Budget change hits home
FEDERAL Budget changes to how depreciation can be claimed on residential properties will cost some investors tens of thousands of dollars and potentially negatively affect housing affordability, despite being designed to do the opposite, according to some experts.
The measures, announced on Federal Budget night, read as follows:
“From July 1, 2017, the Government will limit plant and equipment depreciation deductions to outlays actually incurred by investors in residential real estate properties. Plant and equipment items are usually mechanical fixtures or those which can be ‘easily’ removed from a property, such as dishwashers and ceiling fans.”
This means property investors can only claim depreciation on dishwashers, fans and other fixtures that they paid for themselves, presumably by buying the property brand new.
Until now, investors who bought established properties could continue to claim depreciation on those items going forward.
While it may not sound a big deal, Tyron Hyde, director of quantity surveying firm Washington Brown, says it would be costly in the short term and could set off a chain of events that would end in housing affordability suffering further than it already is. “Investors need these deductions early on,” he says. “Not so much down the line, because the value has gone up and they’ve increased the rent.” Hyde calculated the effects on the hip pocket and found that for an $800,000 apartment in a 2017 development, an investor’s savings on depreciation over the next 10 years will now amount to around $110,000.
This is down from the $140,000 the investor would have made prior to the new Budget measures.
If that $800,000 property was built in 1997, an investor who buys it now can claim $61,000 over the next 10 years. Previously, they could have claimed $100,000.
Meanwhile, the purchaser of a $600,000 apartment built in 1986 could now claim $0 over the next 10 years. Previously they could have claimed $17,000.
“You might see investors now holding on to a property for longer, because they know they won’t get depreciation on their next property,” Hyde says, adding that the flow-on effect would further exacerbate the supply shortage crippling some of Australia’s east coast capitals.
“Supply is the real problem (for housing affordability) and this will do nothing to help that problem,” he says.
The changes have been “grandfathered”, meaning they will only apply to investors who purchase a property after May 9, 2017. The changes are expected to save the government $260 million.
Meanwhile, property investors will no longer be able to claim travel expenses for trips taken to view their investment properties, a rule that is expected to net the government a further $540 million in savings.