Changes relating to the May 2017 Budget

On the 9th of May 2017, the Federal Treasurer Scott Morrison announced in his budget a proposal that will change aspects of Property Depreciation. After a period of public consultation, input from companies such as Write It Off and debate in the senate new legislation was passed 15/11/17 and applies from 1/7/17.

These changes include:

  • The only Plant and Articles e.g. dishwasher, carpet, cooktop, hot water systems that can be depreciated are the ones purchased by the investor or part of a brand new property.
  • You are unable to depreciate any Plant and Article assets purchased as part of a 2nd hand property if you entered into the contract after 9/5/17.
  • You are still able to claim depreciation on any Capital Works expenditure including the original Construction Cost of the building if built post 1987.
  • The Govt is allowing you to treat any lost depreciation as a capital loss thus increasing your cost base by the amount of depreciation you could have claimed under the old rules when you sell the property. This could drastically reduce any future Capital Gains Tax payable.

These changes do not effect:

  • Any existing property investors with properties rented before 1/7/17.
  • Brand new properties
  • Commercial properties
  • Properties owned by companies as defined under Section 960-115 of the Income Tax Assessment Act but does apply to Self-Managed Superannuation Funds

Remember, you can still claim the Div. 43 capital works allowance which represents approx. 70 – 90% of your claim under the old rules.

Is it still worth buying a 2nd hand Investment Property?

If you are thinking of buying a 2nd hand property as an investment then there are a few main points to consider.

  1. Was the property constructed after 15/9/87? If so, a large depreciation claim of the building is still available to you.
  2. You can still claim depreciation on capital works done after 15/9/87 and structural improvements after 27/2/92 even if you didn’t do them.
  3. You can only claim depreciation on plant and equipment you have purchased for rental purposes.
  4. Older properties (older than 16/9/87) could still have a sizeable depreciation benefit. If there has been money spent by previous owners on capital works assets such extensions or new kitchen and bathrooms, it may still be worth getting a professional depreciation report done. Write It Off could assist you with the potential depreciation claim before purchase or before engaging our services.

With these 4 points considered, you need to think through your own investment strategy to understand which property best suits your needs. It is important to not just buy a property based on what tax benefits you receive, it’s part of the equation but should not be a definitive reason of what to purchase.  Other considerations include potential rental yield, potential for capitals gains, maintenance costs & upkeep costs.

Potential impacts on the property market:

The budget proposal came under the auspices of Housing Tax Integrity Bill. Its main focus was to stop property owners potentially claiming depreciation on plant and articles assets under Div. 40 that had previously been depreciated before by former owners.  Thus limiting depreciation on plant and articles to only brand new assets either part of a new property or installed by the owner for investment purposes.

Will this also influence the property market?

We believe that in the long run it will. Driven purely by the amount of their potential depreciation claim, property investors may now be more inclined to buy only buy brand new properties thus increasing demand in this part of the market. But what happens when it comes time to sell it? Well, as it is not as appealing to a property investor because it is now a 2nd hand property the market is potentially halved to owner occupiers only. This can only decrease demand and lower any potential sale value. This is a direct outside influence on the free property market and can only hurt the property industry. Furthermore, investors may not see property as the ideal option for investing and rental stock may start to decline. In the end rental yields will rise but those who are trying to transition from renters to property owners are now only going to find this all the more difficult. We will have to wait and see the true impacts of this new legislation, but it will take a long time before we know. In meantime considerable damage could have been done and the main negative impact could be on those who can ill afford it most. Low income earners in the rental market and first home buyers trying to get into the property market which is what the government is trying to avoid.

If unsure about any of the aspects discussed in this article, then please speak to our office on 1300 883 760 or info@writeitoff.com.au

Written by Steve Wynn BEc ANU

How You Benefit from a Depreciation Schedule

Depreciation is one of the biggest and most under-utilised claims available to property investors. Many people do not realise the cash flow benefits of obtaining a depreciation schedule which can result in having to pay literally thousands of dollars less tax each year.

Unlike the other deductions related to investment properties (land tax, body corporate fees, repairs & maintenance, property management fees etc.) depreciation is a deduction you can claim without spending money each financial year. Generally, you pay a one-off fee and receive a 40 year schedule that your accountant will utilise every year to legally reduce your taxable income.

Whether your property is positively or negatively geared, depreciation can make a great deal of difference to your tax return (Click here to find out exactly how it works).

