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Archive for category: ONYX Finance

Productivity Commission’s Errors a Tragedy for Home Loan Borrowers.
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Productivity Commission’s Errors a Tragedy for Home Loan Borrowers.

I nearly choked on my brekky this morning when I read this article, “Why you can’t get a good deal on your home loan” on news.com.au.

The article has a crack at mortgage brokers using the Australian Government Productivity Commission (AGPC) report into the finance industry released today.  It’s a tragedy for home loan borrowers that AGPC has got critical issues so wrong.

Mortgage Brokers are Licensed

This line really got my hackles up – “Unlike in wealth management, mortgage brokers are not obliged by law to act in the best interests of the customer,”

This is just plain wrong. Mortgage Brokers are licensed by the Government through ASIC and one of the requirements of our license is that brokers “must complete an assessment as to whether a loan is ‘not unsuitable’ for a consumer”. The compliance is very strict.

Furthermore, I would happily line up the performance of mortgage brokers against the wealth management industry.  For 16 years we have provided quality advice to our clients always putting them first.

Banks Taking Advantage of Loyal Customers

I do agree with the statement that banks offer a better deal for new customers rather than established. I’ve been commenting on that for over a year now.  However, the report somehow puts the blame for this on mortgage brokers not doing their job.

The reality is that the clear majority of customers who switch banks do so through a mortgage broker arranging a home loan for them with another lender.

Instead of deriding brokers the AGPC should be encouraging more consumers to talk to a broker.

Why Criticise Choice? 

The report claims there are 4000 different home loans and that somehow this is a bad thing.  Home loan choice combined with professional mortgage broker advice is absolutely the best option for borrowers.

Don’t Forget the Non-Bank Sector 

The article also does not mention the “non-bank lending” sector. We have always been a strong advocate for non-banks. They play a key role in innovation and providing solutions for niche markets that would normally be unable to obtain finance.  Mortgage brokers are the main way borrowers find out about non-bank lenders because they don’t have the marketing spending power of the major banks nor a branch network.

Word of Mouth Speaks Volumes 

Like most brokers, we rely heavily on “word of mouth” referrals so it is in our best interests to deliver the very best outcome for our valued clients and if we don’t they are less likely to refer.  Furthermore creating a win, win environment is what makes the world go around. The commission system used to remunerate brokers only rewards us when we get the job done for the client and for making sure they are happy over the long term.

It’s a Tragedy

I’m surprised and disappointed that Australian Government Productivity Commission, an institution we rely on for knowledgeable advice, could get this so wrong.  If the Government acts on these views, its only going to lead to tragic consequences for home owners and investors. It will also in fact decrease competition as borrower’s access to alternate lenders will be become more difficult.

The Mortgage & Finance Association of Australia (MFAA) is disappointed by the report saying “The Report’s authors have failed to understand the reasons why consumers engage brokers to act on their behalf“.

 I’d Love to Hear from You

As always if you would like to chat about how we might be able to assist you or if you would like to discuss the content of this article I’m always up for a chat, so please feel free to call me direct on 0409 02 99 22.

 

Stop hating property-owning baby boomers! Homes for all are coming!
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Stop hating property-owning baby boomers! Homes for all are coming!

Great article from Peter Switzer

It looks like it’s capitalism to the rescue and its ability to induce ‘outside the square’ thinking just might reduce the hate session young people have for baby boomers over their dominance of real estate assets.
Over the weekend, smart economics writer, Jessica Irvine, who graces the Fairfax Sunday papers, reminded us how annoying it is that baby boomers hold so much of the property that Gen X’ers and Gen Y’ers covet. Some critics even resent that baby boomers live so long and have the temerity to live in their homes — big homes — too long as well!
It’s an intergenerational hate session over the thing that used to force tribes to war over past centuries — land! And the arguments against baby boomers (and even older Australians) have been powered along by the Grattan Institute, which seems to spend a lot of its life telling baby boomers that they’ve had it too good and have been ripping off younger Australians.
How did they do that? Firstly, living too long — damn modern medicine!
Secondly, after being told by Paul Keating in the 1980s that they wouldn’t get the pension, they’d always been promised, if they had too much money and bugger all super, they looked to investment properties to build our wealth quickly.

