In the current investment space, there’s been much rhetoric surrounding housing affordability and the ways in which the government will curb investor interest with changes to policy.
In light of the government’s budget announcement, Washington Brown director Tyron Hyde joins host Phil Tarrant for this episode of The Smart Property Investment Show to shed light on the government’s latest changes to property depreciation, outline what will or will not impact property investors, as well as explain how they can ensure they’re in the clear on recent purchases prior to the budget’s official release.
Tune in now to hear all of this and much, much more, in this episode of The Smart Property Investment Show!
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Suburbs mentioned in this episode:
Related articles of interest:
Property industry reacts to housing affordability measures
NSW government announces housing reforms
Budget changes impact both buyers and sellers, says REIV
Perth property to benefit from $1.2bn boost to infrastructure
Phil: G’day everyone, it's Phil Tarrant here. I’m the host of The Smart Property Investment Show. Thanks for joining us. I've come off the back of a big week last week in Canberra, down at the budget. I was fortunate to move through the walls of parliament and meet with a whole bunch of people, lots of things on the issue, lots of different areas for our business, which is impacted by the budget, and we try and articulate that.
But, for The Smart Property Investment Show, it's all gonna come down to what the announcements were made around changes to depreciation, some other changes to how investors can look to maximise tax deductions. So, obviously, it's a topical issue. Housing affordability continues behind agenda at all stages of politics, and every single barbecue or dinner table around Australia, people are still talking about it. So, the government has tried to put a couple of measures in to hopefully put the brakes on the market, whether or not it will have any effect I'm not too sure. The market is the market. The market drives itself. However, one of the major changes that the government's announced is changes to how we can depreciate property, in particular the internal fixtures and fittings of it.
I'm confused. I didn't get the answers that I wanted from the people who are in power, and I don't think they actually know themselves how it's all gonna play out. This is a lot of grey areas. But I've asked Tyron Hyde from Washington Brown into the studio to come and have a chat with us about all things depreciation. Tyron, how're you going?
Tyron: G'day, good thanks Phil.
Phil: What do you think about all these budget changes? You understand it? Because I've had a good look through it and it's a bit grey.
Tyron: It's a bit grey alright. It's a bit sloppy writing if you ask me. But first let's start what we do know. Alright? There's three things we know. Firstly, there's no changes to whether the property is commercial, industrial, or anything else non-residential.
Phil: Okay, so this is only residential -
Tyron: Only residential property.
Phil: Residential property. Okay.
Tyron: Second thing, if you acquired a property prior to the budget, you are not affected at all. So, you can continue to claim... We had a lot of emails over the last week, as you can imagine, saying "How does this affect my current depreciation schedule?", and the answer is it doesn't.
Phil: So it's all grandfathered?
Tyron: It's all grandfathered.
Phil: Got it, got it.
Tyron: So that's a good start. The third thing that's not affected is capital works layouts. Okay? So that's the building depreciation. Now, to put that into perspective, when you build a house, 90 per cent of the construction costs is the capital works layouts, which is not affected at all. Bricks, concrete, shocks...
Phil: All this sort of stuff.
Tyron: And that hasn't been changed at all.
Tyron: So, let's put it in perspective. It's only 90 per cent of a building or a unit is not affected. Inside the... As you said, the fixtures and fittings, the ovens and the dishwashers, and what the government is saying is you have to physically acquire those items in order for you to claim depreciation on them.
So when you buy, in my reading of it, is when you buy a unit off the developer, the developer acquired those items, and sold it to you as a full sale price. So therefore, you can't claim those items.
Phil: See, this is where it's grey. So, if you buy... And when you listen to a lot of the information that comes out of people selling new apartments they always like to put the depreciation benefits front and centre in looking at it as an investment.
Phil: So this is gonna change it completely -
Tyron: Totally. Whilst 90 per cent of the allowances don't change, a big ticket item in the early years is the partner equipment items, right? I'll give you an example, if you buy an $800,000 dollar brand-new apartment, at the moment you might get a $20,000 dollar depreciation deduction. And you won. Makes it look affordable, the property. Moving forward, you might be getting somewhere between seven and ten, so it's an extra two to three hundred dollars a week difference that you've gotta come up with. That makes it look not as attractive isn't it, for an investor. Overnight.
And the problem with that is, a lot of the developers rely on those numbers to get presales, to show the investor "Look, it doesn't cost a lot to own this property". If that suddenly stops, guess what? No presales, no bank funding, no construction.
Phil: The idea of these measures is to improve affordability so...
