» Budget 2017

Cosmetic or substantial renovation? Tax implications

BMT team — Tue, 29 Oct 2019 22:09:51 +0000

Australian property investors are increasingly undertaking both substantial and cosmetic renovations to increase property values. Renovations were up 11 per cent this year according to Master Builders Australia, with chief economist Shane Garrett stating, “Australia’s home renovations sector enjoyed its busiest quarter in 14 years during the three months to September 2018”. Let’s look at the difference between a substantial renovation and a cosmetic renovation and the tax implications for owners of investment properties. In this article we will answer: What is a substantial renovation? What is a cosmetic renovation? What are the rules affecting second-hand property owners? What is a substantial renovation? According to the Australian Taxation Office (ATO), substantial renovations occur where ‘all, or substantially all, of a building is removed or is replaced’. This includes removing or replacing ‘foundations, external walls, interior supporting walls, floors, roof or staircases’. When combined, these would directly affect most rooms within a property. If you’re undertaking any structural work that requires building approval, or moving doors and walls, the renovations would likely be categorised as structural in nature. If a property was substantially renovated by previous owners prior to selling and renovations remained unused, property investors can claim depreciation on the new plant and equipment assets installed by the previous owner, as well as any newly installed or qualifying capital works deductions available. With substantial renovations, the following applies: Investors who do not live in the property during renovations can claim on work they complete themselves Investors can claim on capital works renovations Investors can claim on existing plant and equipment installed by the previous owner Investors who live in the property while renovating can only claim on capital works improvements once the property is income producing What is a cosmetic renovation? Cosmetic renovations are generally visual in nature and more cost effective than their structural counterparts. Examples of cosmetic renovations can include painting, patching up minor wall cracks, adding new carpet, replacing hardware like door handles, adding a letterbox to the front of a house or changing light fittings. Undertaking a cosmetic renovation is a good way to improve a property without incurring the expense of undertaking a substantial renovation, but it’s important to understand the differences and know what you can claim. With cosmetic renovations, the following applies: Investors who do not live in the property during renovations can claim on work they complete themselves Investors can claim on capital works renovations Investors can’t claim on existing plant and equipment installed by the previous owner Investors who live in the property while renovating can only claim on capital works improvements once the property is income producing What are the rules affecting second-hand property owners? Following depreciation legislation changes in 2017, restrictions have affected the ability of property investors to claim tax depreciation deductions on previously used plant and equipment assets. Second-hand residential properties purchased after 7:30pm on the 9th May 2017 are not able to claim depreciation deductions for existing plant and equipment assets as they are deemed by the ATO to have been ‘previously used’. There are some exceptions to this rule which include: Commercial properties which are unaffected New properties which have never been lived in Properties where contracts exchanged before 9 May 2017 and haven’t been lived in by the owner after 30 June 2017 Substantially renovated properties Most properties have had some work completed that a current owner can claim. It’s always worth contacting a specialist Quantity Surveyor to find out how much you’re entitled to. A BMT Tax Depreciation Schedule outlines all the deductions you can claim for your property. The schedule lasts for forty years and the fee is 100 per cent tax deductible. In the FY 2018-19, BMT found our clients an average of almost $9,000 in first-year tax deductions for all residential properties. For those with properties directly affected by the 2017 legislation changes, we still found an average of $5,641 in deductions per year. There are benefits in undertaking both substantial renovations and cosmetic renovations. Often the two will complement each other and add to the overall improvement of your property. Knowing what you can claim will ensure that you obtain the maximum depreciation deductions from your investment property. BMT staff can assist you in reviewing your current circumstances and provide a tax depreciation schedule that includes a forecast of eligible depreciation claims. For a free assessment of your property, speak with one of our expert team on 1300 728 726 or Request a Quote online. To learn more, read Are home renovations tax deductible?

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Do the depreciation legislation changes affect me?

