In 2017, the Australian Government significantly changed the way depreciation can be claimed on second-hand property... .
And if you ask me, the new legislation is sloppy, at best!
In essence, you can no longer claim depreciation on “previously used” residential assets such as carpet, ovens, dishwashers, etc. You can learn more about the specific depreciation law changes here.
But in my opinion, this rushed piece of legislation has left some crazy anomalies.
Crazy Fact Number 1 - Brand new property
When the government made the surprising change to second-hand properties - they still allowed investors the ability to claim on the plant and equipment in brand new property.
This made a lot of sense. Many developers rely on depreciation to sell these properties to investors.
And developers need investors to buy off-the-plan so the bank will fund the development.
It has been shown that a dollar spent on construction is magnified throughout the economy.
Now, the main test of whether a property is “Brand New” or not is whether the vendor (seller) has paid GST as part of the sale.
So what happens when a buyer purchases that unit 12 months before it’s finished, but then on-sells it six months prior to completion? What happens when it comes to the day of settlement?
Consider the following situation: The developer settles the property with the original buyer and then this original buyer immediately sells it to the second buyer on the same day.
For the Second Buyer in this scenario, this means that because I have purchased from the original investor, not the developer, my property is now treated as previously used and I cannot claim the depreciation on the “previously used” assets like the carpet and oven.
That's right! I cannot claim the depreciation on the “previously used” Plant & Equipment items even though I now have the keys but have never opened the door to this new and unused property!!
So if you are buying off the plan and want to claim the depreciation - make sure you are buying from the developer and that GST is being paid on the sale.
Crazy Fact Number 2 - Why pick on residential property owners?
The Government made these changes because they felt residential investors were overclaiming on these second-hand assets. I think there was some truth in that.
So now, you can only claim depreciation on plant & equipment in residential properties if they are brand new.
However, they never changed the law relating to commercial property. So in theory, you can buy a 100 year-old warehouse and revalue the air conditioning equipment inside it and start claiming the depreciation on this asset again.
Why pick on just residential?!
Please note, you can still claim depreciation on the structure of the building (which represents about 85% of the building) in second-hand residential properties, so a rental property depreciation schedule is still worthwhile.
Crazy Fact Number 3 - What if it’s the same building?
Where there is a residential and commercial property combined, things get really crazy.
You know the ones - you have a retail shop on the street level and a residential property upstairs.
You might have the same flooring running throughout the property.
Now, let's say you buy this property and it’s two years old. You can claim the depreciation on the flooring that’s downstairs but not upstairs.
This is regardless of the fact it is the same flooring, installed at the same time and used for the same purpose of generating income. Go figure?!
Crazy Fact Number 4 - What happened to the “on” button?
When we depreciate ducted air-conditioning, we now have to break it into various components.
We have to separate the items, like controls, fans and pumps from the ductwork as ducting is now considered part of the building.
To put this in context, when you buy a two year-old house, you can still claim depreciation on the ductwork because it’s part of the structure - but you can’t claim on the controls you push to turn on it!!
Crazy Fact Number 5 - Big is better
The changes the Government made only applied to the people like you and me. You see the same rules don’t apply to corporations, large super funds or a large trust fund that has over 300 members.
So in essence, Macquarie Bank or UniSuper could package up 1000 second-hand properties and claim the depreciation - but we can’t buy one second-house and do the same.
Does that seem fair to you?
Crazy Fact Number 6 - When it sold it’s not even new.
Let's say you own an investment property and have a tenant in place. The tenant decides to move out and you decide to sell the property.
Just before you sell it, you decide to upgrade some items to get the maximum sales price. So you install new flooring, window coverings, kitchen appliances and a brand new hot water system, in order to prepare the house for sale.
The new purchaser is not eligible to claim depreciation on these assets, even though they have never been ‘previously used’. This is because they were not the owners of the property when the assets were first installed.
There is a section of the Income Tax Assessment Act that would enable the new owner to claim the depreciation - whereby you as the owner would deem the property to be “Substantially Renovated” and thus creating a new supply of the property.
However, that would mean that you would have to pay GST on the sale and not many property owners want to do that!
So in summary, if no GST is paid on the sale - no depreciation can be claimed on the plant and equipment assets.
Crazy fact number 7 - Living in the past
When the Government changed the laws around depreciation - it changed the game for the quantity surveying industry - and in particular - whether your property now requires an inspection.
Some companies are still advising that every property needs an inspection for depreciation purposes.
This is simply not true and I would argue it is in their interest to say this, not yours.
Of course, there are many reasons why some properties do require an inspection and others don’t.
Washington Brown will only inspect your property if it is necessary. If it doesn’t need an inspection, we will pass on those savings.
Learn more here - do you need a property depreciation inspection.
Finally learn how to calculate depreciation on your investment property here.
Tyron Hyde is the CEO of Washington Brown and is considered one of Australia’s leading experts in property tax depreciation. He is also a registered tax agent. Washington Brown manages construction costs worth over $2 billion and completes 10,000 schedules annually. For a depreciation schedule quote CLICK HERE and follow the 3 simple steps or estimate your depreciation cost.
The Washington Brown Free Depreciation Calculator will give you an estimate of the depreciation deductions you could claim on your investment property.
Read more Expert Advice articles by Tyron
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.