Thirdly, much higher tax rates encouraged people to use the taxman and tax refunds to bankroll their life as a landlord. This was encouraged by the rise of the media money-men and women, who started to get air time and column inches in media outlets, like yours truly.
These money mentors started explaining the mumbo jumbo of wealth-building that once was only known by a group who used to be called “the wealthy”!
So that’s why baby boomers went into property but two big things have made it such that reasonable people like Jessica admit that the current housing situation makes her blood boil, a bit.
Firstly, governments have slugged huge charges on developers and have put ridiculous restrictions on them, as state governments effectively got out of public housing. Dumb governments have created a housing supply problem, which has pushed prices up for the existing stock. And it has happened while Australia has one of the fastest population growth rates of the Western world. Governments screwing up? No!
Secondly, cool younger people like Jessica don’t want to live in the boondocks too far away from great cafes, entertainment and cool lifestyles, especially when many dumb governments have done precious little to create great, affordable public transport systems.
So that’s the problem and here’s the ‘outside the square’ part-solution and I call it the Manhattanization of our cities.
New York’s Manhattan is a huge paddock of apartment blocks with most New Yorkers being renters. Anyone who watched Seinfeld would know that and there’s enormous competition for apartments when older people die, as a Seinfeld episode showed us.
The Age newspaper today tells us about groups such as Mirvac that are planning to build apartment blocks purely to rent out.
“They’ll be nothing like we’ve seen before, either, with building managers looking after apartments, staff to look after leases and run ‘community’ events, and onsite cafes, shops and work spaces,” Sue Williams tells us.
“There will also be long-term rolling leases with the potential for tenants to transfer to other allied blocks in different areas if their jobs or circumstances change.”
Adam Hirst the GM of Capital Allocation at Mirvac explained why this new style of building is coming.
“It’s a lifestyle choice of millennials, young families and downsizers, and the choice of a growing number of people,” he said.
“There are currently 2.5 million rental homes in Australia and we see that growing in the next few years with purpose-built apartment buildings for the rental market”.
“It’s well-established overseas but, in Australia, it’s a new form of housing and there’s a lot of excitement around it.”
This will become a new asset class that the retirees — those damn baby boomers again! Could invest in but, better still, it should entice our super funds to use their money to bankroll affordable housing, which will return a reliable flow of income.
Ironically, this move could slow down house prices rises in hot inner city locations but could raise prices in sea-change and tree-change areas as weekly, inner-city renters escape to the country on their weekends, like lots of New Yorkers and Europeans do, who have grown used to believing that owning a property in their home cities might be just too hard.
Given the incurable stupidity of the politicians who populate governments, who never seem to come up with solutions to our social problems, thank God capitalism throws up lateral thinkers, who love profit and who can do the fixing our so-called leaders always fail at.
Go capitalism!

Don’t Get Mad… Get Even!
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Don’t Get Mad… Get Even!

Yes, we repriced the back book’, ANZ defends rate hikes!

Please tell us something we don’t know!

The big four banks are fronting the House of Representatives Standing Committee on Economics to amongst other things try and justify the gouging of their customers by increasing rates on the back-book.

To read a short article written by James Mitchell for The Adviser magazine click here.

Unfortunately I don’t think ANZ chief executive Shane Elliott answers the question adequately, he merely spins his way around the issue.

Industry luminary Steve Weston also weighs in on the matter….

The four major bank CEOs will be before Parliament, and I suspect they will be asked the same questions,” Mr Weston said “If they are found to have misled consumers about their reasons for lifting their back books as is being suggested, they may then be asked what else they have been disingenuous about. This could be a pivotal moment for banking in Australia.”

As you would know, if you read my blog posts, I’ve been pretty vocal and angry with the these opportunistic actions taken by the banks and other lenders who have followed suit.

At least now it is getting some mainstream media.

In the words of Robert F. Kennedy “Don’t get mad, get even!”

How you may well ask?

