Depreciation benefits have always been helpful to property investors.
And again there are some changes in the wind.
For the first time in recent memory, the ATO has consulted with the Australian Institute of Quantity Surveyors regarding their annual review of effective lives.
In fairness, I assume they consult more with manufacturers of assets which is appropriate, but I do believe us QS boffins have something to offer around the inclusions.
Each year the ATO issues a document outlining the assets they deem to be plant and equipment items across all industries.
The document also provides the number of years they assign to the asset as it’s effective life.
If the asset or material in a property is depreciable, it’s either plant and equipment, or essentially depreciates at a flat rate of 2.5% along with the rest of the ‘structure’.
An effective life is generally the time in which warranties would expire and or the point at which the asset ceases to have any value or requires replacement.
In theory, adding more plant and equipment items means that the tax deductions available would increase over the beginning of ownership.
Say for example if something like carpet was never considered plant and equipment, it would depreciate at 2.5% per year for 40 years.
Since it is classified as plant, it’s 10 year effective live gives it either a 20% or 10% depreciation rate per year depending on the method of depreciation.
So instead of waiting forty years to claim the whole value, it can be claimed in as little as ten years.
Whilst the deductions remain the same over forty years, plant and equipment brings the value forward in the beginning, thereby increasing deductions over the first 6-7 years.
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Well, since the game has changed a little, it’s not quite as simple as that.
With the changes announced to depreciation in the May 2017 budget, new investors can now only claim plant and equipment on items they install themselves, or if the property they buy is brand new.
With most investors purchasing established properties (61.8% of them according to our research), more plant and equipment items being acknowledged will actual marginally reduce depreciation deductions.
Conversely, investors buying new are now even more incentivised to do so.
That’s a whole other issue we’ll leave for another day.
Notably, there will most likely be a few additions announced around July 2019 such as;
- Digital Peep holes (hopefully they change the name of this one, it sounds a little creepy)
- Home automation control assets (a few homes now have a panel that controls lighting etc)
- Hydronic water heating systems
- Automated Skylights
- Water pumps (they were there before but now there are a few different types noted)
- Folding arm automated awnings
- Rainwater tanks (really this is long overdue as we should encourage better sustainability practices, previously it only applied to commercial entities)
- Automated roller blinds
- Swimming pool blankets (those protective and heat trapping covers)
Some existing assets are having their effective lives changed. I won’t cover them all but some of the major residential ones for investors are;
- Carpet (Dropping two years meaning deductions will again be higher in the beginning of a schedule)
- Air conditioning (certain types)
- Bathroom accessories
- Laundry assets (washers and dryers)
- Swimming pool filters
Mostly, all these plant categories are having their effective lives reduced meaning the average investor buying new will be better off over the shorter term, and investors buying established potentially disadvantaged.
However, this is only the case if buying a property that has one of the new assets coming in, and in all honesty, this is likely to be a rare occurrence.
The advantage on buying new is very clear though when you allow plant and equipment deductions.
It’s perhaps not something the average investor would keep on their radar, but it is something that can have implications on the amount of deductions available to you.
As the resident QS tax legislation nerds, we’ll keep you in the loop!