When you have a depreciation schedule prepared for your property, it will be split into two categories: capital works and plant & articles. The capital works are the original building cost, any renovations or extensions and generally permanent assets that form part of the building or surrounding structures (eg. fencing, retaining walls, pergolas, paving, sheds etc.) These assets generally depreciate over 40 years and form the ‘backbone’ of the depreciation report. The plant & articles (also known as plant & equipment) are the removable assets such as window furnishings, appliances, carpet, exhaust fans, fire alarms etc. These depreciate at different rates depending on the type of asset and its ‘effective life’ as determined by the ATO. These effective lives usually fall between 5 and 15 years and are the main reason the bigger depreciation claims fall in the early years. (Click here to see a sample depreciation report).

To complete a depreciation report, a qualified building inspector will need to carry out an inspection of your property.  During the inspection your property will be measured and all of the depreciable assets will be assigned a value, including the building itself if it is eligible for depreciation (generally speaking this would be anything built on or after 17 September 1987). It is important to note that the values for the building are based on the year of construction and what it would have cost at that time, not what the building would cost to replace. Plant & Article can only be claimed if they were installed by the current owner.  Plant & Article assets installed by previous owners are no longer depreciable if the property was contracted for purchase on or after May 9 2017. This is a result of 2017 Federal Budget changes.

Schedules are tailored to maximise the benefits available under Australian tax law including immediate write offs, low value pooling whilst taking advantage of multiple owners and higher thresholds. Once the inspection is completed the information is compiled into the report which if required can be provided directly to your accountant in a format that they can import into their software. There is very little that you actually need to do and the benefits can be enormous.

Many people are under the misconception that depreciation is only claimable on new properties and this is simply not true. There are a few cases where it is not worth getting a depreciation schedule done but if some work has been done to an older property then it is likely it would be a valuable option to get a depreciable report completed. If you’re not sure you can discuss your concerns directly with Write It Off. We also offer a minimum claim guarantee to ensure that the report is worth your while.

Property Depreciation Schedule

The following has been written assuming you need to lodge an Australian tax return. The reasons you would need to lodge a tax return in Australia are long and varied and depend on individual circumstances. We will not go into that here but generally speaking, if you earn income within Australia there is a good chance you need to lodge a return with the ATO. This also includes rental income from an investment property and having a professionally prepared rental property depreciation report will help you reduce the amount of tax you have to pay.

What happens if you have an investment property that is located outside of Australia?

Though tax law varies across different countries, you are generally still liable to pay tax in Australia on the foreign sourced income and therefore the Australian tax rules apply.

If you receive rental income from an overseas investment property, you will need to declare it on your Australian tax return, even if you have already paid tax on that income in another country. If both countries have taxation rights on that income, you may be eligible for a foreign income tax offset whereby double taxation can usually be avoided and you can reduce your overall tax liability. In order to be entitled to the offset, you must have actually paid an amount of foreign income tax and the offset can only be claimed after this has occurred. There is no requirement that the entity claiming the Foreign Tax Offset must be an Australian resident. Therefore a non-resident could technically claim the offset.

From 1 July 2008, if your overseas property is negatively geared you may use this “loss” against any Australian sourced income. Even if the property is positively geared, you can benefit from a property depreciation schedule as it will reduce the taxable income on the property in the same way it would for a property located in Australia.

Write It Off does not have inspectors overseas but we can still complete a depreciation schedule on a foreign investment property using the self-assessment method. You will need to fill out the Self-Assessment Worksheet and include photos of the property where possible. We will convert everything into Australian dollars and provide you with a depreciation schedule for both the Prime Cost and Diminishing Value methods which you can then use to reduce your taxable income.

It is important to remember that what you can claim as a deduction in Australia is not necessarily the same as what you can claim in other countries so it may be wise to consult a local tax professional.

Please call our office on 1300 883 760 or email info@writeitoff.com.au for more information on our self-assessment reports.

How Does Low Value Pooling Work

How Does Low Value Pooling Work

Low Value Pooling (LVP) is just another form of depreciation available to the taxpayer. The advantages of a LVP are it allows you to accelerate your depreciation effectively depreciating the bulk of the asset within 3-4 years instead of the ATO prescribed effective life.

There are some rules surrounding the use of the LVP and the rates that apply in first year versus subsequent years.

Rule no.1 is that you must be using the diminishing value method of depreciation to be able to utilise a LVP.

Rule no. 2 if you adopt the diminishing value method for one low-cost asset (an asset costing less than $1,000) you must use it for all low-cost assets across the life of the assets. You cannot transfer one low-cost asset to the LVP and the leave the other assets out. However for low-value assets (an asset where the depreciated value has fallen below $1,000) you can decide on a asset by asset basis whether or not to move into the LVP. Equally if you are using the Prime Cost method you must use this method for all assets.