Well quite simply lenders are providing better rates for new business than that provided to current customers.

So it follows that you get rewarded for making the change rather than being blindly loyal.

If you would like me to do a quick review to see how you can save then please call me on 0409 02 99 22 or email at greg.clough@onyx.net.au.

You may also like to download my ebook Seven Tips to Healthy Finances.

I look forward to chatting with you soon to start the process of putting your hard-earned dollars back into your pocket.

Warm Regards

Greg Clough

Banks Are Under the Pump!
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Banks Are Under the Pump!

The major bank CEO has explained how it was a first mover on mortgage repricing and why it made a decision to hike rates knowing full well that its customers could move to another lender.

ANZ chief executive Shayne Elliott appeared in Canberra on Wednesday (11 October) where he answered questions before the House of Representatives Standing Committee on Economics, commonly known as the major bank review.

Committee chair David Coleman MP asked the ANZ boss why the group increased rates for existing loans earlier in the year when APRA’s 30 per cent interest-only cap was for new lending only.

“We run a business,” Mr. Elliott said. “We need to make sure that it is prudent and that we identify risk and price for it appropriately while still providing a good, decent service to our customers.

“We started changing our approach in terms of lending standards, policy and pricing well before APRA put in place its speed limit. In fact, our first changes around interest-only started in April 2016. We made policy changes, we have reduced the amount of time people can have interest-only, and we have reduced the maximum LVR. That was well before [APRA’s speed limit] because we assessed that the risk in that book was changing and that we needed to be mindful of that.”

Mr. Elliott said the first pricing changes the bank made were on 24 March, a week before APRA’s interest-only speed limit came into place.

“Subsequent to the speed limit we came out and reduced rates, we were the first. We reduced rates for people paying principal and interest and we increased others. We did that not knowing what our competitors would do and not knowing what the customer behaviour would be. But we wanted to reward customers who repaid principal, because it is the right thing to do, and we wanted to give them the right signals to move.

“Yes, we repriced the back book but, we also gave price cuts to the back book as well.”

ANZ CFO Graham Hodges added that the bank also introduced its lowest ever fixed-rate at 3.88 per cent for P&I borrowers.

Mr. Coleman argued that it is “disingenuous” for a bank to tell its customers, who are not impacted by APRA’s regulatory action, that the bank has determined that it is good for them to move to P&I.

“First of all, we gave people a four-month notice period,” Mr. Elliott said. “Whether that’s to move with us or a competitor. Also, when people come to us and asked for an interest-only loan, we assess them on the basis that they can afford to pay P&I from day one. We do assess people’s ability to be able to pay the principal.”

Mr. Elliott said the bank modelled the impact of its pricing changes. Asked about the profitability of interest-only loans and the impact of repricing, the chief executive explained that the answer depends on customer behaviour.

“It depends what customers do,” he said, adding that there was an assumption in Mr. Coleman’s question that all customers stay with ANZ and don’t move.

“About 10 per cent of our customers with a home loan choose to leave us and go somewhere else each year. There are a lot of factors.

“We absolutely ran an analysis and looked at the fact that by reducing P&I loans by 5 basis points it would come at a cost. That’s about two thirds of our customers who received the benefit of a rate cut.

“We were first. We did that not knowing what the competition would do and at a risk that a lot of those customers would vote with their feet and go somewhere else, or vote choose the fixed-rate, which is a much lower margin product.”

Interest-only loans currently account for approximately 34 per cent of ANZ’s total mortgage portfolio.

Westpac also faced tough questions from David Coleman in Canberra yesterday. Chief executive Brian Hartzer told the committee that interest-only loans accounted for 50 per cent of the Westpac mortgage book.

[ARTICLE: SOURCED FROM THE ADVISER]

Understand the Rules on Depreciation
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Understand the Rules on Depreciation

It’s not too late to claim depreciation

With the 2016-2017 financial year now over, property investors may assume they have missed their opportunity to organise a tax depreciation schedule and make a depreciation claim.

Research suggests around 80 per cent of property investors simply don’t claim because they are unaware of depreciation, they don’t know the rules or they don’t realise they’re eligible.

