renovations (if applicable) and the total Building Allowance again.
The DV ‘Schedule of Depreciable Items’ will show effective lives of ‘<=$300**’ and ‘Low Pool*’ for some assets. ‘<=$300’ are items with a value less than or equal to $300, and are eligible to be fully deducted in the first year of ownership. While ‘Low Pool’ items are those valued at less than $1000, and are depreciated at 18.75% in the first partial year of ownership, and 37.5% in subsequent years.
The ‘<=$300’ and ‘Low Pool’ assets are not available in the PC method, and therefore won’t be shown in the PC ‘Schedule of Depreciable Items’.
The ‘Year End Summary’ for both methods are similar, with the DV version showing an extra column for ‘Low Value Pool Items’. The figures to focus on here are in the ‘Amount Claimable’ column, showing the total claim per financial year, already prorated based on your settlement or construction completion date.
Finally, the ‘Graph’ page shows your total claims over the first 20 years of ownership. Each bar shows two financial years’ worth of claims, increasing cumulatively. It also provides a comparison between the rate of claims between the DV and PC methods.
If you have any further queries regarding your depreciation schedule, contact firstname.lastname@example.org
At Washington Brown, we aim to keep the turn-around time from ordering your report to receiving the final copy to less than 7 days for No Inspect properties and less than 14 days for properties we have to inspect.
Our records show that 94% of jobs get completed within these timeframes.
If an inspection is required, we usually have it booked within the first 3 business days after you have supplied all the Required Information, and then completed within 7 days. Tenant availability is the biggest variable here, occasionally causing a slight delay, although we find that most tenants do allow access at short notice.
Once the property is inspected and we have all the information required from you, your report will likely be completed within 7 business days.
No Inspection Required
The timeline for a ‘No Inspect’ depreciation schedule is a bit more simple. Once you’ve provided all the required information (construction costs, schedule of finishes, plans, etc.), we’ll have your report completed within 7 business days.
At Washington Brown, we try to make the inspection process as smooth as possible for you. Once you have provided the Required Information to us, that’s all your work done! We set out about organising the onsite inspection.
This begins with getting in touch with the Access Contact you have put down – often your real estate agent. From there, our inspector will organise a time to inspect that suits the tenant, aiming to complete the inspection within a week in most cases.
Our inspection process is designed to maximise your depreciation every time, and it’s taken over 20 years to perfect the art.
All our inspectors use our digitally powered quality assurance process – the TAXMAX500 – which evaluates every property across 500 variables, and is constantly updated as ATO policies change.
A standard inspection involves our inspector measuring the dimensions of every room, nook and cranny, documenting each and every one of the fittings, fixtures and built in assets within. In fact, we’ve created an app that ensures our property inspectors can’t proceed from one room to another without documenting and photographing particular items from a very specific list.
It doesn’t finish there, our inspectors will also make sure they inspect and evaluate the common areas, basement/garage area and amenities. You’ve bought a share of these areas, we make sure you claim it!
By putting these checks and balances into place, using our 20 years of experience, we can guarantee to get you the maximum deductions – every time.
Step 1: You provide the best Access Contact
Step 2: We organise the inspection with the real estate agent or tenant
Step 3: We complete the inspection
If you’ve engaged a builder, bought a house and land package, or constructed a brand new home yourself, then there is some great news!
- The 2017 Budget changes to depreciation don’t affect you (provided you never lived in the house yourself); and,
- We can generally complete your report at a lower fee, as we won’t have to conduct an inspection (provided you can supply us with the correct information)
Regarding the first point, the changes that restrict deductions on plant and equipment for second hand properties don’t apply to brand new properties. As a result, your depreciation claims will generally be much higher, especially in the early years of ownership.
Unfortunately, if you lived in the property as an owner occupier at any point, the plant and equipment assets are deemed to have been “previously used” and therefore ineligible to be claimed once you do start renting the property out. It’s not all bad news though, you can still claim on the Building Allowance, which for brand new property is usually quite substantial.
As for completing the depreciation schedule for a lower fee, there are three things we require you to provide:
- The total construction cost or purchase price
Generally, a copy of your building contract will satisfy this requirement, although make sure to include any post-contract variations.
If you organised the build yourself, a spreadsheet of all the costs incurred is required (e.g. Council fees, architect fees, trade costs, appliances, finishings, etc).
If the property was purchased as a house and land package, and the developer did not provide a cost split between the house and the land, then the total purchase price will suffice.
- Schedule of Finishes
Your builder will normally provide you with this before they commence construction. Often it is a document, around 10 pages long, listing all the inclusions the builder has agreed they will provide (sometimes with individual costs next to some of these inclusions).
For house and land packages, it is common for this list of inclusions to be displayed on just one or two pages.
Both types of schedule of finishes should include items such as the kitchen appliances, floor coverings, electrical fittings, air conditioning type, etc.
The final floor plans of your property are all we require for this step. However, if you have the electrical plan and/or floor coverings plan, they are often very useful too.
So, generally that’s all the extra information we require specifically for New Build properties. If you have further questions about any of these steps, or depreciation in general, email email@example.com and one of our depreciation experts will help you out.
Below is a list of the types of additional required information we may require to produce your comprehensive, ATO compliant Depreciation Schedule.
Whilst you do not need this information at the time of accepting the quotation, you’ll need to supply this to us before we can commence work on your report.
If you are unsure of any aspect of the below or if you feel you will be unable to provide the information, please speak to your Washington Brown Tax Depreciation Specialist about options and the best way to proceed.
If you purchased the property:
- The approximate age of the property or construction commencement date.
- The contract settlement date.
- The contract exchange date.
- The purchase price of the property.
If you built or had the property built for you:
- The construction commencement date (month/year).
- The construction completion date.
- Schedule of finishes and floor plans.
- Summary of all costs to build the property or the building contract.
- Full address of the investment property.
- Owner’s name(s) as you would like it to appear on the report.
- To complete the report we will require access to your property. Please provide property access details (e.g. tenant, property manager).
- Details on any renovation work you have carried out to the property.
- Details on any additional items you have purchased for the property (such as blinds, air conditioner, etc.).
- If you wish for us to include all the furniture in the property e.g. beds, linen, lounges, cutlery then we will require copy of the inventory list.
- If the items on the inventory were not part of the purchase price of the property, we will also need the price paid and the date of purchase for each of the items (or total cost if bought as a furniture package).