Budget 2017: changes to depreciation claims for new purchases.

Purchase of ANY new resi property means the first owner can claim depreciation and get a QS report that is complete. When they sell the new buyer cannot depreciate plant and equipment items. The new buyer can get a QS report only for Div 43 capital allowances or use the Div43 on the former owners report.

All owners of property already owned or already contracted at 9th May 2017 is also eligible for a new QS report for the assets at that time and that they buy and add to the property themselves.

A buyer of property that is not NEW cannot depreciate plant and equipment if they contract after 7:30pm on 9th May 2017 UNLESS they incur the item cost themselves.

Remember the rule is about the first use of "new" assets and acquisition must be by the first owner OR as a element of a new property. Buying second hand goods and contracting to buy existing assets is also excluded. They arent new.

 

Be interesting to see if the bank will lend you money for P&E in this scenario.

Under the old system it was 500k 80 LVR = 100k deposit 400k loan
New system could be 400k purchase 80 LVR = 80k deposit 320k loan + 100k for P&E or total input of 180k.

Maybe the bank might lend but I wonder if they would still lend at normal LVR for P&E but I would say not as it depreciates, removable etc so likely lower LVR and higher IR if it is possible.

 

This may generate a new push towards older run down properties. Buy a shell, renovate and rent ...

 

So 2nd hand furniture is no longer tax deductible if purchased for you investment property?? What about if its from a 2nd hand store with a tax invoice?
What about if its under $300 and can be claimed immediately?

 

How much would P&E be on a new development though? $5,10k? Should be relatively low compared to the building and land.

 

The main depreciation businesses must be beside themselves. Surely this will lead to a massive drop off in work? It was often recommended that even purchasers of older properties should order a report as while there might not be any building to claim, the plant and equipment could make it worthwhile. Now...

 

Do quantity surveyors have other wholesale channels, or service commercial/industrial sectors. Curious. $600-700 for a residential deprec report seems... Insufficient as a profit generator, from my very narrow exposure to this niche.

 

So Commercial, and Businesses still okay, this ones aimed solely at residential property investors

 

If you replace or add an item of furniture you will be able to depreciate the item based on what it cost you regardless of whether you bought that item new or secondhand. If the item is secondhand it is an arms length transaction so it's not like you're over claiming on what the item is worth which is one of the reasons these changes have been introduced.

 

I have been running my QS company for 20yrs. Almost all our revenue comes from Tax Depreciation Schedules. I expect these changes to have very limited effect on our bottom line. 80% of our Schedules are for new properties which are not affected by the changes (despite what some might be saying on social media). For existing properties where construction commenced after 15 Sep 1987 you will still require the services of a Quantity Surveyor in order to claim the building depreciation (unless the previous owner is kind enough to pass on an existing Schedule containing the Division 43 amount(s)). For pre 15 Sep 1987 properties the requirement for a Tax Depreciation Schedule will come down to the extent of any renovations and improvements completed by the previous owner. If there have been renovations then you will require a Quantity Surveyor to estimate the costs of the works in order to claim depreciation but the viability of the Schedule will depend on the extent of the renovations and the time you intend to keep the property. So, the only drop-off in work will be from those who acquire pre 15 Sep 1987 properties which have NOT undergone any capital improvements, however, in the past our company has referred all such clients to their accountants because the client was always capable of claiming the plant and equipment themselves under the rules for 'self-assessment' (advice you'll get nowhere else).

 

Thanks @RedlineQS. Sounds like you'd only be in trouble if they removed depreciation altogether. Perhaps there would be some impact if negative gearing was axed too?

Can you outline what is included under capital improvements? I had assumed things like paint, new kitchen, flooring, renovated bathrooms etc. would have come under plant and equipment?

 

Depreciation on investment properties was, and still is, divided into Division 40 (plant and equipment aka assets) and Division 43 (building aka capital allowances). Division 40 is where the news rules take effect and this includes items like appliances, hot water systems, air conditioners, fans, light fittings, carpets, blinds, etc and Division 43 is typically everything else that makes up the property i.e. floor slab/framing, walls, roof, joinery, plumbing fixtures, electrical wiring, tiling, windows, doors, hardware, painting, etc. Note, please download "Rental Properties 2016" (ATO Publication) which lists out all components of a property and divides them into Assets (Div 40) and Capital Allowances (Div 43). So, to answer your question, paint, kitchen cupboards, bathroom renovation, tiling, etc are NOT plant and equipment. So, if you buy an existing property which has been renovated and the renovations include such works you will need a QS to estimate the cost of these works in order to depreciate them.
I trust this answers your question.

 

It is relatively low, but $5-10k is too low. In most cases, capital works is about 85% of the build cost, with a 5% margin of error. Therefore, even a modest $200k build can have about $30k of plant in it. If we're talking a large unit development with lifts, a pool, a gym, security systems, etc., the plant deductions can be massive.

 

It does! Thank a lot @RedlineQS, you've been very helpful.

 

I very much doubt developers would be able to get finance to build apartments that would be incomplete in an attempt to let purchasers buy fixtures and fittings for depreciation purposes.

Could you imagine the field day valuers would have on these!! They are already slashing values on almost every OTP now, just imagine they were handed a fixed build contract for OTP that was incomplete.....haha

 

How about a company or trust buys the property, you then purchase the company or trust that owns it?

Existing plant and equipment items will be reflected in the cost base for CGT though

I also noted that as at 1 July 2017, deductions for travel expenses related to inspecting, maintaining or collecting rent for a residential rental property will be disallowed.

The Government also makes the point that inspection costs undertaken by third parties (i.e. Property Managers) will be permissible, meaning that inspection costs are seen as legitimate, but only if genuinely incurred for pure inspection purposes.

Travel expense deductions will still be permitted for non-residential investment property (again showing its aimed at Mum & Dad investors).

 

Just a thought, how about blocks of units, hotels etc

Then AirBnB, Short Term or Executive Rentals etc?

 

Most of the above actually count as residential (and hence will likely be affected), despite the fact that they are sometimes within large developments. For example, you need to own ten or more rooms to qualify for traveler accommodation depreciation rates (which means that even some small motels don't qualify!).

There may be other factors that could determine the property's nature as commercial, but you'd need more than just having a serviced apartment or two.

 

Draft documents now available and they are accepting (comment) submissions to August 10th: Housing Tax Integrity – Disallowing Travel Deductions and Limiting Depreciation Deductions | The Treasury

 

just recently been researching the changes, where can I find the government released confirmation of the changes?

edit:
here
Housing Tax Integrity – Limiting Depreciation Deductions – Exposure Draft Released

or here
Housing Tax Integrity – Disallowing Travel Deductions and Limiting Depreciation Deductions

for some reason the treasury updated all their previous urls.