By Margaret Lomas

The proposed Federal budget 2017 stopped short of removing negative gearing for property investors, but it did contain some surprising changes which no one really saw coming. There had been a considerable amount of industry stakeholder collaboration with the government, yet they pulled a pretty unpalatable rabbit out of the hat at the finish line, and many of us are now scrambling to make sense of some of the proposals.

In a nutshell, here is how the budget will affect property investors.

Travel expenses

Property investors can no longer take a tax paid trip to inspect their property twice a year.

In my opinion, this is a good decision as this was a costly rort, which did little more than provide two tax paid holidays a year to investors and a great opportunity for property spruikers.

Those spruikers would market often over-priced property in divine tropical locations to willing investors on the basis that they could get a holiday on the tax office just for going to inspect that property. Such an incentive often stripped the investor of their ability (or desire) to even assess the true investment potential of the underlying asset, and the fall out has been that a considerable number of investors now hold property worth far less than they paid – and they are tired of holidaying there.

While the occasional investor took only bona fide inspection trips, this was one benefit which was often abused, and it is a fair decision. For those investors now worried about how they will be able to inspect their properties, remember, you are a property investor, not a property manager. Build a good team of people in the area where your property exists and have them do this menial work for you, while you use your time to seek out more investing opportunities.

Plant and equipment depreciation

This is the one that will hurt the most. While investors retain the right to claim the depreciating value of the building (capital works deduction), they are no longer allowed to claim any fixtures, fittings and furniture, unless they are the original purchaser of that asset.

So, if you build a new property, you essentially are the first owner and so you can claim the building and all that is inside. If you buy from someone else, you no longer get the new effective life (or the remaining value) of the plant and equipment, although you still get the remaining building write-off.

If you scrap items to replace them, you cannot claim the residual value of the scrapped items as before, but you can then claim the new items which you buy, and so a renovation still carries significant benefits. On all property, you can still claim capital works deductions on a structural improvement which you, or someone else, does.

To some extent, I think this is also a step in the right direction, but there are holes you can drive a Mac Truck through. In its present form, an investor can buy a property which has, say, 15-year old carpet, and engage a quantity surveyor to asses its present value. Hence, the investor gets what is known as a ‘new effective life’ on the asset, which gives a further 10 years of depreciation on the second-hand value. Theoretically, that carpet could be depreciated forever under the old rules! So, in my opinion, it’s fair to scrap the ability to get that new effective life on an old item of plant and equipment.

However, if you buy a property which is, say three years old, the original owner of that same carpet has only depreciated it for three years of its 10-year life! It doesn’t seem fair that the new owner cannot at least claim the remaining seven years, especially since they are allowed to claim the 37 years left on the building depreciation. Depreciation schedules for capital works, plant and equipment should belong to a building, and pass to the next owner to depreciate what is left of its original value. This will still be a fabulous integrity measure, but more sensible and easy to implement.

It’s a flawed change, and it needs better clarification. It also raises more questions than it answers, and opens more loopholes than it closes. If you buy a second-hand item (such as a refurbished hot water heater) to put in your second-hand rental house – are you the first owner of it, or does the item have to be new to qualify? And what stops me from buying a property under two contracts; one for the house and land and one which itemises a purchase price for each and every item of plant and equipment? Am I then the one who ‘bought’ the items, and can I claim them?

CGT

While a potential change to Capital Gains Tax (CGT) was mooted, it surprisingly remained unchanged and still offers a 50% discount after you hold the asset for 12 months or more.

Other property-related matters

Other measures which do not necessarily directly impact on property investors include:

  • Those over 65 who sell their homes with a view to downsizing can now contribute up to $300,000 of the proceeds to super as a post-tax contribution;
  • Super borrowing, which is one of the fastest growing areas of lending, has been left alone. This is still allowed BUT borrowed funds are counted in the 1.6m contributions cap;
  • First-home buyers can use their voluntary super contributions to buy a home, but, unlike the now defunct First Home Saver accounts (which were a miserable failure), there are no contributions from government and there is a maximum contribution for home buying purposes of $15k per year and $30k total. Just like its predecessor, I can’t see this having a great rate of take up;
  • Buyers of ‘qualifying affordable housing’ get a 60% CGT discount after 12 months. We will wait to see exactly what these properties look like and how they will be delivered as there is little information around what will constitute a qualifying affordable home. Last time this idea was implemented under the National Rental Affordability Scheme (NRAS), all that happened was that greedy developers built NRAS property, sold it above market value to individuals (even though the scheme was intended for institutional investors) and flooded the market, reducing demand. A lot of mum and dad investors lost a considerable amount of their net worth buying these properties. 
  • Buyers of any property over $750,000 must withhold 12.5% of the purchase price and remit it to the tax office, unless they cite a tax clearance certificate from the vendor proving they are not a foreign resident. This certificate must be produced even if you know they are not a foreign resident. The onus is on the buyer to withhold and remit this tax.

For property investors, the proposed changes will be grandfathered for anyone who owned, or had signed a contract for, property prior to budget night, 9 May 2017. Of course, this all has to be passed yet and it is just a proposal, but given the desire by the Labor party to make sweeping changes to negative gearing, I highly doubt it will be met with much resistance.  

What remains to be seen is just how the anomalies are dealt with and how it is all implemented. Discussions are underway with key industry stakeholders, so we wait with bated breath to see just what will transpire. Once I have more information around these changes, I’ll write them up in another article, so look out for that.