Are depreciation legislation changes affecting property investor behaviour?

Yes, yes they are. Or at least, it seems that way.

Now I’m tempted to just leave it there for my own amusement, but anyone that knows me will know I won’t be able to help myself in sharing the data I’ve crunched. Let me give you some background;

On the 9th of May 2017 the then Federal Treasurer and now Prime Minister, Scomo, announced that anyone purchasing established residential investment properties (i.e. not brand new) after that date would no longer be able to claim plant and equipment item deductions. Plant and equipment represent a big slice of the overall deductions, especially in the first five years of ownership. Generally, in the first full year of claim it’s more than half of the total deductions.

I’m a big believer in incentives. I believe that humans will naturally follow paths that they’re incentivised towards. So where are the incentives leading people? In my view, they’re clearly leading them to purchase new property.

If you buy a brand-new property that’s always rented out, you’re exempt from the changes. Meaning that you can not only claim all the available building structure deductions, but you can claim those juicy, high depreciation rate attracting plant items. Things like;

  • Kitchen Appliances
  • Blinds and Curtains
  • Hot Water Systems
  • Pumps
  • Ceiling Fans
  • Air Conditioning
  • Bathroom Accessories
  • Exhaust Fans
  • The list goes on

So, there’s your background, now what about the data? I have to be a little cagey I’m afraid as we’re about to share some of this industry first data in a press release and whitepaper, but I can tell you that between November 2017 and December 2019 investors buying a brand new property have increased by just shy of 45%. To me, that marks a sizable shift.

Now there may be several other reasons why this has happened. Perhaps there’s greater education on the benefits of new properties, perhaps our data which only really comes from investors obtaining schedules is a little too skewed. Although on the latter point, we’ve checked it against big data from mortgage aggregators and it’s pretty darn close.

What can we surmise from this? I think it’s a key indication that whenever the rules around property investing change to skew the advantages in any direction, investors will likely follow. Of course, there are way better reasons to buy one property over another than the tax advantages. However, but one should not underestimate the power of the fear of the stick and the pleasure derived from the carrot.

Mike Mortlock is a Quantity Surveyor and Managing Director of MCG Quantity Surveyors. MCG Specialise in Tax Depreciation Schedules and Construction Cost Estimating. You can visit them at www.mcgqs.com.au