The tax depreciation disadvantages when buying a new property - October 2019
By Guest Blogger, Mike Mortlock,
MCG Quantity Surveyors - www.mcggs.com.au
I can sense that you’re looking for an admission of some sort of typo here, but I do mean to say that there are disadvantages to buying a new property from a tax depreciation perspective. So, stick with me.
Let’s start by analysing the advantages of buying new.
- The property and all its components are obviously brand new - However, from a tax perspective this specially means you’re claiming on un-deducted assets (if you’ll allow me to invent a word). This simply means that 100% of the deductions are there for you. Rather than having your Quantity Surveyor calculate that there are only 50% of the deductions available based on the age of the dwelling.
- The dwelling was recently constructed – I know, it sounds like I’m just repeating myself here. Specifically, construction costs rise over time. So, buying a property that’s four years old, means that the construction costs that we calculate for you, are based on materials and labour costs from four years ago, rather than today. This means that on top of the property not being new and having lost some deductions to the previous use, the deductions will also be based on costs that were lower at the time the property was actually built than they are today. This is obviously not the case for a new build.
- You can claim plant and equipment items – This is the big one really. If you buy new, you can claim all the floor coverings, window furnishings, appliances, air conditioning and the like. If the property is previously used at purchase, you get one big duck egg. Or zero, in less mad parlance.
Now I hear you saying yes, we know all of that, but you said there were disadvantages to buying new. Is this just one of those clickbait thingys?
Certainly not. While the Government has made it even more advantageous to buy new property with the plant and equipment claims, there’s an issue that applies here that makes very little difference with established property. This single disadvantage is not something everyone is across, and my public service announcement can be broken into two parts. Here goes.
You will eliminate all existing plant and equipment item deductions if you;
- Occupy the property – Our industry first research shows that 22.4% of our clients occupy the property before it becomes an investment property. I’ve shared some of the reasons and more background in an article here, but it’s important to note that if you decide to live in your new property and then rent it out, you won’t be able to claim and deductions on those plant items as they’ll be deemed ‘previously used’ by the time the property is available to produce income.
- Incidental Use – The best example here is a holiday home. Buy a new holiday home and spend two or three weekends a year in it and you’ll wipe out your plant and equipment deductions.
Perhaps even more concerning than this, is this snippet from the ATO; “for example staying at the property for one evening while carrying out maintenance activities would generally be incidental use.”
Whilst they’re saying that one evening is ok in this example, I’d take them to mean that two may not be. Sticking with the holiday home example they have this to say: “spending a weekend in a holiday home or allowing relatives to stay for one weekend in the holiday home free of charge that is usually used for rent would generally be occasional use.”
Again, they’ve said that one weekend is ok (generally) but it assumes that two isn’t. The best advice if you have a family member staying there charge them rent and then buy them an equivalent value present! (An accountant actually came up with this so please do hide in my bushes Mr ATO, hide in theirs.)
Overall, yes there are more positive reasons than negatives to buy new when tax depreciation is the aim. However, these two nuances will see a lot of people come unstuck and no longer be legally entitled to the extra claims that plant and equipment items offer.
This is the reason (painful though it may be) that a close relationship with a tax depreciation expert is a solid investment. Now if you can, go forth and stop living in your investments and holidaying in your holiday homes. I’ll have to work on that holiday home pitch, it’s not making any sense is it?
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