BMT team — Tue, 25 Sep 2018 01:23:52 +0000

On 15 November 2017, Parliament passed the Treasury Laws Amendment (Housing Tax Integrity) Bill 2017, which brought about some major changes to ‘plant and equipment’ depreciation claims. Plant and equipment depreciation refers to the deductions an investor can claim for the wear and tear that occurs to the fixtures and fittings located within a property. They are referred to as assets, which are considered by the Australian Taxation Office (ATO) to be easily removed from the property. Investors can claim depreciation deductions for more than 6,000 different ATO recognised assets, such as the carpets, blinds, dishwashers, hot water systems, smoke alarms and ceiling fans. Each of these assets is assigned an individual effective lifespan and depreciation rate by which depreciation of the asset is calculated. The depreciation rates and effective lives of all ATO specified plant and equipment assets differ by each individual asset and even by individual industries. The ATO recognises that plant and equipment items will wear out more quickly than the building itself and will likely need replacing sooner. The legislation changes mean that owners of second-hand residential properties (where contracts exchanged after 7:30pm on 9 May 2017) can longer claim depreciation on existing plant and equipment assets located within their property. However, owners of affected properties can still claim depreciation on the ‘plant and equipment’ assets they purchase for their property directly. It is important to note that there are still thousands of dollars to be claimed by Australian property investors, as there has been no change to ‘capital works’ deductions, or building write-offs, which typically make up between 85 to 90 per cent of an investor’s total claimable amount. Investors who have already purchased prior to this date can continue to claim depreciation deductions as before. It’s more important than ever to work with a specialist Quantity Surveyor to ensure that all deductions are identified and claimed correctly under the new legislation. BMT Tax Depreciation will show you how to claim more deductions, pay less tax and see a greater return on your investments. BMT Tax Depreciation schedules are designed specifically for ease of use by Accountants to incorporate depreciation deductions into an investors’ income tax assessment. All information is prepared in full compliance with ATO regulations, meaning that deductions are detailed and evidenced correctly in the event of an audit. Alternatively, you can contact one of our expert staff on 1300 728 726 for a free estimate of available deductions. Find out more about the 2017 depreciation legislation and how this applies to a range of property investment scenarios.

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How recent changes to depreciation legislation will impact investors

BMT team — Wed, 06 Dec 2017 04:03:29 +0000

On Tuesday the 9th of May 2017 the government proposed changes to the depreciation of plant and equipment assets in the federal budget. These proposed changes were passed by the Senate on the 15th of November 2017. Shortly after these changes were proposed and following their legislation, a number of property investors contacted BMT Tax Depreciation to discuss how they might be affected. Understandably so, as the last major changes to depreciation legislation were made by the government in the mid 1980’s. The main concerns investors had were about the impact the changes would have on their existing arrangements, future purchases and more widely on the property market. The good news for investors is that properties purchased prior to 7:30pm on the 9th of May 2017 are unaffected, as the previously existing depreciation legislation has been grandfathered. This means that any investor who exchanged contracts prior to this date can continue to claim depreciation deductions as per before. The changes outlined in legislation section two of Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 remove a subsequent owner’s ability to claim a depreciation deduction for previously used plant and equipment assets (the easily removable or mechanical fixtures and fittings) in properties which exchanged contracts after the 9th of May 2017. The legislation also confirms that the proposed changes will only apply to second-hand residential properties. Any investor who purchases a brand new property can continue to claim depreciation for plant and equipment as normal. The changes won’t affect an investor’s ability to claim the capital works component (deductions available for the wear and tear of the building structure and fixed items). Depreciation of plant and equipment for non-residential/commercial properties is also unaffected. The legislation also states that amendments to deductions for plant and equipment assets held in residential properties will not affect those carrying on a business, corporate tax entities, superannuation plans (other than Self-Managed Super Funds) and those who hold a property in a large unit trust. Properties which have been lived in and turned into an investment property by their owners prior to the 1st of July 2017 are not affected. Owners can continue to claim plant and equipment depreciation and capital works deductions. A property owner will not be able to claim depreciation on pre-existing plant and equipment assets within properties which have been lived in as a primary place of residence where the owner decides to rent the property out after the 1st of July 2017. Plant and equipment assets within this scenario are considered previously used. There are scenarios where the values of plant and equipment will be needed. This includes when an asset is scrapped, where there is a partial or full CGT exemption and where the exchange date and settlement date on the sale of the property occur in separate financial years. Depending on the circumstances, a property investor who is unable to claim depreciation on previously used plant and equipment assets due to these amendments should be able to claim a capital loss for the decline in value of the plant and equipment assets. This capital loss should only be able to offset a capital gain and if needed can be carried forward to offset future capital gains. Case study The below scenario explains in detail how depreciation plays a role in assisting a residential property investor to improve the cash return from their property. It also compares the depreciation deductions for the first full financial year on a three year old house purchased for $600,000 before and after the 9th of May 2017. In the example, the owner receives a rental income of $560 per week or a total income of $29,120. Expenses for the property, such as interest, council rates, property management fees, insurance and repairs and maintenance total $41,028. In the first scenario, the owner is able to claim a total depreciation claim of $12,397 from both capital works deductions and plant and equipment depreciation. Using depreciation, this investor is experiencing a weekly cost of $56 per week to hold the property. In the second scenario, as the owner exchanged contracts on the property after the 9th of May 2017, they are only able to claim $6,126 in capital works deductions and will be unable to claim $6,271 in plant and equipment deductions. This reduced claim would result in the investors weekly cost of holding the investment property increasing from $56 to $101, a difference of $45 per week or $2,340 in the first full financial year. It’s important to note that the change will have the same effect on both positive and negative cash flow scenarios. While we believe that generally the integrity measure has merit, the legislative changes go much further than what was necessary to deliver on the government’s intention of stopping subsequent owners from claiming deductions in excess of an asset’s value. The approach outlined in the legislation treats residential property investors differently by extinguishing a property investor’s ability to claim a deductions based upon a transaction. We believe this is caused by gaps in current legislation around establishing a depreciable value for second-hand plant and equipment. It’s more important than ever to work with a specialist Quantity Surveyor to ensure that all deductions are identified and claimed correctly under the new legislation. Each and every BMT Tax Depreciation Schedule will be tailored to suit an individual’s property investment scenario, ensuring that all deductions are maximised.

