Property depreciation is a legal tax deduction related to the ‘wear and tear’ of an investment property over time. A tax depreciation schedule outlines the deductions you may be entitled to claim each year of ownership on the Building Allowance (the structure itself including bricks, concrete, etc.) and, if eligible, on the Plant and Equipment items (internal items like ovens, carpets, blinds, etc).
As with any tax deduction, claiming property depreciation reduces your taxable income. That means more money in your pocket to reinvest or to spend on yourself or on your family.
A depreciation schedule from Washington Brown is a fully-comprehensive, ATO-compliant report that helps you pay less in tax. The amount the depreciation schedule says you can claim effectively reduces your taxable income because it’s taking into account how much it costs you to own and maintain the property.
While you may be used to claiming on such items as council rates or property management fees where you have paid money towards an item or service, depreciation is a “non-cash deduction.” This is because it’s the ONLY deduction that you don’t have to pay for on an ongoing basis – its already ‘built’ into the purchase price of the property.
Let’s talk about bricks and mortar. Or what the Government calls the Building Allowance.
Whilst you can no longer claim depreciation on plant and equipment in second-hand investment properties, that’s the things like ovens, dishwasher etc.
You can still claim the structure of the building, that’s the bricks, concrete, windows, tiling, etc. provided the residential property was built after 1987.
And these costs typically represent about 85% of the construction cost of the property.
And that’s good news, but I want to turn it into great news!
Up until now, when you ordered a depreciation report, quantity surveyors give you a lump sum total for your building allowance, based on the government’s guidelines that these items last approximately 40 years.
But in our experience, that’s not true.
Investors tend to update things like kitchens and bathrooms every 20 years.
So Washington Brown has come up with the Building Allowance Maximiser report, and it’s the only one of its kind.
What it does, it splits the building allowance into different categories, based upon our research of what items wear and tear more quickly.
Which means, if you use our report, when you replace those items or update them, you’ll be able to claim the full amount as an immediate tax deduction.
Let’s say I bought a property 20 years ago, with a kitchen that cost $10,000 to build.
Now, because it’s halfway through its 40-year life, I’ve only claimed 50% of its depreciation, which is $5000.
When I remove it today, using Washington Brown’s new report, I’ll be able to claim the remaining 50% as an immediate tax deduction.
The 6 must-know takeaways from these budget changes:
For residential property, you will only be able to claim depreciation on plant and equipment items (ovens, dishwashers etc.) when you buy a brand new property.
You will still be able to claim the building allowance (bricks, concrete etc.) on any residential property built after 1987.
If you bought a property built prior to The Budget on the 9th of May, 2017 when the changes were announced, you are not affected in the slightest.
There is no change at all to commercial or other non-residential property.
If you personally buy any item for your property after the settlement you can still claim the depreciation on that particular item.
Perhaps the most interesting point: Whilst 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, by claiming any unclaimed depreciation as a capital loss.
Moving forward, property investors will have a choice of ordering a building allowance report only, a CGT schedule or a combination, from Washington Brown.
Peter: The attendance tonight is mind blowing. In the world of depreciation, this is very much the equivalent of playing to a packed stadium. So thank you all for your interest.
Tyron Hyde: Peter, I’ve never been more popular.
Peter: Yeah, well. That’s right. In the quantity surveying world, this is as good as it gets I think.
Tyron Hyde: Sure.
Peter: Look, as all of you know the federal budget announcement at 7:30 pm on Tuesday the 9th of May included proposed changes that will significantly affect the way property investors claim depreciation in Australia from now on. Please feel free to type questions in the question panel as we go, and we’ll certainly have a question and answer session a little later on, but for now, to talk you through the ins and outs of these proposed changes, I’d like to hand over to Washington Brown’s Director, Tyron Hyde.
Tyron Hyde: Thank you Peter. I just want to confirm you can hear me okay?
Peter: Yip, all good on this end. Yip.
Tyron Hyde: Okay, great. Okay so, firstly thanks for coming. I know you can be doing other things tonight like watching the Swans or the Sharks and you’ve chosen to come here and listen to a talk on depreciation, but if you’re a property investors it’s probably a wise decision, because in my view what’s about to occur in the property investor market, is huge.
There are big changes ahead and I think we need to understand that, but before I get into those I just want to have a quick vote or a quick poll. I’m curious, how many of you have actually bought an investment property prior to the budget on May 9, 2017? So Peter’s going to put up a quick poll and you can vote or answer “yes” or “no”, whether you did or not. That’ll be great. So I’ll just give a quick couple of seconds to do that. Thank you.
Now let me tell you, you’re the lucky ones because what you’ve entered into will not change. If you bought an investment property prior to the budget, you’re lucky because these changes will not affect you, but I’ll go into that a little bit further down the line. But there are changes ahead and we need to be aware of them, and as property investors, we need to strategize about how it’s going to affect our future investments because the budget had changed the game.
The investment equation is altered significantly since the budget and I’ll explain that more shortly, but before I do that, a little bit about myself. My name’s Tyron Hyde, I’m the CEO of a company called Washington Brown. We’re Quantity Surveyors and as Quantity Surveyors, we work out what things cost to build. A large part of our business is in the preparation of depreciation schedules. So we go out to the audience and we identify what the construction cost of the property was and what the final equipment that you buy in that property contains.
So, we give you a report that says you can claim certain amounts of deductions based upon the construction cost, and also what’s included in that property as well.
But in summary, as Quantity Surveyors, what we do is we work out what things cost to build, and the reason I’m here tonight was a ruling in 1997 called TR 97/25 and that identified Quantity Surveyors as being the appropriate body to estimate construction costs where the costs are unknown. It was a good ruling to me, because they identified that we’ve got a lot of work, but in the good old days i.e., let’s talk about the good old days.
In the good old days, roughly a month ago, what we’d use to do; we’d go out to a property as I said, and we would distinguish between the plant and equipment in the building and the building allowance, the structure of the building. Now the plant and equipment in the building are things like the ovens, the dishwashers, the carpets. Now, this is the stuff that’s going to wear out quicker. The other part of a report of depreciation schedule is what’s called the Division 43 allowance. That’s the building allowance. That’s the structure of the building, that’s the brickwork, the concrete, the windows etcetera.
Now in order for you to claim those allowances, the property has to be built after 1987. So what’s changed? Well, lots changed. What the government is proposing is exactly this. Now I often like slides with lots of images, but a couple of slides here you need to understand what the exact budget measure is. So let me highlight it here. Now, this is the budget measure, and I’ll read this.
“From July 1, 2017, the Government will limit plant and equipment depreciation deductions to outlays actually incurred by investors in residential real estate properties.” Now the key here is “actually incurred”.
