A subtle move to tax investors more - September 2019

By Guest Blogger, Mike Mortlock,

MCG Quantity Surveyors -  www.mcggs.com.au

Sometimes seemingly tiny shifts come together and cause seismic events. A tweak here and an adjustment there might not sound impressive, but they can bring about a dramatic income.

And so, this scenario has unfolded in the world of 2019 taxation and property investment … and could cost many landlords dearly.

The simple shift

In 2019, a ruling change by the ATO is underway – and unless you constantly monitor the guidelines like some number-obsessed, levy-nerd (i.e. quantity surveyor), it’ll pass by so quietly, you might not even feel the sting to your hip pocket.

So, what’s happened this year that’s raised my antenna and has me reaching for a bullhorn?

It’s been a re-categorisation of some depreciable items in the new effective life legislation that will see many investor’s deductibles reduce. 

How this works

Let’s look at some simple principles that explain this change.

Firstly, among the volumes of rules related to taxation sits a comprehensive list of items (fittings, fixtures, works and improvement) that can be claimed by property investors in some form as deductions in their annual tax return.

Each of these items is classified into two possible categories:

• Building structure deductions (or, for those who must know, division 43 deductions)
• Plant and equipment assets (or, again for the purists, division 40)

The way in which an item will be treated as a tax deduction by the ATO depends very much on which category it falls into – particularly in relation to Plant and Equipment assets.

The amount you can claim each year as a deduction for Plant and Equipment items relates to their “effective life” which defines how quickly they depreciate for use in a formula to calculate their deductible value.

By changing an item’s effective life via new rules, the ATO alters how much of a deductible benefit you get each year out of that item.

A number of items have been given new “effective lives” which has increased their annual deductible amount – seemingly a great result for investors.

But wait! There’s more.

In addition, the ATO can choose to move items from the Building Structures category and place them in the Plant and Equipment category.

For residential properties, these moves hadn’t occurred for years… until 2019 that is!

This year, quite a few items have been moved into the Plant and Equipment column, and this will hit the hip pocket of those who invest in established homes rather than brand-new homes – which, by my analysis, is just over 60 per cent of the nation’s property investors.

Why do the established-home investors lose under the ATO’s re-categorisation?

Because on the 9th May 2017 the Federal Treasurer (now Prime Minister) announced that if you contracted to buy a property after that date, you would only be able to claim depreciation deductions for Plant and Equipment items if the residential property was brand-new, or if you added the asset yourself – say as a renovation or extension to a tenanted property.

Think about that. It means if you bought an existing home after that date, there are no Plant and Equipment benefits that come with the property. A distinct advantage to new-home investors.

So, the move this year to shift some items into the Plant and Equipment column removes them from being deductible for many existing-property investors under the guidelines.

What’s the pain?

If you buy a two-year-old house, you used to be able to claim 2.5 per cent of the value of an item such as the rainwater tank each year. Now that they’re considered new plant and equipment items, your claim on them is zero – nada – zilch.

While smart investors never buy property solely for the tax advantages, every little bit helps when trying to service a loan and maintain a holding. These 2019 changes have given another subtle edge to the minority who’re buying new property, while the majority of landlords with older homes will have to, once again, cop it sweet.

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