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Draft legislation: understanding the proposed changes

BMT team — Thu, 27 Jul 2017 00:37:25 +0000

This month, the government released draft legislation regarding the proposed changes to plant and equipment depreciation as announced in the May federal budget. The draft outlined further details around a property investor’s eligibility to claim depreciation and provided a range of scenarios to be aware of should this legislation pass. In a positive move, the government provided the public with an opportunity to have their say on the new measures. A public consultation period, which was open until the 10th of August 2017, has now closed. While these measures are yet to be legislated, we have taken a proactive approach in reviewing how these intended changes could impact investors. Following is an in-depth look at the possible outcomes. Limiting depreciation on second-hand assets Section two of Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 advises that the Bill intends to amend the Income Tax Assessment Act 1997 (ITAA 1997) to limit deductions for plant and equipment in residential premises. In essence, the proposed new law reduces the amount an investor can deduct for a previously used depreciating asset for the purpose of gaining or producing assessable income. Should the proposed legislation be passed, this means that residential property investors won’t be able to claim depreciation for plant and equipment assets found in second-hand properties in which contracts exchanged after 7:30pm on the 9th of May 2017. Investors can learn more about the proposed changes, who is affected and what they mean by visiting our blog post, ‘What do the proposed changes to depreciation mean for you?’ Capital gains tax changes and implications The draft legislation outlines some detail around a reduced Capital Gains Tax (CGT) liability for property investors. Any property investor who is unable to claim depreciation on previously used plant and equipment due to these amendments will be able to claim a capital loss for the decline in value of the plant and equipment assets. This capital loss will only be able to offset a capital gain and if needed can be carried forward to offset future capital gains. A value that relates to the previously used depreciation assets will need to be established at the time of purchase. A decline in value will then need to be calculated for the assets so that a termination value can be determined at the time the property is sold. The difference between the value at the time of purchase and the termination value will be the capital loss which will reduce the owner’s CGT liability. How will the changes affect an investor’s cash return? The following scenario compares the cash return an investor will receive for a three year old house purchased for $600,000 both before and after the proposed new measures. In the example, the owner receives a rental income of $560 per week or a total income of $29,120. Expenses for the property, such as interest, council rates, property management fees, insurance and repairs and maintenance total $41,028. In scenario one, the owner is able to claim a total depreciation claim of $12,397 for both capital works deductions and plant and equipment depreciation. Using depreciation, this investor will experience a weekly cost of $56 per week to hold the property. In the second scenario, as the owner exchanged contracts on the property after 7:30pm on the 9th of May 2017, they are only able to claim $6,126 in capital works deductions and will be unable to claim $6,271 in plant and equipment deductions. This reduced claim would result in the investors weekly cost of holding the investment property increasing from $56 to $101, a difference of $45 per week or $2,340 in the first full financial year. As you can see, the proposed changes will limit the depreciation deductions available to property investors, which will lead to a cash flow reduction each year. BMT believes that while generally the integrity measure has merit, the proposed changes go much further than what is necessary to deliver on the Government’s intention of stopping subsequent owners from claiming deductions in excess of an assets value. The approach proposed in the draft legislation treats residential property investors differently by extinguishing a property investor’s ability to claim a deductions based upon a transaction. We believe this is caused by gaps in current legislation around establishing a depreciable value for second-hand plant and equipment. Property investors who would like more information can speak with one of our expert staff by contacting their local office.

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