Who actually incurred that expense? Was it the developer? Was it you? So what they’re saying is, if you buy a secondhand property, it’s guaranteed that if you buy a secondhand property, that oven in that property wasn’t yours. You didn’t actually incur that expense when you bought that depreciable item.
I don’t know who bought it, I don’t know who did, maybe the fairies bought it, but you as property investors didn’t actually incur that expense. So you can’t claim the depreciation of those depreciable items such as the ovens, dishwashers etcetera. Who wants some good news? Put your hand up if you want some good news. Me too. The good news is, it’s grandfathered. The proposed changes they’re about to make are grandfathered, and what that means is that if you bought a property prior to the budget, nothing changes.
Who wants some good news? Put your hand up if you want some good news. Me too. The good news is, it’s grandfathered. The proposed changes they’re about to make are grandfathered, and what that means is that if you bought a property prior to the budget, nothing changes.
The good news is, it’s grandfathered. The proposed changes they’re about to make are grandfathered, and what that means is that if you bought a property prior to the budget, nothing changes.
If you exchanged contract, let’s be clear on this if you exchanged a contract prior to the budget, nothing changes. If you’ve already got a report from Washington Brown, you continue to claim the depreciation exactly how it is. It’s moving forward from that date. So, if you did buy a property two years ago and haven’t got a depreciation report, now is a great time to get a report because you have the benefit of the old system. So if you did buy a property three years ago or two years ago, and haven’t got a report, now would be a good time to do that. You can actually amend tax returns to factor in that property that you haven’t claimed, so you can actually amend your tax returns for a
If you’ve already got a report from Washington Brown, you continue to claim the depreciation exactly how it is. It’s moving forward from that date. So, if you did buy a property two years ago and haven’t got a depreciation report, now is a great time to get a report because you have the benefit of the old system. So if you did buy a property three years ago or two years ago, and haven’t got a report, now would be a good time to do that. You can actually amend tax returns to factor in that property that you haven’t claimed, so you can actually amend your tax returns for a
So if you did buy a property three years ago or two years ago, and haven’t got a report, now would be a good time to do that. You can actually amend tax returns to factor in that property that you haven’t claimed, so you can actually amend your tax returns for a two-year period.
So, now would be a good time to get a report if you haven’t got one. What else is good news? Well, the other good news is this only relates to residential property. So offices, industrial properties, retail properties, there’s absolutely no change. This is only targeting residential property investors. The other good news is that
Well, the other good news is this only relates to residential property. So offices, industrial properties, retail properties, there’s absolutely no change. This is only targeting residential property investors. The other good news is that
The other good news is that there have been no changes to the Division 43 deductions. What does that mean? Well, as I said before, there’s two components of a depreciation schedule. There are the plant and equipment and there’s the building allowance. The building allowance is the structure.
So you can still continue to claim. If you’d buy a property today, you can continue to claim brickwork, the concrete, the roof, the scaffolding as shown in this image here, exactly as it always has been. But the issue is, and there’s a bit of confusion in the market and quite rightly so, as to whether these changes affect the new property, or is it just secondhand property? No one knows. I’ve been in meetings with other Quantity Surveyors firms and really, we are unsure. I’ve written to Treasury and asked them for their guidance as to whether new property can still continue to claim the depreciation of plant equipment, and I got the usual response, “We’re formulating this budget measure …”
That’s not good in my opinion because there’s a lot of people out there now buying property, brand new property, and not knowing the full impact of what their depreciation claim will be and no market likes uncertainty. Now the reason there is uncertainty is because of this. Let me read the budget statement again.
“Acquisitions of existing plant and equipment items will be reflected in the cost base for capital gains tax purposes for subsequent investors.”
Now the key is here “existing plant and equipment items”. So it’s pretty clear if it’s a secondhand property it’s an existing item, but what about if I’d buy a brand new property that’s being finished, but it’s two weeks old, is that an existing plant and equipment item? You tell me.
What happens if I buy a property off the plant and it hasn’t even been built yet? Is that existing because I’ve entered into a contract to do that? What happens if I flip that property in three years time, who can claim those existing plant and equipment items? It wasn’t clear in saying brand new property’s okay, a secondhand property is not and that’s why there’s confusion in the market.
The bad news, boo! Who wants the bad news? No one wants bad news. The bad news is definitely for a secondhand property, the way the budget statement is written and possibly new, not yet sure, but definitely for a secondhand property, you will not be able to claim depreciation on things like ovens, dishwashers, lights, air-con, television sets, blinds, carpets, all those depreciable assets.
If we’re talking about a high rise apartment here, we’re talking about the common property items that you cannot claim as well and that might be things like the lifts, your portion of the lift, your portion of the smoke detectors, your portion of the common carpet in the hallway, garage motor doors, all right. So all those kind of equipment items will in the future be part of the cost phase. Who wants some great news? We all want great news. The great news is, you’ll still need a QS, said that with a smile, but you’ll still need a Quantity Surveyors because in order to claim the building allowance, you’ll still need to work out what the actual cost of construction of the structure is, and that’s where we come in.
The problem is that it’s going to be less. So let’s put this into perspective all right. When you build a house, roughly probably about 15% … I said 80/20 there because when I went to iStock, there was no 85/15 rule, but approximately 15% of the construction costs of a unit or a house relates to the plant and equipment of a building, that’s the ovens, dishwashers et cetera. The other 85% relates to the construction cost of the structure of the building. It’s got a massive difference in the overall claim that you’ll be able to make over 40 years. The main difference is in the early years, and that’s when a property investor needs those claims.
Here are some charts showing what the difference would be. So let’s say you buy a brand new unit today for $850,000. Pre-budget, your first-year claim will be about $20,000. Today, post budget, if your property is not allowed, will be about $9000. The second year $17,000, the second year post budget $9000. You can see here on this chart by about the eighth, ninth year, it’s getting very similar but it’s in the early years where the big difference is and that is when an investor needs it. See after 10 or eight years, the rent’s gone up and it’s not as crucial to getting those big deductions. Now let’s look at another scenario. If you were to buy a property built in the year 2000 that cost $850,000, today or pre-budget you’d get about a $15,000 year one deduction. Post budget you get about $6000 in my opinion. It’s about a third.
Again, year two $13,000, year to now, about $6000. The big difference is up front when you need it. About in year eight, year nine, it’s very similar, but again it’s the early years when and investor needs that to make it affordable. Now let’s look at a property built in 1986, and as I said before, a property has to be built after 1987 in order for you to claim the structure of the building. So, in this case, a property built in ’86 will get you $0 now if it has had no renovation. Pre-budget you might be able to claim $6000 in the first year, second year $3,000 and that relates to the plant and equipment, but because post budget you can’t claim the plant and equipment, there’s zero.