Once using the diminishing value method (which is the most popular) you can then transfer your assets into the LVP. There is 2 rates of depreciation, 18.75% for the first year and 37.5% for subsequent years. If you have already been using the diminishing value method for a previous tax year and the value of an asset falls below $1,000 then all low value assets can be transferred to the LVP can immediately attract the 37.5% rate. If this is the first time you have started to own and depreciate the asset and you want to use the pool then the 18.75% rate applies. Any new assets purchased and installed ready for use during the tax year must first be depreciated at 18.75% and then 37.5% for subsequent years. For new assets, it does not matter if you purchase them at the beginning of the tax year or on the 30th June, you can still depreciate the asset at the full 18.75%

Example (to show the accelerated advantages of using a LVP)

Asset                            Diminishing Value MethodLVP Method                   
Cost of Ducted Air Conditioning Unit (Effective Life 20 Years)$8,970$8,970
Depreciation Year 1$897$1,682
Depreciation Year 2

$807

$2,733
Depreciation Year 3$727$1,708
Depreciation Year 4$654$1,068
Total Depreciation after 4 years$3,085$7,191
Residual Value of Asset after 4 Years$5,885$1,779

 

 

 

 

 

 

 

 

 

*Note: the above information applies to taxpayers who are not adopting any of the simplified taxation rules for small business.

Joint Tenants vs Tenants In Common

When two or more people own a property together they may either own it as joint tenants or tenants in common. We often have clients ask us what the difference is between the two types of ownership.

What is the difference?

Generally speaking a joint tenancy ownership is one in which all parties have an equal interest in the property and there are no defined shares. Together, they own the whole property. Should something happen to one of the owners, their interest in the property passes to the other owner(s).

If two or more people own a property as tenants in common, they each own only their stipulated share of that property. Each owner has no control over the shares of the other owner(s) and the shares do not have to be equal. If one owner dies, their share does not automatically pass to the other owner(s) and they can leave it to whomever they wish in their will.

Some of the most common reasons to utilise a tenancy in common include:

  • The parties have contributed unequal amounts to purchase the property
  • The owners are friends, relatives or business partners
  • There are children from a previous marriage
  • One owner has a considerably higher income compared to the other and wants to take a bigger share of the negative gearing opportunities. (If the property is positively geared, the lower income earner may wish to have the larger share.)

There are a number of different legal and financial implications to be considered when choosing whether to purchase a property as joint tenants or tenants in common. There are also minor differences between states so it is important to speak with qualified professionals before making a decision such as this.

How do I know?

The short answer is if you don’t know, it’s probably a joint tenancy. Joint tenancy is usually the ‘default’ type of ownership unless specified otherwise.

Why is it important for my depreciation report?

When we prepare your depreciation report we need to know whether the property is owned jointly or as tenants in common. One of the main reasons this is important is because we will tailor the report to reflect each owner’s share. This makes the report easier to understand and use for both accountants and investors but more importantly, is also essential in order to ensure that the figures are calculated correctly.

The ATO rules clearly state that when calculating the depreciation of assets for owners with different shares, the assets must be apportioned according to the ownership percentages before the depreciation rules are applied. This is particularly important when the percentages are say, for example, 99% and 1% as the person with 1% will be able to claim almost everything in the first year. The Low Value Pool calculations also depend on the asset’s value falling below $1000 and when only a small percentage is owned, this will happen a lot faster, meaning that owner can claim more, sooner. Conversely for the 99% owner, it will take longer for the written down value of the asset to fall below $1000 and the asset will be depreciated over a longer timeframe.

See the Low Value Pool article for more information or contact us on info@writeitoff.com.au.

Rental Properties, Natural Disasters and Insurance Payouts

Rental Properties, Natural Disasters and Insurance Payouts

We assume your property is a rental property and used for investment purposes.

Normal repairs to your rental property are tax deductions in the year they occur. A repair is “to make good” or remedy defects to the property or parts of the property. Eg: repairing a fence

If expenses go beyond repairs where you either significantly upgrade or replace an item then this is a capital expense and will have to be depreciated over 40 years. Eg: completing replacing an old fence with a new one. This is regardless of whether or not you used the same material or a very similar modern day equivalent; this is a capital expense and not a repair.

Some expenses may be a combination of both repairs and capital improvement. Replacing part of the wooden vanity cupboard due to water damaged (repair) and replacing the tiles around the vanity because they look a bit dated (capital cost). In this case you would need to get the builder to separate and itemise the two costs as repairs or improvements. Otherwise the total cost would have to be classified as improvements.

When items are completely replaced eg: the carpet in an entire room that contained some damaged carpet. This is a capital cost to be depreciated but an immediate deduction would be available for the adjusted value of the old carpet.

Any insurance payout you receive as a result of property damage should be included in your assessable income.

What happens if the entire house is destroyed?

Obviously this is more than just a repair and the entire cost is capital in nature to be treated as a new depreciable asset. The un-deducted balance of your old property is immediately deductable.