Tyron: That's right, but it could have the complete opposite effect if you ask me. And the other thing is, if you now board a property pre-budget, and you've got ten years left on the depreciation of all the fixtures and fittings, you might think "Well I might keep that one, because if I can't buy another one, I can't claim those items". Right? So therefore, people might tend to hold that property as well.
So, the two measures that they've put into place to increase affordability, or make it more affordable for housing, could have the opposite effect.
Phil: Okay, so this is your reading of it. I'm still unsure of it. Are you unsure exactly if that's the case. We haven't actually had any formal notification from the government saying "This is for new and old", or-
Phil: This is for development stock.
Tyron: That's right. But the part... I read the budget statements, that's the reading of it, but until it's legislated we don't know a hundred percent.
Tyron: But maybe, cos I've put out an article about this, perhaps it might get in the right hands and say "Well, maybe this is an issue that we haven't actually thought about". Who knows.
Phil: Yeah, it's a tough one. So, people who have exchanged contracts on off-the-plan property, when you build property -
Tyron: Might be affected.
Phil: They're okay.
Tyron: They're okay.
Phil: Okay, but any time after Tuesday night, 7:45pm when they release the budget, if you're signing, exchanging the next day.
Tyron: You could be affected.
Phil: The new regime exists.
Tyron: And developers and property marketers who are selling stock now based upon those big allowances, might need to stop until the 1st of July, because they could be saying to an investor "Hey, you're gonna get twenty thousand dollars", they're relying on that information. And then when it comes to settle, they're not gonna get that. So this is -
Phil: So if you're sitting there right now, if you're assessing a new build purchase, you should be calling up the project marketer, whoever sold you the property, "What's going on".
Tyron: What's going on, that's right. And they won't have the answer, unfortunately. Because we're getting asked to give a lot of what we call marketing reports to developers, and we're saying "Look, we don't really know. We don't give you the bottom line, because we don't want you to get in trouble further down the line when someone says "Well you told me it's gonna be twenty thousand, it's now ten, we relied on that, and it doesn't work anymore. The thing doesn't stack up. We're gonna sue you”.
Phil: So we're only talking about the 10 per cent of stuff inside the building.
Tyron: Yes but, that's right, it's only 10 per cent of the stuff inside, but that makes a big difference to the initial five-year depreciation numbers.
Phil: Okay, ‘cos that – most of that depreciates.
Tyron: That's because you claimed an oven at 20 per cent, whereas bricks and concrete you only claimed at 2.5 per cent. So yes, overall, 90 per cent hasn't changed, but it's where the first five to seven years, is where it's a big difference. And that's where investors rely on those to make the cash flow affordable, because once it gets to after seven years your rent's gone up, your mortgage may have come down, et cetera, so it's not as bad.
So it's a big issue.
Phil: It's a tough one, yeah.
Tyron: I don't think people have actually worked this out a lot. I read an article in the Herald, in the Sydney Morning Herald, on the weekend. It had a three-page spread on what the changes'll be, not one mention of this. It's slipped though.
Phil: It's a lot of rhetoric around trying to slow down the market, make it more affordable. And all this other stuff.
Tyron: Look, I understand that, but I think they're tinkered with the wrong thing here.
Tyron: In terms of... So the budget is forecasting by this saving, by this change, a $216 million dollar saving over three years. That'll pale insignificant in relation to the revenue raise by development, by all the... The HIA says that if you spend one dollar in building something, there's $10 through to the economy, by all the trades, et cetera. So by stopping development, which I know this sounds a bit high but, if people can't get presales, developments don't go ahead.
Phil: Yeah. Well, the bank's gonna be very nervous about funding stuff on there.
Tyron: They're already nervous. It's interesting times.
Phil: And what about for existing properties? Cos a lot of people like to trade in that two, three years old stuff, cos they can still get a lot of the depreciation benefits. But that's completely out the window now.
Tyron: According to the budget statement, yes. And that's why I think the... It'll apply for new as well. Because, if it's not, you could have a bizarre scenario where you initially claim something brand-new, and you sell it after one year. You can claim the depreciation. You then move it on to the second purchase, after two years, one or two years, and he gets nothing. It doesn't make sense from a how to work out your capital gains tax implication, if you do it that way. I think that's why, when I read it, it says clearly that you have to be the acquirer of the plant equipment in order for you to claim it.
Phil: Okay. So if you buy a hypothetical property, and you spend $50,000 renovating it. You can claim the plant equipment, say new stoves, new ovens, new dishwasher, new whatever. So you get to claim that then. So you still get the scrapping on the existing stuff, or... ? Is that a -
Tyron: I don't think that's gonna happen either.
Phil: Yeah, okay.