In my view that’s not going to occur a lot because most properties built before ’86 has had some renovation on it. It’s very hard to rent out a unit that was built in, say, 1980 that hasn’t had some capital improvement on it, new kitchen, new bathroom tiling, etc etcetera. So this is a bit of an exaggeration because most properties built before ’86 have had some capital improvements to them, but it highlights the difference between a property built before ’86. Now, why is the government doing this?
There are a couple of reasons in my view. The first reason, as the budget statement says is, “This is an integrity measure to address concerns that some plant and equipment items are being depreciation by successive investors in excess of their actual value.”
You know what? I agree with them, a 100% agree with them. The reason is, there’s hasn’t been a lot of legislation or guidance on how you actually value second-hand plant and equipment attached to buildings, attached to land. Let me give you an example of this, and this actually occurred … I’m sitting at 321 Pitt Street right now and last week a unit in our block, in our Strata building here, sold for $600,000. The next day, someone came along and gave that guy $800,000 check to take it off him. So he made $200,000 in one day. Now, how do we as Quantity Surveyors value the carpet that was sold with the $600,000 purchase and then the next day, value it when someone bought it for $800,000?
In theory, even though it was a day, the carpet depreciated and because someone paid a lot more for it, didn’t they just pay a bit more for that carpet that was situated in that suite? I would argue “yes”. Now, this is a very different scenario to the building allowance because the building allowance and the structure of a building are based upon its actual cost. So it has no bearing in relation to what the purchase price was, but plant and equipment are based on what you pay for it. That’s the confusion. The other issue is to address housing affordability, and I agree that if you’re in Sydney or Melbourne right now, not in a lot of parts in the country, but in Sydney and Melbourne right now if you’re on a medium wage it’s pretty hard to get into the market no doubt.
I’m not sure though if these measures are the correct way to address housing affordability, I’ll go through that shortly. So will it work? Well, if you ask me, the government’s got themselves into a pickle. There is a fork in the road, as I’ve shown by this fork and pickle, that they’re going to legislate this two ways and I do truly believe that when this budget statement came along, there was a lot of people in the ATO saying, “How on earth do we legislate this?” So there are two paths they can take now. One is to allow new a property to be depreciation and then the second purchaser thereafter can not, or all property, new and secondhand property, can not claim the plant and equipment as a depreciable asset.
So let’s look at these options. So if they say that new property’s okay, well, don’t you think that near new property will struggle to sell? Say I want to buy a property, if the developer down the road is selling a brand new unit and he’s saying, “I can get you $20,000 in depreciation” to someone who’s got a similar unit nextdoor that’s two years old and there’s far less depreciation, I suspect that those people that have got the secondhand property would struggle to sell that. That worries me a little bit because I know there’s been lots and lots om mums and dads have been advised by their financial planners to take money out of their super fund and to buy this brand new unit. If they need to sell that in a couple of years time, a two-year-old property, in my view they’re going to struggle.
I think people will hold on to their property, don’t you? If I bought that brand new property three years ago and I’ve just seen that the law has changed, and if I go and buy another property, I can’t get the same depreciation allowances, I suspect that people will hold onto it. Now I’m not a great economist, but I do remember one thing about economics and that price tends to be a factor of supply and demand, and if there’s less supply in the market, prices could go up. I don’t know how that’s going to affect affordability. The other thing is, do you remember the Vendor Tax? I don’t know how many of you are here in New South Wales, but about 15 years ago, the state government in their wisdom here, decided to introduce a Vendor Tax on property, which was, in essence, a stamp duty on the way out.
It was about two and a half percent and they said, “Well, we’re going to slug you, two and a half percent of the sale price of the property when you sold it.” Guess what everyone did? They held on to their property. The revenue forecast for that was a quarter in the first year and they didn’t get the stamp duty, they didn’t get the forecast on the Vendor Tax, so seven months it was around and then they squashed that and said, “This doesn’t work.” I can see the same thing happening here. Let’s look at their other option. That all property, there’s no depreciation on plant and equipment. Well, if new property can’t be depreciation for plant and equipment, in my view, developers will struggle to get presales.
You know, when a developer is developing a block of apartments, they need presales to show the bank that this is a good job from a financing point of view, and in a lot of the way they do that is by getting investors to buy early on and they do that by mathematical modelling and a big part of that is in depreciation deductions. If they can’t get that, they won’t get funding so obviously they’ll struggle to get off the ground because not a lot of people say, “I want to buy that unit. In three years time I want to live there and be an owner occupied property” because things happen. Some of them get married, some have kids. The owner occupied market is more closer to the event, whereas investors can do the mathematics on it, hope the property goes up, know they’re going to get these depreciation deductions etc cetera..
So, that could limit supply, which again, how’s that going to help affordability? I don’t think it’s going to. And again, people that have already got property, will hold onto their property because they know that if new and secondhand property can’t be depreciated for their plant and equipment decisions, I’ll just hold onto it. It’s like what happened with the Vendor Tax in my view. I don’t think there’s been a great cost benefit analysis of this proposed change. This is from the government, this is from the budget statement. Their forecast, Treasury’s forecast over the three year period, they’re going to save $260 million from this, over a three year period.
How on earth they got that number is baffling to me, but in the overall scheme of things, I don’t think they’ve weighed up what the risk of changing people’s mentality of how to buy and sell property is. You see, there could be a loss of revenue in Capital Gains Tax. If some people at the moment though, “Well, I think the Sydney market or Melbourne market has peaked and I’ve made a half a million dollars on it” they might sell because they might think, “Well, you know, I can continue to claim these deductions.” Maybe. If they don’t sell and they don’t go a buy another one, well, they might be less stamp duty, or they can’t get into that new property because there’s less deductions, there will be stamp duty loss.
Another aside is this. If new property can’t be depreciate as well, well then construction activity will slow down. The Housing Industry Association says that for every $1 spent on a construction job, $10 filters through the economy. Now I know they HIA is quite pro property, well let’s assume they’re half right. It’s a big risk/reward scenario just to save $40 million in carpet deductions I the first year, if you ask me. Houston, we have a problem. Now I look at this from a technical point of view, because I’ve been dong this for 25 years and I can see how this actually works in terms of what we do as Quantity Surveyors and I think there’s some problems and some things that have not been thought out.
When I’ve been giving these talks, a lot of people say to me, “Well, I’m just going to split the contract. I’m going to buy a unit or engage a builder and say, ‘Well, just have the plant and equipment separate’ and then I actually buy that stuff” and that could occur. It depends on the legislation as to how that actually occurs, but I think the government will say that if [inaudible 00:22:50] at the time, it’s part of the property. I don’t know, but already whenever I’ve given these talks, people were already trying to work out how they can get around it without any legislation being written. I don’t think that’s a very good system that we’re going into.