At the time the insurance payout is received, a Capital Gains Tax (CGT) event has occurred. Note: the CG may be able to be deferred in certain circumstances (Discussed below)

Four things will happen:

  • 1.Property is destroyed; any insurance payout is treated as income.
  • 2.Any un-deducted balance of property is immediately available as a deduction less any insurance payout. i.e: a balancing adjustment.
  • 3.A CGT event occurs when the insurance payout is received.
  • 4.The new property is then to be treated as a depreciable asset just like any new build.

CGT Rollover

Rollover for CGT relief is the process of deferring the payment of the CGT to when the asset is actually sold. This rollover is generally available to those who lose part or all of their property due to damage and receive compensation for the damage through an insurance policy.

Should you use Prime Cost or Diminishing Value

The question needs to asked is the Prime Cost method of Depreciation relevant anymore? Do circumstances still exist that that you would choose the Prime Cost method of depreciation over Diminishing Value? To answer these questions we first need to briefly explain the difference between the two methods.

Prime Cost or Straight Line depreciation is the simply equal amounts of depreciation of an asset over a set number of years. So if an asset costs $1000.00 and has an effective life of 10 years then the equal yearly instalments of depreciation over 10 years would be $100.00 p.a. However Diminishing Value allows you to accelerate depreciation which allows you to claim more now but less in the future. The table below represents the two methods

Purchase price of asset$1,000.00
Effective life of asset10
YearsPrime CostDiminishing Value
1$100.00$200.00
2$100.00$160.00
3$100.00$128.00
4$100.00$102.40
5$100.00$81.92
6$100.00$65.54
7$100.00$52.43
8$100.00$41.94
9$100.00$33.55
10$100.00$26.84
Total Depreciation$1000.00$892.63

As you can see, Diminishing Value allows you to claim $200.00 in the first year whereas Prime Cost only allows $100.00. However as time goes on Prime Cost still delivers a claim of $100.00 p.a where Dimishing Value starts to drop off. Generally, the saying “a dollar today is better than a dollar tomorrow” is true. If you can take the bigger claim now then you should do it for many reasons. Among them are:

  • You may plan to hold the property for many years so you will get your full claim in end anyway. But this is not always the case and circimstances change. If for unforseen reasons you had to sell the property you have missed out on some of the claim the thought you were going to get.
  • Having more money today allows you to invest more now for the future. If you wait until tomorrow (or next year) to invest then you have missed out on potential capital gains. Remember the saying “time is more important than timing” This means that for a start it is very hard to pick the best time to invest in the market and historical evidence shows those who leave their funds in the market the longest do better than those you try and pick the best time to put their money into the market.
  • But the most important reason is “the time value of money”. $1.00 today is worth more than $1.00 tomorrow. The reason for this is inflation. We all know that everything goes up in price which means the purchasing power of our dollar goes down. So having extra money today is better than waiting until next year or the year after to make the bigger depreciation claim. This is why you should always take advantage of legitimate tax deductions as soon as they become available.

So this must mean that Diminishing Value is always better? Lets say you own a property for a few years and during this time you lived in it. Then you decide to rent it out, earn some rent and claim the expenses, including depreciation. The important thing to note here is assets, say a $1000.00 oven start to depreciate in the eyes of the Tax Commissioner as soon as they are installed and ready for use. So if you lived in the property for say 4 years then your oven has already lost 4 years worth of value and depreciation. When you get your depreciation schedule prepared for tax purposes, you get to choose which method of depreciation you adobt. But remember, what ever method you choose, from this point you must continue with for all assets in the property, you cannot change methods half way through. So if you look at the table above, if you start to make a depreciation claim using the Diminishing Value method from year 5 onwards, then you can claim $81.92 in this year and it gets worse from there. However if you choose the Prime Cost method you get to claim $100.00 in year 5 and continue to claim $100.00 for the remaining life of the asset. Therefore, in this case, Prime Cost is the better choice. Remember this is general advice only and you need to discuss your personal situation with a trusted tax agent.

No Rental Income

Can you claim rental expenses (depreciation) if your property does not produce rental income?

Example:

Joe & Mary have owned a property for a number of years in Sydney and decided to make it available for rent in January this year. However despite repeated attempts and dropping their rental asking price, they have not been able to secure a tenant. Therefore they have no rental income whatsoever.

Can they claim in their tax returns, expenses related to this property such as interest, depreciation and other?

Answer:

The answer is YES, Joe & Mary can still claim the rental expenses (including depreciation) on their property from the time they first advertised the property for rent.

If the ATO queries their claims, all Joe & Mary have to do is prove that repeated attempts were made to rent their property! They can do this by putting ATO in contact with the rental agent or showing them copies of the rental ads.

Depreciation Service in Canberra

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