Budget 2017: changes to depreciation claims for new purchases.

I saw there are new rules regarding how investment purchases after the May 2017 can claim depreciation. But existing investment properties are exempt..

 

Hey @Tony66 , great timing. I had posted an article link explaining the changes from the view of one of the major players in the depreciation space literally a minute ago (in the Federal Budget thread). Duplicating it below.

Properties which settled before 9 May are exempt from all changes.
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The Depreciation Party Is Over - Washington Brown

Sharing a piece by Tyron @ Washington Brown on their views on the new depreciation rules.
He points out 3 reasons why the changes are dumb, and I agree with them:

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 the need to hang onto their existing properties to continue claiming depreciation because if they sell that property they won’t be able to get 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 pre-sales which are required by banks to fund the deal.
3. These budget measure 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

 

Hey random question to @BMT Tax Depreciation and @Depreciator, and members who've looked into this already: if I replace an applicance in an investment property (dishwasher, dryer etc), are these items worth inserting into existing reports? What's the general way to get schedule reports updated to factor these in?

I feel like most investors would forget to do so when a dishwasher or dryer gets replaced years down the track.

 

If it's a Dep Schedule we have done, we update them free of charge. It's a very easy thing to do.
But equally, if you have the cost of the new Asset, your accountant could take care of it.

 

Just to clarify, properties that were under contract before 9th May are exempt from the changes.

 

To add to what Depreciator said, don't forget that there might also be a scrapping value on these assets you dispose of as well (i..e, don't necessarily just leave it at claiming the new item's deprecation!).

 

I'm curious @BMT Tax Depreciation - do you guys do a lot of AIRBNB stuff? will that change a lot with the new rules coming in - say someone bought an airbnb apartment all in fridge, washing machine etc. I went to one of the "block apartments recently" and saw your estimates in there

 

Properties for which a contract was entered into prior to 7:30pm on 9th May 2017 remain under the former rules. They can get a full QS report after it settles or use the former owners report etc. For properties contracted after that time a limited QS report would be obtained. NOBODY should get confused and think a QS report is no longer of benefit. That message is very important.

For new assets acquired by ALL owners on or aftre 9th May 2017 they must add the new item only if they personally acquired the asset (and had it installed). Accountants can assist with that as they have done so previously. The accountant should (!) also review the former asset if it is a replacement to ensure any residual depreciation can be claimed. It isnt always the case...eg if the asset is pooled.

 

Good question. Unfortunately if you bought the apartment from the current owner a huge chuck of depreciation is lost. ie $181K or less !!! Div 43 still continues for the new owner...ie the benefit reduces by approx 9%. Thats not too bad but a $25K tax deduction loss hurts.

 

interesting - it would mean buying a fully furnished apartment with all the high end fittings and furnishing will be less attractive.

 

So if you buy a brand new house from a developer, you can't claim any of the plant?
Does this mean that you have to physically contract the build yourself to claim the depreciation?

 

Perhaps the buyer can buy the building minus equipment and then install them after purchase?

 

So if i am an investor looking at brand new apartments, there may arise 2 categories of developers:

a) those selling OTP where the fixtures and fittings are not put in...the potential buyer buys an empty shell and proceeds to outfit it and then claim the depreciation allowance...

b) those developers whose apartments are close to completion with the internals done up nice and fancy; oops ! now all these depreciation cannot be claimed ...

The question is: as an investor, will there be an opportunity for me to bargain on b) then ??..

Give it 6 to 9 mths to shake itself out ?

 

Sounds like poorly thought through legislation that is going to have lots of unintended consequences.

 

Probably don't even need that. Just a separate invoice lumping all the plant and equipment to show you "bought" them if the ATO ever come asking why these are being depreciated.

 

that was my initial thought. It could be any property (new or old) you can work with selling party to buy plants and equipment separately. In that way you have suffice the legislation (at least the way I read it) new owner has bought them hence allowing ongoing depreciation. and guess what happens with above you pay less stamp duty cause taking items out of buying price should reflect in lesser stamp duty....

 

As others have pointed out, (perhaps unsurprisingly) details are thin on the ground, almost as if it hasn't been thought through. We're not taking a sky-is-falling approach, though.

Our position is summed up on our website and we'll be keeping clients and referrers alike up to date on things.

We don't really have more than that at the moment. Fingers crossed, eh?

 

Thoughts

How about Commercial Property, is the impact similar as i've read it may not be?

How about purchasing an entity that owns a property, how/will that affect it?

Change begets change

 

Just to be clear, if you buy land and contract a builder to build you a house, you would still be able to claim Plant & Equipment right? This will affect the supply balance between new Houses and new Units big time!

 

This would logically be the case as you are the first owner of the P&E.

Redwing, it's only residential property.