UPDATED 11/5/2017

If you’re not already aware, last night’s budget announced some major changes to tax depreciation that will have a huge impact on quantity surveyors preparing depreciation schedules and residential property investors. I’ve been fielding calls and emails from accountants, investors and quantity surveying firm directors through the evening. There are two main ‘buckets’ of depreciation, there’s division 43 which relates to the structure of a building (concrete, timber, gyprock, tiling, cabinetry etc.) and division 40 which is plant and equipment items. Plant and equipment items are loosely described as items easily removed from the property without damage. Within a residential property, there are predominantly air conditioners, blinds and curtains, carpet, floating timber floors, ovens, cooktops, dishwashers, range hoods, hot water systems, security systems, smoke alarms and light shades. The list is quite long at around 150 individual assets, and apartment complexes will have a much larger list of shared plant and equipment items like lifts, fire indicator panels, swimming pool filters and the like.

The Government has just announced that there are now only two ways you’ll be able to claim depreciation deductions on plant & equipment items.

You buy a brand new residential property*;
You add the plant and equipment item directly yourself

This means that if you’re the second person to own a property, even if it’s only a year old, there will be zero depreciation deductions attributable to the plant and equipment items. This applies to residential investment properties where a contract was entered into from 7.30pm on the 9^th of May 2017. If you’ve purchased an investment property prior to that date, you’ll be able to continue to claim plant and equipment items until the values either run out, or you sell the property.

What does this mean in real terms for the depreciation deductions for property investors?

Thankfully we’d already begun an analysis of our last 1,000 residential depreciation schedules, albeit for a completely different purpose. Nevertheless, here are some of our key findings;

Of our last 1,000 schedules, 38.3% of them were purchased brand new and would be unaffected by the changes.
69.9% of the properties were built after the division 43 cut-off date of 16/9/1987, so there would be depreciation claimable on the original building structure
Of all the properties built prior to the cut-off date, 63.8% have been renovated to some extent by the current owner. The average total value of this renovation is $39,191

So the key takeaway is that if we remove from the 1,000 figure, all the properties that would benefit from a depreciation schedule (built after 1987, renovated to a significant extent by owner or previous owner) we’re left with 161 properties that would not have sufficient depreciation deductions to warrant having a depreciation schedule completed.

In some ways that’s good news for the industry, as 83.9% of investors will still have some worthwhile claims (at least $1,000 per year), and arguably the market for depreciation companies has not been cut in half. My cut-off point for ‘worthwhile deductions’ for those older properties was the average post-purchase renovation figure of $39,191, which I also applied to prior renovations.

If we look at an average $39,191 renovation, our analysis tells us to expect around $3,278 of that to be plant and equipment. Since plant and equipment depreciate at higher rates than the building structure, that has a big impact on the deductions in total.

Our analysis shows a first full year depreciation breakdown as follows:

Building Structure $897.83
Plant and Equipment $956.18 (under the diminishing value method)

As you can see, removing the plant and equipment deductions cuts the deductions roughly in half. Our analysis is slightly on the pessimistic side as it’s feasible a 39k renovation could have zero plant and equipment.

So according to MCG Quantity Surveyors analysis, whilst there’s still going to be enough value to justify a depreciation schedule in 83.9% of cases, the total benefit of the schedule will be diminished. Over our 1,000 residential schedules analysed, the average first year depreciation deductions was $9,407.73. For pre-owned investments only, that figure drops to $7,484.35. It’s reasonable to assume that around half of that value will be gone within the first year. On a 37% marginal tax rate, the after tax increased cost of ownership of your average established investment property will be around $1,300-$1,400 per year.

We urge accountants to direct investors to quantity surveyors to analyse the potential claims and caution property investors not to panic.

Do I think the 83.9% is a solid figure? Sadly not. The concerns is that investors will not chase their entitlements based on poor advice or misinformation about their entitlements. On the basis of 69.9% of properties qualifying for division 43 deductions on the original property, this is likely going to be closer to the true cut to the depreciation business. Of course again, misinformation may amplify the problem.

It’s a massive hit to property investors, but mostly to depreciation companies such as ourselves. The budget speech championed the role of investors in keeping rents down and providing accommodation to millions of Australians. This measure will increase the after-tax cost of holding a residential property and that cost will either be passed onto renters, or the supply of affordable rental properties will drop placing upwards pressure on rents due to demand.

This is a disappointing development and I urge the Government to consider the clear majority of investors that are simply holding one investment in the hope of self-funding their retirement.

*Some developers and quantity surveyors are concerned that plant and equipment items on new properties might be excluded. Given the intention of the measures was to stop investors from repeatedly depreciating old assets on the event of each new sale, I cannot see this happening. If you buy a new property, the assets have never been depreciated so the deductions should be available.

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

The budget is only two hours old and I’m back in the office trying to come to terms with some pretty fundamental changes. To cut a long story short, from now on, property investors will only be able to claim depreciation deductions on plant and equipment items if they either;

a) purchased the asset directly themselves (i.e. added a new dishwasher) or;

b) bought a brand new property.

Up until now, when investors purchased an established home, quantity surveyors were charged with the task of estimating the residual or left over value of the plant and equipment assets. These are things like blinds, curtains, carpets, ovens, cooktops, dishwashers, hot water systems, light shades, security systems, air conditioners and the like. From now on, the only available claim will be on the construction component of the dwelling. This of course only applies to properties that had commenced construction after the 16th of September 1987 or properties renovated after 27 February 1992. To put that in perspective, a property built in the 1970s that was extended in 1998 for $50,000, will receive 2.5% of that value in depreciation each financial year for 40 years from the completion date of the works. Now the 50k of works cannot include those plant and equipment items mentioned above, it must be building works (division 43) only.

So 50k of division 43 only improvements would result in $1,250 worth of deductions per year. Plant and equipment items depreciate at much faster rates than standard building improvements, and would equate to roughly half of the total value of a depreciation schedule, though in this scenario it could certainly be double.

We were the first quantity surveyors to publish actual data on average residential depreciation deductions and our average total depreciation claim was $9,138 dollars. I’ll be pulling the exact plant figures out asap but it’s fair to say that between 40-50% of that value would be plant and equipment items.

This budget measure was supposedly designed to ensure that an asset could not be claimed multiple times by different owners. For example, you could purchase a new property with a $180 door closer and write it off as a 100% deduction. You could then sell the property to an investor two years later, who would then claim a 100% deductions for the residual value of the door closer, which might have dropped in value to say $140. So I think it’s fair to say that new properties will be safe from these changes. The ATO stated you did not need to consider or search for the depreciation claimed by the previous owner, so they created the problem in the beginning.

It’s a massive hit to property investors, but mostly to depreciation companies such as ours. We’re a small business employing a number of people to prepare depreciation schedules. We’ve just been blindsided by a change that could cost hundreds and perhaps thousands of jobs within the next few years. The budget speech just promoted the role of investors in keeping rents down and providing accommodation to millions of Australians. This measure will increase the after tax cost of holding a residential property and that cost will either be passed onto renters, or the supply of affordable rental properties will drop placing upwards pressure on rents due to demand.

This is a disappointing development and I urge the Government to consider the vast majority of investors that are simply holding one investment in the hope of self funding their retirement.

Mike Mortlock, Managing Director, MCG Quantity Surveyors

Tag: plant and equipment

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Changes to Depreciation Deductions for Plant & Equipment Items

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