Are DIY depreciation claims costing investors thousands?

Australian real estate investors are potentially costing themselves thousands of dollars at tax time thanks to do it yourself depreciation claims.

According to BMT Quantity Surveyors, figures from the Australian Taxation Office (ATO) show that during the 2012-13 financial year investors claimed an average of $3,292 in depreciation deductions.

Over the same period, BMT claims that their clients claimed an average of $9,076 in depreciation deductions, a difference of $5,784.

BMT chief executive officer Bradley Beer said investors going the DIY depreciation route likely don’t have a comprehensive understanding of what is involved.

“Because it’s a tax issue people probably think their accountant looks after it and their other people who just make some guesses. The thing we need to do is get inside the head of investors and give them a bit more education about what’s involved and how they can get the most out of it,” Beer said.

“A large percentage of investors in Australia only buy one property and something like 90% only buy a maximum of two. Investing in property is not something that’s only done by property investments experts who are buying multiple properties, those people are out there but they’re not the norm,” he said.

While investors doing their own depreciation claims may be doing the best they can, Beer said there are some common areas where they’re likely to miss out maximising their deductions.

“Probably the most regular is that people think if a property’s not new or nearly new then there isn’t any claim to make. Old property still gets depreciation, it just doesn’t get as much, but it’s still worth asking the questions,” he said.

“The other thing is that they’re not getting the maximum because they’re leaving it with the accountant or trying to make a guess and do it themselves because they’ve got some of the costs, but they’re still really unlikely to know how to how to pull the costs apart to get maximum deductions.”

It’s also likely that investors are put off from engaging the the services of a quantity surveyor due to fears of another bill to pay, but Beer said a quick look at the numbers can show whether it’s worth it or not.

“People think I’m buying a property and I’ve got all these costs, stamp duty, solicitor’s fees and everything else that goes with it and then they look at $700 for depreciation schedule and they don’t even know what that is.

“The fee is tax deductible as well, but the most important thing is making sure it’s worth doing beforehand. Before they even buy a depreciation schedule form us we say talk to us about the property and we’ll say deductions should be roughly X and then they can make the decision on whether it’s worth spending the money or not.

“A depreciation schedule is about $700, if you let someone else deal with it and then end up with $5,700 less in a claim then it’s probably not the best course of action.”

While an investor may be able to put together a sizeable deduction on their own, Beer said engaging a professional in the area can have other benefits as well.

“It’s definitely reducing the risk by getting an expert to claim the right things. We won’t put something on there that you can’t claim and we know the correct methodology to value things for the purpose of depreciation.

“If something does come up we’re the ones you’re going to come back to and we’re going to back it and talk to the ATO about what we’ve done and we’re confident we know the rules.”
 

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Interest rate rise warnings begin to stack up

Another prominent voice in the mortgage industry has warned borrowers to brace themselves for additional interest rate rises in the near future.

Peter White, chief executive officer of the Finance Brokers Association of Australia (FBAA) believes current regulatory requirement and funding costs faced by Australian lenders combined with other factors such as the rising Australian dollar have created conditions that are ripe for a rate rise.

“This is really the perfect storm for interest rate rises as banks look at softening the jump in the wholesale cost of funds that they lend out, like mortgage-backed securities and bonds,” White said.

“Those with money deposited in banks should be happy their interest rates have risen slightly but the flipside is the borrower will possibly have to carry the cost with an increase in home loan mortgage rates,” he said.

White’s prediction follows that of John Kolenda, head of mortgage broking network 1300HomeLoan, who made a similar prediction earlier this week.

“Mortgage holders can expect to be hit again by lenders because of their additional current funding, compliance and provisioning costs,” Kolenda said.

“With continued global economic uncertainty banks have recently seen their cost of funding increase and unless that eases they will have no choice but to pass those increases onto consumers,” he said.

Kolenda said future rate rises are likely to be similar to those seen last year when lenders increased variable rates by up to 0.29% and investor loans by up to 0.49%.

While the rate rises will mean a hit to the back pocket of mortgage holders, Kolenda said regulators are trying to strengthen Australia’s banking system.
 
“The Australian Prudential Regulation Authority wants to make our banks the safest in the world by enforcing new regularity requirements that will increase the cost of providing mortgages.” 
 

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Stalling unit market drives down new home sales

The sale of new homes in Australia suffered somewhat of a surprising fall during February, according to figures released yesterday.

According to the Housing Industry Association’s (HIA) latest New Home Sales Report, the sale of new dwellings fell by 5.3% during February, falling to below 20,000 for the first time since December last year.

The overall fall in February was felt across dwelling types, with detached house sales falling by 3.9%, while multi-unit sales declined by a sharper 10.6%.


Source: HIA

HIA chief economist Harley Dale said the February fall wasn’t desirable; however it doesn’t mean the bottom has completely fallen out of the new housing sector.