Legislation enforced by the Australian Taxation Office (ATO) allows investors to claim depreciation deductions on any income producing property for the wear and tear that occurs over time to the building’s structure (capital works deductions) and the plant and equipment assets contained.

Both new and older properties attract depreciation. Although the ATO restricts owners of older residential properties on claiming capital works for buildings in which construction commenced prior to the 15th of September 1987, depreciation of plant and equipment can be claimed for most buildings*. Property owners could also be entitled to claim deductions for any recent renovations or updates made.

A specialist Quantity Surveyor can prepare a tax depreciation schedule at any time of year. This schedule will begin from the property’s settlement date and outline depreciation deductions over the entire depreciable life of that property (forty years).

If an investor has not previously claimed or maximised the depreciation deductions available from their investment property they can go back and amend two previous tax returns.

*Under proposed changes outlined in draft legislation (section 2 of Treasury Laws Amendment Bill 2017), investors who exchange contracts on a second hand residential property after 7:30pm on 9th May 2017 will no longer be able to claim depreciation on plant and equipment assets. Investors who purchased prior to this date and those who purchase a brand new property will still be able to claim depreciation as they were previously. Investors should note that these changes are not yet law, as the legislation still needs to be passed through the senate for confirmation. BMT Tax Depreciation remain in discussion with government around the new changes and will keep our clients informed on the outcome. To learn more visit www.bmtqs.com.au/budget-2017.

Investors who would like more information can contact one of the expert staff at BMT Tax Depreciation on 1300 728 726.

[SOURCE: BMT Tax Depreciation] 
Bradley Beer (B. Con. Mgt, AAIQS, MRICS, AVAA) is the Chief Executive Officer of BMT Tax Depreciation.
Please contact 1300 728 726 or visit www.bmtqs.com.au for an Australia wide service.

Take Action – Time for a Finance Health Check
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Take Action – Time for a Finance Health Check

In the words of Mahatma Gandhi, “Action expresses priorities”.

Now is the time to take action on having a Finance Health Check while you still have some say in the outcome.  Make it a priority!

Mainstream lenders continue to tighten policy with the latest change being the revision of Loan to Income ratios.

In recent times, we have seen other tightening of lending policy with the following changes being implemented.

  1. Cost of living allowances closely analysed and tightened.
  2. Interest only borrowers paying a premium on rate for the privilege.
  3. Investors paying a higher rate than owner-occupiers.
  4. Loan to Value ratios reduced in some cases.
  5. Serviceability calculators tightened.

What does all this mean to you?

Well if you haven’t checked your own loans recently you could be paying too much.

Lenders offer discounts to new clients while leaving their current clients out in the cold.

I know we are all busy but my advice to you, is to put some time aside for yourself and work with us on a Finance Health Check.  Before it becomes out of your control.

With APRA continuing to insist that lenders put the handbrake on policy, borrowing will become tougher in the foreseeable future, meaning you could be stuck in an interest rate that is higher than you deserve to be paying.

APRA is also now regulating non-bank lenders so their lending criteria will start to tighten also.

Do yourself a huge favour and take action today! Spend time on your own affairs.

The process may only be an hour or two of your time.  Please call me today for a chat and we’ll get the process underway.

Warm Regards

Greg

 

Tax Depreciation – Missed Deductions Add Up
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Tax Depreciation – Missed Deductions Add Up

Our system to maximise your claim!

Closed circuit television systems, garden watering systems, intercom systems and solar powered generating system assets are all assets which are often missed by property investors when claiming depreciation.

These and other missed assets such as door closers, freestanding bathroom accessories, garbage bins, shower curtains and smoke alarms are part of a list we have compiled to help investors avoid missed depreciation deductions.

Although many of these items have a low depreciable value, as shown in the following table, the depreciation deductions which can be claimed for these items can add up to thousands of dollars for an investor.