Another issue is, let’s say a new property is allowed to be depreciation, what happens if I buy a brand new property, I live in it for five years, I did apply that, but then I moved out, can that person claim it? I’m not sure. Now, this is the trickiest one to me and I guarantee no thought has been on this. What happens if I buy … because as I said before, commercial property can be depreciation, but residential can’t. What happens if I buy a property that has a doctor suite or dental suite at the front or a retail space and has a retail down the bottom and a residential probably at the top?
So in that scenario, we can have the same carpet at the top, the same carpet down the bottom at the retail or the commercial space and the carpet downstairs is okay, but the carpet upstairs is not. We could have system where deducted air-conditioning goes throughout the whole building, but half of it is okay, half of it’s not. Then, when you sell it, you’d have to somehow split the capital gains cost base into the two and you could have a control system that’s just in the residential, but not in the commercial and I don’t want it there. Not a lot of thought in there if you ask me. So, I can see a CGT nightmare coming along with this, quite frankly, particularly in those areas where there are multi faceted buildings.
Here’s another thing. What about the building contract? What happens … so it says here, so if the plant and equipment is actually acquired by you. So if I engage a builder to build a house, could I acquire that plant and equipment, or do the builder? I’m not sure. I would assume where I’d engage a builder and having a building contract, I would actually acquiring that plant and equipment, so it would be okay. That’s an assumption, but that would be a different scenario to where a developer built a block and you buy it new. What I would think that moving forward, if you actually engage a builder
What I would think that moving forward, if you actually engage a builder to build a property for you or renovation, then you’re actually as part of that building contract, acquiring the plant and equipment within the building contract.
If not, again, people that I’ve spoken have said, “Well, I’m doing a renovation, do I need to split out the plant and equipment now, have that as what’s called a plant cost item, and acquire those items myself?” Seems a lot of work for the minimal reward that the government gets. So, I’ll stop talking about the problems. What the solution? Well, I’ve been involved with some meetings with the Australian Institute of Quantity Surveyors and some other CEO’s of leading firm and it’s quite simple if you ask me, and in reality it probably sort of what’s always occurred. That is, I’ll give you an example. So in my view, the plant and equipment item within a building should be based so the original purchase should be able to claim the depreciation item.
What’s the solution? Well, I’ve been involved with some meetings with the Australian Institute of Quantity Surveyors and some other CEO’s of leading firm and it’s quite simple if you ask me, and in reality it probably sort of what’s always occurred. That is, I’ll give you an example. So in my view, the plant and equipment item within a building should be based so the original purchase should be able to claim the depreciation item.
So that’s in this scenario here, I’ve got carpet here as a good example. At the opening day of a brand new unit, the carpet was $3000 and it was sold after 5 years. The costs to that second purchaser should be about $1500 because it’s gone through half its effective life. This carpet has an effective life of 10 years. So the value should be around $1500 and that reflects the historical cost of the carpet, and that’s what we do now with brickwork and concrete and the structure. We look at what it originally cost to build, and I think the same thing should happen with carpet. Similarly, if the property when I bought it was 12 years old and the carpet had a 10 year effective life, when I buy it today, it should be zero, because it’s already passed its used by date.
At the moment, we look at the carpet and we’ll say, “Well, based upon the purchase price you’ve paid XYZ for your carpet, even though it’s 12 years old.” I think this would address the government’s concern that investors are claiming successive amounts higher than they should be, and I agree with that. That would address that, but also I think this will be able to meet the budgets forecast measures. I think it’s a logical solution. As Quantity Surveyors we’re also trained to look at this stuff and there’s a system in place to implement that, and this would also not disrupt the new property selling market and the construction activity.
So we, as an institute and other learned colleagues, have written to everything politician, senate and lower house, suggesting this as a method that will not disrupt the property market. Here’s hoping. Can’t guarantee it, but it would make logical sense to me. Now Peter is going to run a poll, because I’m curious … look, I’ve got my views on this topic and I think … well, I’ll let you decide. We want to run a poll. We did this at lunchtime today and we asked people what they thought of this. So basically we’ll run a poll now. Poll’s open, I can on my screen and the poll is, I want you to answer … and we’re going to send these results to you tomorrow.
The question is, “Do you think limiting the amount of depreciation you can claim when purchasing a new property will help housing affordability?” So I’m just going to let you vote on that for a second, and as I said, we’re going to send you the results tomorrow. Is that right Peter?
Peter: Yeah, along with as special offer for attending the webinar too.
Tyron Hyde: Great. So let me know when we can go to the next slide? You know I chose this even though it’s got the American flag. Just thought he was really cute and just though I’d like him in there.
Tyron Hyde: All right, let’s move to the next one. I hope you voted on that, thanks. Now I wrote a book called “Claim it”. It’s very relevant today, because a lot of it talks about my property investment journey and property investing in general, but obviously parts of it might be a little bit outdated thanks to the budget. So I’ve been approached by my publicist to write another book and I need a new title.
Peter: I’d like to remind everyone that this was also a bestseller, isn’t that right Ty?
Tyron Hyde: Absolutely it as a best seller. I think it had to reach 7000 sales to be a best seller, but the fact that my mother bought 4000 copies is absolutely irrelevant. The wonderful thing about when she did that Peter, was she read it, she said, “Well Ty, that’s great. I actually know what you do now” which was wonderful. So some of the titles been bantered about are “Claim it 2”, “Keep claiming it”. My favourite so far is “Claim it 2, electric boogaloo”, but I would like you to recommend some. One of the ones at lunchtime today was, “Claim it 2, the demise of Scott and Malcolm” along those lines, but if you can suggest a title, that will … you never know, you might have a book named after you. So wonderful. I will send you a signed copy of that. We’re also going to, Peter, send a discounted rate to people after this webinar. Tomorrow I believe.
Peter: Yep, so look out for that tomorrow.
Tyron Hyde: Now I’m going to throw some questions. Whenever I’ve given this talk, I’ve had some fantastic questions. When I gave this talk in Melbourne last week on stage, but one guy put his hand up. He said, “Tyron, so what I’m going to do, is I own an old property, but what I’m going to do is I’m going to rip out all the carpet and the blinds and the dishwashers, all that plant and equipment stuff and sell it as a bare bones property, because then, when that new purchaser comes in, they can buy all those stuff themselves and claim the depreciation.” I thought it’s an interesting point.
So I was wondering if you guys and girls have any questions that you’d like to throw at us? I’m not sure that I can answer it, but I’ll do my best, but because there is a little bit of uncertainty about this topic, I’ll certainly endeavour to do my best.
