We recently analysed 1,000 residential depreciation schedules and found that 82% of them would still benefit from having a depreciation schedule completed, given the impact of depreciation changes to plant and equipment. In some ways, it’s good news for investors (and quantity surveyors especially) that the impact wasn’t worse. Certainly, abolishing negative gearing would be a sledgehammer to depreciation and a huge disruption to the property market at large. However, the impact of the depreciation changes is not insignificant.
We’ve been monitoring the impacts closely and have just analysed 100 residential schedules in detail to find exactly what investors will lose under the new system.
To recap, any property exchanged after the 9th of May 2017 will need to be brand new, to claim depreciation deductions on the plant and equipment items. Plant and equipment items are typically loose assets but include things like cooktops, ovens, carpets, blinds, vinyl, air conditioners and hot water systems.
What did we find? Well, our average 1st full year of deductions across this study was a solid $11,628. Now taking into consideration that these were established properties with ‘previously used’ plant items, that first full year figure dropped to $4,758. That’s a loss of $6,870 worth of depreciation deductions. On a 45% marginal rate that’s $3,092 out of your hip pocket within the first year of ownership. Looking over a 5-year cumulative period that’s $16,466 of deductions lost.
To put it another way, 59% of the first-year deductions are blown to smithereens.
Now that percentage drops over time due to the high depreciation rate of plant items. After 10 years of ownership, it’s likely that it’s only the building claims that are left at 2.5% of the construction value for 40 years. However, we do know that however well-intentioned, property investors aren’t holding properties for 10 years plus in general. Investors also know that the period right after purchase is the point where the property is most likely to be heavily negatively geared, and therefore harder to service from a cashflow perspective until the rental income increases to cover the interest repayments. So, to lose 59% of your depreciation deductions in the first year will be a real kick in the guts to most investors.
In most cases (82% as per above), investors will still see some great benefits from a depreciation schedule, but there can be no doubt that the depreciation changes to plant and equipment for established properties will have some serious ramifications for investors and the property industry.
Mike Mortlock is a Quantity Surveyor and Managing 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