So here’s our system to help investors ensure no item is missed and to maximise their depreciation deductions:

  1. Take note of the assets included in the above table
  2. If you have a depreciation schedule and you own any of these assets, confirm with your Accountant that they are included in your schedule and your depreciation claim. If items have been missed, the Australian Taxation Office will allow you to go back and amend the previous two years of missed deductions
  3. If you don’t have a depreciation schedule you should talk to a specialist Quantity Surveyor as soon as possible
  4. Ensure your specialist Quantity Surveyor can outline the deductions available for assets which are eligible* to be written off immediately or added to the low-value pool

*Under proposed changes outlined in draft legislation (section 2 of Treasury Laws Amendment Bill 2017), investors who exchange contracts on a second hand residential property after 7:30pm on 9th May 2017 will no longer be able to claim depreciation on plant and equipment assets. Investors who purchased prior to this date and those who purchase a brand new property will still be able to claim depreciation as they were previously. BMT Tax Depreciation will be making an official submission outlining our concerns along with suggestions of alternative methods to better resolve the Government’s integrity issue. To learn more visit www.bmtqs.com.au/budget-2017.

A specialist Quantity Surveyor will use their expert knowledge of tax legislation to ensure the maximum deductions are claimed for each individual asset.

[SOURCE: BMT Tax Depreciation] 
Bradley Beer (B. Con. Mgt, AAIQS, MRICS, AVAA) is the Chief Executive Officer of BMT Tax Depreciation.
Please contact 1300 728 726 or visit www.bmtqs.com.au for an Australia wide service.

Draft Legislation: Understanding the Proposed Changes
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Draft Legislation: Understanding the Proposed Changes

This month, the government released draft legislation regarding the proposed changes to plant and equipment depreciation as announced in the May federal budget.

The draft outlined further details around a property investor’s eligibility to claim depreciation and provided a range of scenarios to be aware of should this legislation pass.

In a positive move, the government has provided the public with an opportunity to have their say on the new measures, with public consultation open until the 10th of August 2017.

While these measures are yet to be legislated, we have taken a proactive approach in reviewing how these intended changes could impact investors. Following is an in-depth look at the possible outcomes.

Limiting depreciation on second-hand assets

Section two of Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 advises that the Bill intends to amend the Income Tax Assessment Act 1997 (ITAA 1997) to limit deductions for plant and equipment in residential premises.

In essence, the proposed new law reduces the amount an investor can deduct for a previously used depreciating asset for the purpose of gaining or producing assessable income.

Should the proposed legislation be passed, this means that residential property investors won’t be able to claim depreciation for plant and equipment assets found in second-hand properties in which contracts exchanged after 7:30pm on the 9th of May 2017.

Investors can learn more about the proposed changes, who is affected and what they mean by visiting our blog post, ‘What do the proposed changes to depreciation mean for you?’

Capital gains tax changes and implications

The draft legislation outlines some detail around a reduced Capital Gains Tax (CGT) liability for property investors.

Any property investor who is unable to claim depreciation on previously used plant and equipment due to these amendments will be able to claim a capital loss for the decline in value of the plant and equipment assets. This capital loss will only be able to offset a capital gain and if needed can be carried forward to offset future capital gains.

A value that relates to the previously used depreciation assets will need to be established at the time of purchase. A decline in value will then need to be calculated for the assets so that a termination value can be determined at the time the property is sold. The difference between the value at the time of purchase and the termination value will be the capital loss which will reduce the owner’s CGT liability.

How will the changes affect an investor’s cash return?

The following scenario compares the cash return an investor will receive for a three year old house purchased for $600,000 both before and after the proposed new measures.

In the example, the owner receives a rental income of $560 per week or a total income of $29,120. Expenses for the property, such as interest, council rates, property management fees, insurance and repairs and maintenance total $41,028.

In scenario one, the owner is able to claim a total depreciation claim of $12,397 for both capital works deductions and plant and equipment depreciation.

Using depreciation, this investor will experience a weekly cost of $56 per week to hold the property.

In the second scenario, as the owner exchanged contracts on the property after 7:30pm on the 9th of May 2017, they are only able to claim $6,126 in capital works deductions and will be unable to claim $6,271 in plant and equipment deductions.

