The Property Market Limbo: Depreciation Solution

Budget Changes Depreciation Solution

The property market is currently in a state of limbo, particularly those involved in the selling of new property.

Why?

Because budget statement in relation to helping “reduce pressure on housing affordability” has potentially changed the game and 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 7.30pm Tuesday, May 9th 2017 are not affected (unless they were not income producing in the 2016/2017 financial year – read more about the updated Budget changes here).
  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. 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…

According to the budget statement

“From 1 July 2017, the Government will limit plant and equipment depreciation deductions to outlays actually incurred by investors in residential real estate properties. Plant and equipment items are usually mechanical fixtures or those which can be ‘easily’ removed from a property such as dishwashers and ceiling fans.”

Here’s the uncertainty….who actually acquired the plant of equipment?

Was it the builder/developer or was it the initial purchaser of the brand new residential property?

This is key.

Why is the government making these changes?

“This is an integrity measure to address concerns that some plant and equipment items are being depreciated by successive investors in excess of their actual value.Depreciation Quote Schedule

Acquisitions of existing plant and equipment items will be reflected in the cost base for capital gains tax purposes for subsequent investors.”

The industry needs urgent clarification on this matter! Why? Because many agents are currently advising potential buyers on the cashflow advantages of new property. This figures may prove to be inflated and put the developer or marketer at risk further down the line.

You see investors rely on these figures in assessing the merits of the investment.

Here is why I think this is dumb policy.

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

  1. Property investors may now feel they need to hang on to their existing properties in order to continue claiming depreciation. With these new changes, if they sell this property, they won’t be able to get anywhere near as many deductions on the next one.
  2. Developers rely on high depreciation figures in the early years to show investors how affordable an investment property can be. If the allowances are taken away, they will struggle to get the pre-sales which are required by banks to fund the deal.
  3. These budget measures 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 issue, this truly appears to be an example of policy on the run…

Here’s the solution:

Depreciation CalculatorPlant and Equipment in residential property needs to run it’s natural course.

The ability to re-value and re-assess the item after it’s initial effective life has run it’s course should be squashed.

Put simply, if you a buy a property that is say, 11 years old, and it has a dishwasher installed that had an initial effective life of say 10 years you can’t claim it, revalue or re-assess it.

That would alleviate the government’s concern that:

“….that some plant and equipment items are being depreciated by successive investors in excess of their actual value. “

This would make a lot more sense in my opinion

I am looking forward to  providing a further update once the legislation is finalised and I will give more details regarding the specifics of these changes when they come to light.

UPDATE: Read about the revised Budget changes here.