Peter: Well Ty, we’ve certainly got a huge array of questions here, which is fantastic and we’ll try and get through as many as we can. So we’ll jump right in. Similar question asked by Minlee and by Michelle and they’re saying, but purely from a depreciation maximisation perspective with these new rules in place post budget, “What type of property should investment property should I be looking for?”
Tyron Hyde: Well, that’s a good question. Firstly I’ll say that tax driven investments are not what someone should focus for. Obviously commercial, industrial properties you’ll still be able to claim depreciable benefits and building allowance benefits. Just like residential properties, you can still claim the building allowance, but to me, the investment focus of an investor or should not be about the tax driven benefits.
You should be focusing on other things such as the infrastructure, yields etc cetera, and then make the tax benefits work for you. Easier said than done, but that should be the focus but clearly commercial properties and industrial properties will still be able to reap the benefits of depreciable plant and equipment assets. The funny thing about this is, I think the government has targeted residential properties for this and in reality, let’s face it, they’re really targeting Sydney and Melbourne because someone who’s owned a property in Perth isn’t jumping up and down saying, I’ve got all these depreciation benefits when their property has gone backwards, right?
So in my view it is a Sydney and Melbourne kind of focus tax driven budget measure. The interesting thing about that is, I mean look at what the RBA is saying, they’re more concerned or as concerned about the commercial property market. Some of the yields that people are buying commercial property on at the moment, are ridiculous, but they’ve let commercial properties continue the way they are. That’s possible because there’s a lot of big players in commercial and if you were to tell Lendlease, so when they buy a shopping centre, they can’t claim the air-conditioning in their shopping centre, that would be difficult.
Peter: So potentially commercial property, who knows in the future whether they’ll shift attention to that too?
Tyron Hyde: Who knows? Who knows?
Peter: All right, I hope that answered that question guys. All right, so we’ve got a question here, obviously a good one, from Mark. Mark’s asking, “Do these changes apply to all scenarios of ownership for residential property, for example, is it the same for owners whether they’re an individual owner, a joint owner, a company, a trust, a super fund?”
Tyron Hyde: Great question Marc, it’s something that I haven’t thought about, to be honest. It does. It clearly just says it’s residential, not the structure that you own it in, but it’s a really good question. I never thought about that, but the differentiation is not the entity that you own it in. The differentiation is that it’s residential property. So the answer is I don’t think it matters when you own in a trust fund or super fund, it’s clearly written that it applies to all residential properties, but a good question.
Peter: Yeah, I thought so too. All right, Jayni is asking, “When we talk about property purchased before Tuesday, May 9th, when these changes were announced, do we mean settlement date or contract exchanged?”
Tyron Hyde: Definitely contract exchanged. So if you bought that property prior to … if you exchanged that property, but you settled today, you’re okay. We had a client last week, ring us up in a panic saying, “I exchanged on the 9th of May. What kind of reporting can I do?” And we said, “Well, you’re going to have the old good report. You’ll be able to claim both plant and equipment and the building allowance, provided that you exchanged before 7:30 pm.”
Now most people do, but sometimes it does occur later, but we said, “As long as you’ve got some email correspondence from your lawyer that this occurred prior to 7:30 pm, which is when the cutoff hour is, you’d go into the older system and be fine.” So it’s definitely on exchange, not on settlement and on that note, if you entered into a building contract the same applies. It’s not from when handover is, it’s when you would’ve signed that building contract, so when you entered into that building contract would be the applicable time, not when the building was handed over to you.
Peter: Right, okay. Thanks for clearing that one up. Okay, we’ve got a question from David. David’s asking, “I bought my investment property three years ago and have never had a depreciation schedule prepared. Can I get one now, and how many years back can I claim?”
Tyron Hyde: Absolutely you can David. So you’re in that boat where I said before, that this is a golden opportunity for you. What we will do is we will based that report on when you settled on that property. You’ll get a report that says from us that you settled in 2014 and those deductions will start from that day. You can then amend … you know, you need to speak to your accountant about this, but … maybe not your accountant, but as far as we’re aware you can amend your tax returns for two years.
If you’re up to date, you can amend two years back. If you did your last tax return 2015, you can go back to 2013, but again we’re not accountants and you need to discuss that with your financial advisor, but that’s the advice we get from many different firms.
Peter: All right okay, great. We’re getting some really fantastic questions here. Vicky’s asking, and I think it must relate to one of the graphs you showed, the comparison chart. She’s saying, “Is there a reason that the pre budget side uses are diminishing value method and the post budget changes side use the prime cost?”
Tyron Hyde: Vicky, you get a Cutie doll, very clever question.
Peter: It’s a good one.
Tyron Hyde: The reason is that because in the post budget … so in the pre budget, the plant and equipment can be claimed by the diminishing value method and the prime cost method. Post budget, if all we’re talking about is the building allowance, you cannot claim the building allowance via the diminishing value method. It has to be claimed by the prime cost. So very impressed with that question and it wasn’t a typo. So pre budget you’ve got the allowances thereof 20k the first year for the brand new property.
Half of that would be prime cost, which would be the building allowance, the other half would be the diminishing value method, which would be the depreciation of the plant and equipment. Moving forward, if there’s no depreciation of the plant and equipment and it’s part of your CGT equation or part of the cost base, and all you claim is the building allowance, you don’t have a choice to claim the building allowance under the diminishing value method. All you can do is claim that under the prime cost method, so very good and well spotted Vicky.
Peter: And Ty, that’s because it’s at a set rate and therefore the same each year, isn’t that right?
Tyron Hyde: Correct. So the building allowance is a set rate of two and a half percent over a 40 year period, which is why it’s slower. It’s a fixed rate. As an example, if the structure of the building costs $200,000 today to build, you get to claim that at two and a half percent over a 40 year period. So each year is five grand, five grand, five grand, whereas the ovens and dishwashers all have varying rates of depreciation, all have varying rates of effective lives and so it’s a very different scenario and those plant and equipment items we can claim using the diminishing value method, or you can use the prime cost method on that. Complicated, I know, but well done Vicky.
Peter: Good question. Ty, Lisa is asking, “If we already own a unit and we renovate, say now, after the budget, are we entitled to claim any scrapping allowance? Any residual value and can we claim depreciation on the renovation, the new items we’ve purchased?”
Tyron Hyde: So Lisa owned that property … hi Lisa. You own that property prior to the budget, was it?
Peter: Correct, yeah.
