Grey areas in budget on building plant and equipment depreciation tax claims: Washington Brown's Tyron Hyde

The federal budget’s proposed changes on investor property tax claims relates mostly to residential properties and there is “absolutely no change” for commercial properties, according to quantity surveying firm Washington Brown’s CEO and director Tyron Hyde.

The government targeted only residential property investors because of the huge price increases mainly in Sydney and Melbourne that has raised question marks on housing affordability.

So offices, industrial and retail properties were let off. 

However, the budget did leave the Division 43 deductions untouched, says Hyde. 

“What does that mean? Well, as I said before, there’s two components of a depreciation schedule. There are the plant and equipment and there’s the building allowance. The building allowance is the structure,” Hyde told his audience at a web event.

Depreciation allows you to claim a tax deduction for the wear and tear on an investment property over time, but the Federal Budget foreshadowed an amendment. 

Investors can still continue to claim brickwork, concrete, the roof, the scaffolding even if a property is bought after the changes come into effect.

But he added that there was confusion in the market as to whether these changes affect the new property, or is it just secondhand property? 

“No one knows. I’ve been in meetings with other Quantity Surveyors firms and really, we are unsure. I’ve written to Treasury and asked them for their guidance as to whether new property can still continue to claim the depreciation of plant equipment, and I got the usual response, ‘We’re formulating this budget measure …,” said Hyde.

Quantity surveyors Leary & Partners Investors echoed similar sentiment earlier, the budget had stripped investors buying second-hand residential properties of a major tax deduction.

Hyde said many peopler are buying new properties but are unsure of their depreciation claims because of the fog around the rules.

The budget statement said, “Acquisitions of existing plant and equipment items will be reflected in the cost base for capital gains tax purposes for subsequent investors.” 

Now the key is here “existing plant and equipment items”, said Hyde. 

This clearly means if it’s a secondhand property it’s an existing item, “but if an investor buys a brand new property that’s being finished, but only two weeks old, is that an existing plant and equipment item?” he asked.

There's even less clarity for properties off the plan where construction hasn’t even begun. 

The question to be asked here is if that is existing also because a contract has been entered into.

“What happens if I flip that property in three years time, who can claim those existing plant and equipment items? It wasn’t clear in saying brand new property’s okay, a secondhand property is not and that’s why there’s confusion in the market,” asks Hyde.

While these questions remain, the bad news is definitely for a secondhand property, he says because investors will not be able to claim depreciation on things like ovens, dishwashers, lights, air-con, television sets, blinds, carpets, all those depreciable assets.

If the property belongs to a high rise apartment tower, investors can not also claim for the common property items such as lifts, smoke detectors, an investor’s portion of the common carpet in the hallway, garage motor doors, etc.

So all those kind of equipment items will in the future be part of the cost phase. 

In order to claim the building allowance, you’ll still need to work out what the actual cost of construction of the structure is, he says. 

“The problem is that it’s going to be less.”

When building a house, roughly probably about 15% of the construction costs of a unit or a house relates to the plant and equipment of a building, that’s the ovens, dishwashers et cetera. The other 85% relates to the construction cost of the structure of the building. 

“It’s got a massive difference in the overall claim that you’ll be able to make over 40 years. The main difference is in the early years, and that’s when a property investor needs those claims,” he says.

So for a brand new unit bought for $850,000, the first year claim pre-budget will be about $20,000. However, post budget, if the property is not allowed, it will be about $9,000. 

The second year $17,000, the second year post budget $9,000. 

After 10 or eight years, when the rent’s gone up the big deductions count for less, but in the early years they matter a lot, Hyde says.