As promised, this week I am passing on a brief summary of how the changes in last month’s budget to negative gearing look for property investors.
I am actually happy enough with the changes to travel claims as this is something I see that is open to rorting and not really a biggie anyway.
As expected, the govt tweaked some minor aspects of negative gearing but left the majority in place, as they SHOULD.
Negative gearing was scrapped in the late 1980s which was a disaster and quickly re-instated.
While it may have had the effect of cutting back investor activity, it meant the housing shortage at the time was only getting worse and consequently pushing up the cost of housing both in rents and purchase price.
Many people get confused with Negative Gearing and believe positive gearing is better.
While I will agree that having 1 positive geared property is better than having 1 negative geared property for up front income purposes, I wholeheartedly support buying property that is INITIALLY using the benefits of negative gearing to give the maximum tax deductions and cash flow benefits.
Why is that?
It’s a longer story than this brief paragraph will allow but to acquire a property portfolio sizable enough to provide income in retirement you need to buy property for growth but at the same time maximise cash flow by minimising maintenance costs and maximising tax benefits.
As most know, I am an advocate of buying brand new property directly from the builder and the May budget really targets investors buying existing property.
The information below is a summary by my good friend Mark Kilroy from Koste who are Depreciation specialists.
We will include his contact details below so you can contact him directly should you have any questions.
Australian Budget Changes to Tax Depreciation 2017
The Australian Budget was announced on Tuesday 9th May 2017, announced some major changes to tax depreciation for Residential Property Investors in an attempt to help reduce the problem of housing affordability. Whilst we are yet to know the specifics, Koste believes the following:
As many of you will be aware Tax Depreciation is claimed through two main categories:
· Division 43 – Capital Works (Buildings & Structure)
· Division 40 – Capital Allowances (Plant & Equipment)
The changes in the budget relate to Division 40 only Items (Capital Allowances),impacting around 150 items in the Tax legislation. From 1 July 2017, the government will limit ‘plant and equipment’ depreciation deductions so you can only claim this in the following scenarios:
· You buy a new property
· You buy the assets directly, which can be claimed
· You have owned the property before 9th May 2017
This legislation will affect depreciation deductions significantly on second hand properties. Previously, property investors could claim deductions as a “fair apportionment of the purchase price” benefiting from some great deductions. Unfortunately, if you have entered into a contract after 7:30pm on the 9th May 2017 you will no longer be able to claim these deductions.
Contracts entered prior to this date will be unaffected.
Koste are currently in discussions with the ATO about these changes, as we believe there is still many grey areas which needs to be discussed and investigated.
With fewer than 40% of existing property investors claiming Tax Depreciation deductions, now is the time to speak to a specialist and look to claim any deductions before it is too late. Remember you can only make amendments to the previous 2 tax returns (2 years) and hence the importance for existing property investors to claim now and not lose your entitlements.
Utilising Tax Depreciation deductions has benefited many property investors since its introduction. We understand that many investors rely on the depreciation deductions to keep rents affordable to many Australians whilst making investing in property financially possible.
We will be discussing the grey areas with the ATO and have confirmation shortly.