Tyron Hyde: Yes you can. So the scrapping of the residual value, again, if you’ve bought the property prior to the budget, there’s no changes in what you can do in terms of removing items and your original claim is not altered. If you removed items from a property you already owned, you would still get a balancing adjustment of that, there’s no different here because those plant and equipment items do not form part of your cost [inaudible 00:41:57]. It’s a different CGT equation. Another example, say I bought a property prior to the budget, say I bought it in the year 2015 and I renovate that property today, the question there was also asked, “Can I claim the depreciation of the renovation if I bought it prior to it?”
The answer’s yes, the budget statement clearly says that if you bought a property prior to the budget and you then go and replace the oven and depreciation that oven, you can claim the depreciation of that oven. What it does also clearly say is that the purchaser after you cannot.
Tyron Hyde: And that’s were a little bit of confusion is in terms of where it words the subsequent investor. So it clearly says that a subsequent investor cannot claim the depreciation of the plant and equipment, which had let a lot of people to think that new property’s okay, but I’m not reading that way. To be honest, everyday I change my mind. I think, “Ah, they’re going to allow new. Ah, they’re not going to allow new.”
There’s lots of reasons why I could argue both reasons as to why they will they won’t and I can go on all night about that and the answer is, I don’t know.
Peter: It’s frustrating, but I guess we have to have a definitive answer and clarification from the Treasury office as of, what, the 1st of July.
Tyron Hyde: Absolutely. In reality, it should’ve occurred already. It should’ve occurred already, because right now people … as you know Peter, we produce reports for the developers and with say … and we’ve done this since the budget, we’ve said they want to know when they’re selling property, how much allowances they can show potential investors, they can in depreciation, right?
So there’s people out there right now, with marketers and developers saying, “Based upon our forecast and you can get a $15,000 depreciation deduction year one” and they can enter into that contract and then, in three weeks time, they’ll have to go back and say, “Sorry, it’s going to be $6000” and I think it’s quite shocking, quite frankly, that this uncertainty is in the marketplace.
Peter: Yeah, I agree. Very frustrating. Okay, another question if you’re happy to keep taking them. I’ve got one from Veronica. Veronica’s saying that she’s owned her property since well before the budget changes and it was her principal place of residence and now post budget changes, she’s going overseas for an extended period of time and the property will now become a rental. Will she be able to claim the depreciation on the plant and equipment items?
Tyron Hyde: Great question. As I said before, I will be hoping to answer all I could. I think you will be okay. I think that the legislation will look at when you actually acquired that plant and equipment and that was prior to the budget, so in theory it should be okay. I’m not going to bet my last dollar on that, but I think that would be okay. I think that anything prior to the budget, you’d still be under this grandfathering law and the law should still apply to you. It’s a good question, but I think you should be okay.
Peter: Yeah, so I guess Ty, the take away from that is where we think that it will be relevant to when you purchased the property as opposes to when it became an income generating asset.
Tyron Hyde: Correct. Absolutely right. Far better word than me, Peter.
Peter: Well, I’ve had time to think about it. You’ve been speaking. All right. We’ve got a question here. Let’s take this one from Allan. Allan’s asking, “How does all of this affect negative gearing?”
Tyron Hyde: Wow, okay. Good question. So if you ask me, okay, let’s think about negative gearing. So what most people know about negative gearing is that you can claim the losses of the property against your taxable income where there is a loss. Now the interesting thing about this is that, in the current interest rate environment, up until two years ago, most people were getting a 5% yield on properties and as rates have come done to three and a half percent or 4%, well, there’s actually not a lot of negative gearing in terms of what the outlays of your mortgage are versus your rent until today.
I was at a seminar last week and the finance broker was saying they can still get 3.8% mortgage as long as you’ve got 20% equity in the investment property. So at 3.8% you’re getting rent, maybe not in Sydney, but in a lot of parts of the world because there are other places other than Sydney and Melbourne with who we’re getting 5%. Well, that’s not real negative gearing there, is there? In some ways I would say that what the government’s done, and it could be a brilliant political move, they have just sloshed negative gearing without telling anyone they’ve done it because the only thing that … if you look at what the deductions are for investment property owners.
There’s the mortgage, but there’s a lot of other things. So, when you’re reading the paper, “Property investors, they’re claiming $3 billion in negative gearing deductions.” If you actually drill into what the losses are, a lot of it relates to things like accounting, property management fees, rates, taxes. Now I can’t see a time where all those costs are not going to be deductible. That’s like saying when you buy a share that your brokerage fees are not deductible.
In reality, if rates are where they are and rents are where they are, the only thing that are pushing people into the negative gearing territory would be the depreciation of the property, because they’re never going to not let you, in my view, claim your property management fees or accounting fees. So as I said before, when the papers say, “There’s $3 billion in negative gearing losses” lots and lots of that relates to things that are not losses on your mortgage.
As part of that $3 billion figure, guess what one of them is? It’s land tax. So they’re saying that the losses of you paying tax on your investment property are part of the negative gearing equation. So in some ways I would argue that what the government has done, is squash negative gearing without telling anyone, because they said pre election they’re not going to stamp out negative gearing.
Clever. Clever in my mind I guess, but again I reiterate, I think the risk/reward ratio of what they’re trying to do, is far greater than what the reward they would have. I” just get off of my soapbox now Peter.
Peter: Ty, are you happy to take a few more questions that are still coming in?
Tyron Hyde: Absolutely.
Peter: All right. May have covered this before, but Yen is asking, “If I buy a new apartment, do I get the depreciation on the plant and equipment items, or does the developer?”
Tyron Hyde: No one knows, is the simple answer and that’s the big unknown. As I said, I change my mind on that all the time. Look, if the developer builds and develops the property, he’s gong to be able to claim the depreciation. If he then sells it to you as the purchaser, I would hope that you as a purchaser will be able to depreciate those plant and equipment items.
One of the reasons why I suspect that new property will not be able to depreciate as well, is because you could have the bizarre scenario where if someone buys a unit in a high rise block and owns it for two years and they can only claim that carpet for two years, that the next person who’s bought the same unit down the hallway, he owns it for five years.
He can claim the carpet for five years and there’s no other president in that scenario. That doesn’t occur in any other depreciable asset regime. It’s very unusual, so that tends me to think that they will say no new property cannot be claimed as well, but that’s why I think there’s to been a lot of thought in this because they probably went into this thinking that it’s only going to apply for secondhand properties, but then they thought about the mechanics of it, and thought, “How’re we going to do this?” and I’m waiting with bated breath to hear how they are.
Peter: Don’t know if they call that policy on the run, don’t they?
Tyron Hyde: I think they do. I think they do, and look, I think what’s happened is that the government had to be seen to be doing something against property investors. Rather than squashing negative gearing, this was their way of saying, “We’re trying to address housing affordability by limiting deductions on depreciation. We’re not saying there’s no negative gearing, but we’re going to do this” but I don’t think there’s been a lot of thought on the mechanics of it.
