So unlike the Labour Party, who were upfront about their proposed changes to negative gearing and depreciation during their election campaign, the current government have tried to simply slip their changes through quietly in the budget. In fact that quietly that no one saw them coming and they simply appeared as two lines in a statement, but those two lines of information will have an enormous impact on future property investors.
As with all budgets, the proposals require legislating and this will take several weeks to occur and with the broad statements issued within the Budget there are obviously some concerns and questions over what is actually going to eventuate and the impacts thereof.
So here is our current understanding of what the impacts are likely to be:
- The new depreciation changes will come into affect from 1 July 2017, however, they will be applicable to any/all residential investment properties where a contract has been entered into after 7:30pm on 9 May 2017.
- Investment properties purchased prior to this date and time will not be affected and the claimable depreciation will remain as was.
- Capital Allowances, i.e. Depreciation on the building itself, are not affected and will remain as was.
- Depreciation on Commercial properties will be unaffected and will remain as was.
- So that leaves the depreciation on plant and equipment/assets (Division 40) and this is where the Budget changes impact. Our current assessment of these impacts is as follows, however, it must be noted that the current budget statement is very vague and the exact implications will only be confirmed when legislated. (Note, the following only affects investment properties purchased after 7:30pm on 9 May 2017)
- You will no longer be able to claim depreciation on plant/articles if you are not the properties initial purchaser i.e. you can no longer make depreciation claims for carpets, blinds, etc. that were already within the purchased second hand property.
- Items of plant/articles purchased and installed after the property has been purchased will be able to be depreciated based on the items Effective Life.
- New properties are unaffected by this change as for all intense and purposes the investor is buying the items new – this requires clarification at is one of the many items that is currently unclear.
- Properties constructed pre ’87 will now only have claimable depreciation on Capital Works executed thereafter (renovations) and any plant/articles installed by the current owner if purchased after 7:30pm on 9 May 2017.
There remain several unanswered question in relation to these proposals, for instance:
- If I buy an older property that has just been fully renovated and not owned by a party other than the renovator am I the first owner, is the plant/articles deemed new, etc. – again, only on the release of the actual legislation will we be able to answer this question.
- Likewise, if I purchase a property, reside in it for several years, renovate it during this time and then vacate the property to make it an investment, can I depreciate the plant/articles – our answer would be yes, to the items that you have replaced during the time you owned the property, even if it was your principle place of residence at the time as you have obviously expended the money and made the purchase.
Other likely questions regarding these changes:
- Is it still worth completing a Tax depreciation Schedule on an older property (Pre 87)? – The general rule would be yes as long as it has had over $40,000 in renovations, in which case you could expect circa $1,000 in depreciation per year.
- My property was built in 1999, is it still worth undertaking a Schedule? – Yes, assume the building cost $125,000 to build you would be able to claim circa $3,125 per year in depreciation.
- How do you work out the Capital cost of a Building? – We visit the property and work out the original construction cost for the property and also the associated hard landscaping i.e. Paving/fencing/ pergolas etc. This is why a property inspection is so important. We also address any renovations even if these were undertaken by previous owners. Using a Quantity Surveyor and having a property inspection will maximize your depreciation claimable.
- How do I know if my Pre ‘87 property is worth getting a depreciation Schedule. That is easy if you think it has had more than $40,000 in renovations it will be worth undertaking a Schedule. You can always email us the address of the property and we can do a quick search to give you an idea before you proceed and order a report.
If in doubt about any of the proposed changes in legislation or if you property is worth having a Depreciation Schedule prepared on, simply give us a call and we will be more than happy to discuss such with you.
Finally, remember that the proposed legislation does not affect any property purchased prior to 7:30pm on 9 May 2017 and if this is your position, you should seriously consider having a Depreciation Schedule prepared thereon. Don’t hesitate, give us a call and let us clarify the situation for you.