Tyron: But yes, you have to physically... So if you buy a house and you then... That's what the budget statement clearly did say that. If you buy a house, and you own it for two years and you buy an oven from Harvey Norman, you can claim that oven. But the subsequent purchaser can't. And this is where a lot of people misreading the budget statement, if you ask me, by the use of the word "subsequent". That the person after can't. But it's, if you ask me, you have to be the physical person to buy that, and then that subsequent person can't.
So what I could see happening is possibly some developers may build a unit, and let the person acquire their own fixtures and fittings. Right? That's one way. What I'd advise people, it's obviously early days, but some people they're doing a renovation. They might have a building contract that says "We will separate... We want you to do the base building, we'll then acquire the plant equipment ourselves". That's okay, and that'll work for some people, but a minor part. Developers aren't gonna build a lot of units. They do in France, I believe. But they're not gonna massively change their model to build all these units that are empty, and then let everyone finish them themselves, because it's -
Phil: That's what most people... They want to buy something ready to roll, right?
Tyron: That's right. And does the developer really want to have twenty people organising carpets at different times, and all of this kind of stuff. Maybe this'll make developers build more for an owner-occupied market, which is maybe what the government does want, to a certain degree.
Phil: See how it all washes out. It's interesting, the developers seemed to have copped a few on the chin in the budget because the government are after them more so in term of GSD payments, as well.
Tyron: Yeah, that's not really my thing at all… If RIB as well, which was 50 per cent, but which I find surprising, because developers that I know they would show to get bank approval. For 50 per cent, maybe it's the merits of the word that don't have to borrow from banks. Generally speaking, property lenders aren't going to fund a deal, whether it's greater than 50 per cent of share borrows.
Tyron: It's just so risky for them.
Phil: So what's your advice for investors, in terms of how these changes in depreciation will impact their investment share? Should they speak to their accountants? Or...
Tyron: Well yes, but the first thing, obviously if you've acquired a property. Your number one thing, if you've acquire a property pre-budget, get the depreciation numbers now. You have to be certain. It's a golden opportunity, really.
Phil: So even if you haven't known the depreciation schedule for two, three years, on a property you purchased say, that time back then, you can still do that right now.
Phil: And you can go back in time, a period of time, to when you purchased it. Is that a thing for you accountant, or is that a thing for you guys?
Tyron: That's a thing for us. So, we would go to the property, and we'd assess what happened two years ago at that property when you settled on it, for instance. You would then give that report to your accountant, and he may amend your tax returns, or he or she will amend your tax returns for the past couple of years. So that hasn't changed. So there's still that opportunity there to go back and make amendments, which maybe people will focus their mind on now.
Phil: If you don't know, ask questions. And I'm fortunate you've come in here because you've expanded my thoughts around it, and my readings on it, because I've shared it with a couple buyers' agents subsequent to this coming out. And they've been chatting with quantitative aids, and depreciation experts, like yourself, and no one really knows.
Tyron: What we do know is secondhand property, you're pretty much guaranteed you're not gonna be able to claim the depreciation of the plant equipment. It's just whether it's new or not, that's pretty much a given. And what will happen there is that what the plant equipment component that you buy as part of your property, that will now reduce your taxable income when you sell it, your capital gains tax. But if you never sell the property, you might never get any benefit of it. So there's $30,000 worth of plant equipment in your property when you acquire it, when you sell the property for a hundred thousand dollar profit, you take the thirty thousand dollars off the plant equipment that was there.
Tyron: So there is that benefit, but that type at the end, and not when an investor needs it. If they don't make a profit, doesn't help either.
Phil: I could see the logic behind trying to slow the market down by making investment property less attractive, because you don't get the benefits of depreciation if it's a new build or if it... I sort of get that, it means that your property is gonna take a lot longer to be positively geared.
Tyron: Well it’ll reduce investment markets, certainly. But I don't think it was a good thing to tinker with new property, because I think it has such a big effect on the overall economy. Not every market is booming. We living in Sydney think the housing market is a complete boom, right? Sydney and Mel. Go to Perth to see how they're thinking. Right?
Tyron: So this is a national tax change, not just Sydney... So this will slow down the Sydney market, I believe, and Melbourne, but houses are gonna go help Perth.
Phil: Well this is the... Whenever anyone wants to tinker with the property market, and the levers they can pull to boost it, slow it down, whatever. They always make, and the criticism you always hear, is that they always make these policies for markets that are booming, not for markets that are not booming and, there's a lot of different markets in Australia, a lot of people are hurting.
Tyron: Absolutely. And the real issue is supply. It's not the demand. It's getting -
Phil: Build more properties.