This reduced claim would result in the investors weekly cost of holding the investment property increasing from $56 to $101, a difference of $45 per week or $2,340 in the first full financial year.

As you can see, the proposed changes will limit the depreciation deductions available to property investors, which will lead to a cash flow reduction each year.

While we believe that generally the integrity measure has merit, the proposed changes go much further than what is necessary to deliver on the Government’s intention of stopping subsequent owners from claiming deductions in excess of an assets value. The approach proposed in the draft legislation treats residential property investors differently by extinguishing a property investor’s ability to claim a deductions based upon a transaction.

We believe this is caused by gaps in current legislation around establishing a depreciable value for second-hand plant and equipment.

BMT Tax Depreciation will be making a submission detailing this concern along with suggestions of alternative methods which will better resolve this integrity issue.

To view the draft legislation and make a submission click here.

[SOURCE: BMT Tax Depreciation]

Bradley Beer (B. Con. Mgt, AAIQS, MRICS, AVAA) is the Chief Executive Officer of BMT Tax Depreciation.
Please contact 1300 728 726 or visit www.bmtqs.com.au for an Australia-wide service.

Time to Beat Banks at Their Own Game!
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Time to Beat Banks at Their Own Game!

For several months now I have been telling anyone prepared to listen how usury the banks behaviour has been in recent times using APRA as an excuse to gouge customers. The following commentary from industry luminary Steve Weston who is highly regarded in all sections of the industry sums the situation up perfectly…

A former major bank executive says lifting rates for existing interest-only borrowers has little to do with the regulatory pressures the banks claim they are under.

Following a hefty round of rate hikes for interest-only borrowers last month, former Barclays CEO of mortgages Steve Weston says it was surprising to see the banks’ tactics.

“On the one hand, they talk about wanting to rebuild trust with consumers and do all the right things and they’ve got the ABA engaged with a number of well-intended initiatives to ‘make banking better’,” Mr Weston said, responding to a question at the Vow Financial commercial conference in Hobart on Friday. “But then they do things that appear anything but customer-friendly.

“During June, the four major banks announced reductions in their principle and interest owner-occupier rates of between 0.03 per cent and 0.09 per cent, along with increases in their interest-only rates of between 0.30 per cent and 0.35 per cent.”

Mr Weston explained that the media statements from the banks all claimed they had to reprice their interest-only mortgages to meet APRA’s requirement to limit the flow of new interest-only lending to 30 per cent of new residential mortgage lending.

“The key word there is ‘new’. The equation to measure that 30 per cent is all the loans that settle that month – no more than 30 per cent can be IO. The back book doesn’t come into the measure at all,” he said.

“And I wonder how much consideration was given to the impact the rate changes will have on customers. Encouraging existing borrowers to make principle repayments is broadly sensible, although for some, like investment loan borrowers who also have an owner-occupier loan, this may prove sub-optimal from a tax planning perspective.”

Weston further commented that each of the media releases also stated that the rate changes were not related to the bank levy.

“Typically when you see out-of-cycle rate increases, they are justified by an increase in funding costs or the need to hold more capital. But not this time. This time the banks have been clever in using an APRA cap on new lending and using it to justify increasing rates for existing customers. What has been really surprising is the lack of mainstream media commentary about the rate increases.

“Making the changes even more surprising was that in the May Budget, the Treasurer instructed the ACCC to monitor changes in mortgage pricing by those banks impacted by the bank levy. The Treasurer even asked the ACCC chairman to let him know if he finds any evidence of the bank levy being passed on in higher mortgage rates. Whether it was co-incidental or not, the additional income that will be generated by these rate changes all but equates to the bank levy. So it will be interesting to watch how this plays out.”

According to Mr Weston, who was general manager of broker platforms at NAB before joining Barclays in 2012, the Australian banks could have achieved the 30 per cent limit by tightening their credit policies and increasing rates on new loans.

“The back book didn’t need to be touched,” he said.

“At the very least, the banks could have waited until the interest-only loan period expired before increasing rates. They could have written to customers and advised them about the benefits of commencing principle repayments and letting them know that their interest rate would increase at the end of their interest-only term if they didn’t commence making principle repayments at that time.