Peter: Well, time will tell.
Tyron Hyde: It will.
Peter: All right Ty, maybe one last question, and it’s a doozy I think. Leechen is asking, “If I buy a property built before 1987 today, there would be no building allowance to claim on. If the previous owners have conducted an extension of the building, am I able to claim on this?” And then second part to the question Ty, is, “How would I know if previous owners have done this?”
Tyron Hyde: So the first part of the question, it was an extension and it’s the building allowance component of it. Well, the laws haven’t changed in that regard. You can still claim the building allowance component of the extension regardless of these changes, because as I said before, the building allowance hasn’t been affected by that.
What might be affected is if there was carpet in that extension. That might be an issue, that would have to be worked out, but the structure of that renovation, there’s nothing changes because the building allowance component hasn’t changed.
Your second part of the question was, “How do we work that out?” You engage Washington Brown. That’s what we do. We go out to that property, because generally speaking, those costs are transferred over at settlement. So we go out to the property and we measure the areas and we look at what the structure is, we work out what the actual cost of the construction was.
Sometimes we don’t know when it occur, but we try to decipher when that renovation occurred and that’s what we write in your report saying … we say, “Well, the renovation occurred in 2000. The approximate cost was a $150,000 for that renovation” and the ATO, I will say generally accepts our view, but in 25 years they’ve never not backed one of our reports. So I’d say they do accept our view on that.
Peter: Yeah, right. And just to clarify there. You can start claiming the 40 years worth of depreciation available on those extensions from when we identify that they were put in.
Tyron Hyde: Correct. So if that extension occurred 10 years ago, Leechen would have 30 years, if he bought that now. Leechen, you have 30 years left of the claim left of the building allowance on that.
Peter: Even though there might only be 10 years left of claim on the original structure, for example.
Tyron Hyde: Well, there might be no claim on the original structure. So our report will say that there’s nothing on the original building, but the renovation of the property that occurred 10 years ago, you have 30 years left to claim that now. The new budget laws or budget proposal doesn’t affect that at all.
What might be affected, is the carpet within that renovation. This is where it’s all getting very, very interesting.
Peter: Well, I guess that’s a good segue to say stay tuned for the next web event when we get a little more clarification. We’ll certainly be wanting to share that with you all again.
Tyron Hyde: Well, that’s right. I think the amount of people that have come tonight and today, I think we’re definitely going to do an update of what’s actually occurred and look at other news of how we look at what people might do in the future shall we say.
Peter: Yep. Great. Well look, as Ty mentioned, again the attendance was fantastic tonight and you’ve all stayed online till the very end. I hope it was valuable. Once again, watch out for that email from us tomorrow, containing the link to request a quote and receive that exclusive discount and just to mention finally, if you have any questions about your specific scenario and depreciation, hopefully you can tell from tonight that we’re pretty passionate and a little bit nerdy about this stuff and we really love talking about it.
So if you do have any questions, please feel free to get in touch. One of our sales team would be happy to talk about your specific circumstances.
Tyron Hyde: And just finally, thanks for coming. It’s an interesting time that we’re all entering into. I’m going to keep … hopefully our clients and others abreast of these changes because it’s certainly is, in my 25 years of being at Washington Brown, in my view the most significant change that we as property investors are going to face.
Peter: All right, well once again thank you everyone for joining us and we look forward to being in touch soon. Have a good evening.
Fancy a villa in Tuscany? What about a condo in LA or a loft apartment in New York? Yes, please!
But the question everyone wants answered; can I claim depreciation on this property… The simple answer is yes!
Difference between overseas and Australian property depreciation
The main difference between an overseas property and one in Australia is in regards to claiming the building allowance. That’s the wear and tear on structural elements of the property like bricks and concrete.
With Australian properties you’re entitled to claim 2.5% 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 1992.
So, the easiest way to maximise your deprecation benefits on an overseas property, is to look for a newer property that has been built in the last decade or two. Internal items like carpets, ovens, lights and blinds – can also be depreciated, as you would with an Australian property. This is often referred to as plant and equipment. (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 good place to start your research is on the ATO’s website. You can download a publication called Tax Smart Investing: What Australians Investing in Overseas Property Need To Know.
Like any property investing, you’ll need to do your homework. This entails researching the local market, finding out about rental yields and occupancy rates. But the best thing about research nowadays, it that this can all be done online at the tip of your fingers.
The main barrier to depreciating an overseas property is working out the constructions costs, along with the expense of flying a quantity surveyor overseas.
Washington brown has a number of affiliations around the world. We regularly inspect properties in London and New Zealand. I even did an inspection in Koh Samui, Thailand recently.
So there you have it. You can still invest in overseas property and reap the benefits of the Australian Tax system’s depreciation laws. But remember, the property must have been build or renovated after 1992.
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.
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.
Whilst the depreciation laws in this country are quite complex, I believe they are well-balanced and offer property investors realistic benefits.
However, there is always room for improvement on the current property depreciation formulas.
As a quantity surveyor, I disagree with the rates at which certain items can be claimed, along with their effective life.
For instance, I would prefer property investors be able to claim 4% building allowance over a 25-year life span rather than the current 2.5% over 40 years.
In fact, I made that exact submission to the government as part of their Business Tax Working Group in 2013. At the time, the government was considering cutting the building allowance all together.
Thus, my recommendation was that only construction or contracts signed after the proposed date would be subject to a 4% building allowance regime, based upon the original construction cost. I also proposed that the original construction date at which the depreciation of building allowance begins, be pushed forward from the current 1985 to 1990 to help save the government money.
As the following table shows, by immediately making all purchases and contracts entered into for construction subject to a flat 4% building allowance, significant savings will be made and incentives to buy new property will increase.
Table 13.1: Current building depreciation regime
*First year deduction based on $250,000 = $6,250 (new property only)
Table 13.2: Proposed building depreciation regime
*First year deduction based on $250,000 = $10,000 (new property only)
If this was implemented in future depreciation laws, the flow-on effects of increased construction to the wider community could be huge.
According to the Australia Bureau of Statistics (ABS) for every $1 million spent on construction output, a possible $2.9 million would be generated in the economy as a whole, consequently giving rise to nine jobs in the construction industry (the initial employment effect) and 37 jobs in the economy as a whole.
The government decided to uphold the status quo on depreciation laws instead of scrapping or significantly reducing the allowances. It recognised that this would have a significant impact on investment incentives.
Whenever I am delivering a presentation or conducting a webinar, I always make sure to leave time for a 30 min Q&A session at the end.