Tyron: That's right, stamp duty is the major issue, but the problem is we've got different governments having their fingers in there, but really stamp duty should be looked at, not this.
Phil: Yeah. But I think most investors will be happy they didn't mess around with negative gearing.
Tyron: Oh well this kind of does help.
Phil: It means that you're not gonna get the same benefits as what you did beforehand, pre-this budget announcement.
Tyron: That’s right. The funny thing about this is, you can have the bizarre scenario where you buy a commercial suite that was standing here and now, with carpet, it's treated totally different to your residential block next door.
Tyron: And you'll be able to resell that carpet, revalue it as the transactions occur each time, but with the residential – totally different.
Phil: Different rules.
Tyron: And even then, even more different, if it's the service department which people are living in, treated differently again too...
Phil: Now, service departments are different.
Tyron: Well, I would say so, I would say it's more of a commercial deal, rather than a residential. Yeah.
Phil: Yeah. I have to call my accountant I think, and get some good advice on this. Or Washington Brown.
Tyron: Washington Brown, probably better.
Phil: Yeah? All right.
Tyron: We just have to wait until the legislation is actually written.
Phil: So have you guys got any info on your website around this?
Tyron: I wrote a blog on it, but I'll be out... By the time this is up, there'll be a FAQ, big button on what the changes are and how it affects the investors.
Phil: Is it WashingtonBrown.com.au, I believe.
Tyron: That's the one.
Phil: All right. Tyrone, I'm gonna leave it there, mate, but thanks for coming in.
Tyron: My pleasure.
Phil: I really enjoyed the chat, and giving me more questions than answers I think but, I think it runs in the same boat. Make sure you check out SmartPropertyInvestment.com.au. We're gonna do a lot on this because I think everyone wants some certainty around it and I don't think anyone really knows yet exactly what's going on. But as soon as we know, and we'll speak to the right people including Tyron, to actually understand how this is gonna impact property investors.
Interestingly, just a bit of a backstory, I settled on a property up in Queensland on Wednesday, the day after the budget was announced. My first -
Tyron: Lucky you.
Phil: Yeah. The first thing for me was, was that gonna impact that? No, no, no, it's when you actually exchange the contracts, rather than when you settle it. So, that's important.
Tyron: That's right. Correct. Absolutely important.
Phil: So, I'm happy about that, but moving forward it means that I'm not gonna get the benefits that I used to. Also, if you don't know the government's clamped down a little bit on travel expenses associated with holding investment properties. So if you used to have a trip with your family to the Gold Coast every year and deduct that as a travel expense against your investment property out there, that's no longer the case.
Tyron: Just on that, the funny thing about that is, the government has forecast $580 million dollar saving over the forward estimates on travel expenses. They're forecasting $260 million on depreciation deduction. That makes absolutely no sense to me. I dunno about you, but I haven't been to the Gold Coast that often to visit my investment property.
Tyron: I don't know where they're getting those numbers.
Phil: I dunno who's doing it. I think the problem is, Tyron, is a bit of miseducation. A lot of people traditionally, and obviously we're trying to change that with The Smart Property Investment Show, but a lot of people have traditionally bought investment property based on all these great tax benefits that are associated with it, and rather than look at the fundamental benefits of that property and how it's gonna go up in value over time, and hope you hold it. So, it might change what people are thinking right now, and that's a good thing, but it all comes back to the basics. You should only be investing in property, I believe, because it's a good investment i.e., it's gonna go up in value over time, it's gonna cost you as little possible to hold that. A lot of people...
Tyron: Just finally for me, you will still need a depreciation report.
Phil: You will do.
Tyron: Look at the capital works deductions, and...
Phil: Absolutely, absolutely. Well, it's 90 per cent of the investment is to... It's certainly 10 per cent we're talking about here. But, when I look at my portfolio, one of the things that we probably haven't done as well as we could've traditionally, but a lot better now is the depreciation sides. We're really focused on it now, and make sure we get the absolute best outcome that we can. So, Tyrone, you've been a good mate. Thank you.
Phil: Get back on.
Tyron: Thank you.
Phil: Remember to check out SmartPropertyInvestment.com.au today, you were also on all the social channels, Facebook, Twitter, LinkedIn. You can follow me, if you like @PhillipTarrant on Twitter. Remember to keep those five-star reviews coming on iTunes, we do appreciate them. The more that we get, the higher we move up the rankings, and we're pretty strong in that regard. But the team do like the comments and the feedback coming in. And if you want to come on the show, come and have a chat with us, so if you've got any questions to Tyron or myself in general, you can email the team at [email protected] today. We'll be back again next week, thanks for tuning in, we'll see you then. Bye.