“These don’t feel like the actions of banks who want to build trust with customers. To me it feels more like taking an opportunity to increase profits. Actually, it feels very un-Australian,” Mr Weston said.

So what can you do about it? Well more than any time in the last couple of decades it is imperative that you take an interest in your own financial affairs. There is a fair chance that you are paying too much interest however we can help you rectify this with just an hour or two of your time.

We are here to help in any way we can and remember our advice is without cost or obligation to you. Start saving today, feel free to call me on 0409 02 99 22 or email greg.clough@onyx.net.au.

Clarity on Second Hand Property Deductions
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Clarity on Second Hand Property Deductions

Finally, Some Clarity

The property market has finally received some clarity in relation to the Government’s plan to reduce depreciation deductions for residential properties. It’s good news too, if you ask me.

On Friday 14th July, the Treasury Office released a draft bill regarding how depreciation deductions on second-hand property can be claimed moving forward. They also invited interested parties to make submissions.

It’s complicated to say the least, so I’ve tried to simplify this Bill and the key points. Here are my 9 Key Takeaways from the draftLegislation;

  • If you acquire a second-hand residential property after May 10, 2017, which contains “previously used” depreciating assets, you will no longer be able to claim depreciation on those assets.
  • Acquirers of brand new property will carry on claiming depreciation exactly the way they have done so to date. This is great news for the property industry and the way it should be.

We suspected this would be the case and I believe the property industry can collectively breathe a sigh of relief.

  • The proposed changes only relate to residential property. Commercial, industrial, retail and other non-residential properties are not affected in the slightest.
  • The building allowance or claims on the structure of the building has not changed at all. You will still need a Depreciation Schedule to calculate these deductions. This component typically represents approximately between 80 to 85 percent of the construction cost of a property.
  • The proposed changes do not apply if you buy the property in a corporate tax entity, super fund (note Self-Managed Super Funds do not apply here) or a large unit trust.

This is interesting and I suspect a lot more people will start buying properties in company tax structures.

  • If you engage a builder to build a house and it remains an investment property, you will still be able to claim depreciation on both the structure and the Plant and Equipment items.
  • If you renovate a property that is being used as an investment, you will still be able to claim depreciation on it when you have finished the renovations.
  • If you renovate a house, whilst living it in, then sell the property to an investor, the asset will be deemed to have been previously used and the new owner cannot claim depreciation.
  • Perhaps the most interesting point: Whilst investors purchasing second-hand property can now no longer claim depreciation on the existing plant and equipment, they will have the benefit of paying less capital gains tax when they sell the property.

How? Well, in summary, what you would’ve been able to claim in depreciation under the previous legislation, now simply gets taken off the sale price in the event you sell the property in the future.

Here is an example of how this will work:

Peter buys a property in September 2017 for $600k, included within the property was $25k worth of previously used depreciating assets.

As they were previously used, Peter can’t claim depreciation on those items.

Peter sells the property in 2022 for $800k, which included $15k worth of those depreciation assets.

Peter can now claim a capital loss of $10k ($25k-$15k) for the portion that Peter has not claimed in depreciation.

SUMMARY OF THE PROPOSED CHANGES

In my view the Draft Bill could’ve been a lot worse for both the property industry and the Quantity Surveying professions.

It will certainly address the integrity measure concern of stopping “refreshed” valuations of plant and equipment by property investors.

It may, however, create a two-tier property market in relation to New and Second hand property.

You can see the ads now “Buy Brand New – We’ve Got The Depreciation Allowances”.

It will still be just as critical for all property investors to get a breakdown of the building allowance & plant and equipment values so you can:

  • Claim the building allowance (where applicable) and
  • Reduce the CGT payable when selling the property by deducting the unclaimed Plant and Equipment allowances.

The Quantity Surveying industry, just like the property development industry just breathed a huge sigh of relief.

I believe this integrity measure could’ve been better addressed and will be making a submission accordingly.

But it wasn’t a bad ‘first run’ by the Government!

 

[SOURCE: Tyron Hyde. Washington Brown]
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