In most Q&A sessions, the topic that by-far receives the most queries has to do with the concept of “scrapping” in relation to property tax depreciation.
Claiming the Residual Value on items that are about to removed can significantly increase your tax depreciation deductions. The problem is that many investors who renovate miss out on this due to a lack of awareness.
It’s important to understand the basics of property depreciation before diving into the subject of scrapping so, let’s have a quick re-cap into what property depreciation is all about.
What is Property Depreciation?
Just like you claim wear and tear on a car purchased for income producing purposes, you can also claim the depreciation of your investment property against your taxable income.
There are two types of depreciation allowances available: depreciation on Plant and Equipment Assets and the Capital Works deductions.
Depreciating Plant and Equipment Assets (Division 40) refers to items within the building like ovens, dishwashers, carpet & blinds etc.
(NOTE: Deductions for these plant and equipment items may only apply if you bought the property prior to May 9, 2017 – They’re values, however, can still be scrapped in full if removed or sold- Read about the Budget changes here).
Capital Works deductions (Division 43) refers to construction costs of the building itself, such as concrete and brickwork.
Whilst both of these costs can be offset against your assessable income, the property must be used for income-generating purposes. It is also important to note that to be eligible to claim on the Capital Works component, a residential property needs to have been built after the 18th of July 1985.
So what is scrapping and why is it a hot topic for property investors?
Put simply, scrapping is the ability to claim deductions on items within your investment property that you are about to throw away.
Engaging a qualified Quantity Surveying firm will ensure that you do not miss out on claiming any eligible residual value of these items as a depreciation deduction. This value can be claimed immediately in whole, once the items have been removed.
The reason it’s such a hot topic is due to the fact that these deductions can often add up to thousands of dollars.
There is one major caveat though. In order to claim the residual value on these items, your rental property must be producing an assessable income prior to the disposal.
There is no clear guideline on how long the property needs to be rented out for though, just that is was producing an assessable income.
There are two ways we can assess the scrapping allowances of an investment property.
Option 1 – Only depreciable assets can be scrapped
(This means the building was built before 1985 and no residual capital works deductions are available)
For Division 40 depreciable assets, if a taxpayer ceases to hold a depreciating asset (sold or destroyed) or ceases to use a depreciating asset (doesn’t need it anymore) a “balancing adjustment” will occur.
You work out the balancing adjustment amount by comparing the asset’s termination value (sales proceeds) and its adjustable value.
If the termination value is greater, you include the excess in your assessable income but if the termination value is less, you deduct the difference.
These deductions can add up quickly. Even if only in relation to depreciable assets.
Let’s crunch some numbers:
Joan Smith settles on a property for $650,000 on Oct 15 2015, the property had a long term tenant in place, who had agreed to stay for another 6 months. The property was 19.5 years old when she settled on it.
Washington Brown inspected the property on Oct 15 2015 and assigned the following values to the depreciable assets listed
Joan decides, voluntarily, to upgrade the apartment so that she can attract a higher quality tenant. At the end of the lease, when the tenant moved out, Joan replaced the items above.
Joan can claim the full depreciable amount of $4079 in her 2015/2016 tax return for these items that she is removing.
In addition, Joan has spent $8,555 replacing the items above, she can now start to claim these new items based upon their individual depreciation rate.
Option 2 – Depreciable Assets and & Capital Works deduction can be scrapped.
If you start moving walls or replacing kitchens in buildings built after 1987: your claim has the potential to be huge!
And let’s face it, it’s not that unusual to want to update a 20 year old kitchen.
Now let’s crunch the numbers on a situation where Joan renovated the kitchen and bathroom as well:
Capital Work item
Cost in 1995
Residual Value in 2015
Plumbing Bathroom & Kitchen
Electrical Bathroom & Kitchen
Tiling Kitchen & Bathroom
The items above have been depreciated at 2.5% per annum for 20 years. That equates to 50% left of the value that can be claimed as an immediate deduction when removed in 2016.
That’s the tidy sum of $15,816.00 as an immediate tax depreciation deduction!
One thing that needs to be considered when calculating the amount of deductions available, is whether you or another person was not allowed a deduction for capital works.
“It’s complicated” but here the method statement from the Income Tax Assessment ACT:
The amount of the balancing deduction
Step 1. Calculate the amount (if any) by which the * undeducted construction expenditure for the part of * your area that was destroyed exceeds the amounts you have received or have a right to receive for the destruction of that part.
Step 2. Reduce the amount at Step 1 if one or more of these happened to that part of * your area:
(a) Step 2 or 4 in section 43- 210, or Step 2 or 3 in section 43- 215, applied to you or another person for it;
(b) you were, or another person was, not allowed a deduction for it under this Division;
(c) a deduction for it was not allowed or was reduced (for you or another person) under former Division 10C or 10D of Part III of the Income Tax Assessment Act 1936 .
The reduction under this step must be reasonable.”
So in simple terms, you need to take into account any periods where Capital Works deductions could not be claimed and reduce that amount from any residual value left.
The last line is interesting, “The reduction under this step must be reasonable”.
I say interesting, because there are so many variables and not a lot of rulings to go by. But in my opinions here are some reasonable examples:
It would be reasonable to assume that if you purchased an industrial or commercial property, Capital Works deductions were available the whole time. So no allowance for non use would be required.
It would be reasonable to assume that if you purchased a serviced apartment, Capital Works deductions were available the whole time. So no allowance for non use would be required.
It would be reasonable to assume that if you purchased a unit in a ski resort, it was used, perhaps, for 2 weeks of the year for private use by the previous owner and you would need to factor that in.
It would be reasonable to assume that if you purchased a holiday house, in area where holiday lettings are common and that you saw the property listed on AIRBNB prior to your purchase and the holiday period was blocked out – then you should factor 2 weeks of private use per year into the equation.
Now the tricky one, you buy an average unit with a tenant in place. Who knows, it may have changed 5 times since it was new. I think it would be unreasonable for you to have to find out the full history of the unit. Privacy laws are very strict now, particularly in Victoria. So in that case, I would personally assume it was an investment property the whole time – but that’s me!!
One final thing you need to factor in, just to make life more complicated, is whether any amounts were received by way of insurance.
The termination value or residual value needs to include the amount received under an insurance policy.
So, if it is insured, there is often nothing to deduct when the asset is lost or destroyed.
As you have probably gathered by now, claiming the residual value on depreciating assets and capital works deductions “is complicated”.
I would recommend speaking with your accountant or financial advisor prior to engaging a Quantity Surveyor to carry out a scrapping schedule. If you are going to proceed with this type of report, it is advantageous to have the quantity surveyor visit the property prior to you starting renovations.
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!
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.