“This latest result is a larger than desirable fall. New Home Sales are losing some of their lustre as a downward trend becomes more firmly entrenched,” Dr Dale said.

“While the monthly result is a soft one, there is no need to loudly ring alarm bells as often seems to automatically occur every time an economic update disappoints,” he said.

While the monthly fall may not set alarm bells ringing, Dr Dale said it is important that key industry indicators such as new home sales aren’t ignored.

“New home sales are down, but far from out. Over the three months to February 2016, the sale of detached houses increased by 1.8%. The sale of multi-units nudged up by 0.8% over the same period,” he said.

“What we need to keep a watchful eye on are the signals that will shortly begin to emerge for 2016/17 from key leading housing indicators like new home sales and building approvals. Stage one of a down cycle in new home building will be moderate, but signs of a sharper contraction in subsequent stages may emerge as the year progresses.”

In the month of February 2016 detached house sales increased in by 1.7% in Victoria and by 1.8% in Western Australia. Detached house sales fell by 7.4% in New South Wales, 12.1% in Queensland, and 3.5% in South Australia.
 

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Stalling unit market dives down new home sales

The sale of new homes in Australia suffered somewhat of a surprising fall during February, according to figures released yesterday.

According to the Housing Industry Association’s (HIA) latest New Home Sales Report, the sale of new dwellings fell by 5.3% during February, falling to below 20,000 for the first time since December last year.

The overall fall in February was felt across dwelling types, with detached house sales falling by 3.9%, while multi-unit sales declined by a sharper 10.6%.


Source: HIA

HIA chief economist Harley Dale said the February fall wasn’t desirable; however it doesn’t mean the bottom has completely fallen out of the new housing sector.

“This latest result is a larger than desirable fall. New Home Sales are losing some of their lustre as a downward trend becomes more firmly entrenched,” Dr Dale said.

“While the monthly result is a soft one, there is no need to loudly ring alarm bells as often seems to automatically occur every time an economic update disappoints,” he said.

While the monthly fall may not set alarm bells ringing, Dr Dale said it is important that key industry indicators such as new home sales aren’t ignored.

“New home sales are down, but far from out. Over the three months to February 2016, the sale of detached houses increased by 1.8%. The sale of multi-units nudged up by 0.8% over the same period,” he said.

“What we need to keep a watchful eye on are the signals that will shortly begin to emerge for 2016/17 from key leading housing indicators like new home sales and building approvals. Stage one of a down cycle in new home building will be moderate, but signs of a sharper contraction in subsequent stages may emerge as the year progresses.”

In the month of February 2016 detached house sales increased in by 1.7% in Victoria and by 1.8% in Western Australia. Detached house sales fell by 7.4% in New South Wales, 12.1% in Queensland, and 3.5% in South Australia.
 

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Auction volumes on the up after Easter break

Auction volumes across Australia have almost tripled compared to the subdued numbers seen last week thanks to the Easter break.

Figures from CoreLogic RP Data show that 1,428 auctions are currently being tracked compared to the 554 held last week.

Last week’s national clearance rate managed to break past the 70% mark, finalising at 70.9%.

This week’s increase has been spread across the country, with all capital cities registering an increase in volumes.

Sydney is the nation’s busiest market for the second straight week, with 595 auctions scheduled compared to last week’s 349.

The New South Wales capital saw its clearance rate finalise at 77.9% last week and Mosman will be its busiest suburb this week with 13 homes set to go under the hammer.

Melbourne has seen the largest weekly increase in volumes, with the city set for 538 auctions this week comparted to 78 last week.

Melbourne’s clearance rate finished last week at 71.4%.

The Melbourne suburb of St Albans will be the country’s busiest this week with 14 auctions, while Epping and Glen Waverley will both hold 13.

In Brisbane 118 auctions will be held this week, compared to just 48 last week. Brisbane’s clearance rate finished at 45% last week.

In Adelaide, volumes have jumped from 32 last week to 72 last week. The South Australian capital finished last week at 66.7% last week.

Canberra has seen its volumes increase to 63 from 26. Last week saw the national capital finish last week with a clearance rate of 58.3%.

Perth held just seven auctions last week and is expected to hold 33 this week.
 

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Fines a reminder of importance of working with qualified tradies

Investors embarking on a renovation or building project have reminded to check the credentials of any tradespeople they may be considering using to prevent them from being left with substandard or illegal work.

According to publications on the NSW Fair Trading website, the consumer protection body has already ordered unlicensed or uninsured tradespeople to pay more than $100,000 in fines and compensation in 2016 in relation to building, renovation and other home improvement works, such as swimming pool installations and concrete rendering.

While the amount of fines and compensation ordered by Fair Trading is significant, Janson said the issue of unlicensed or uninsured tradespeople isn’t overly widespread, however she did say there are those who believe experience equals qualification.

“There are a lot of people that claim to be tradesmen that aren’t actually licensed or trained and have been in the industry for a long time and assume that’s enough,” Janson said.

“We’re really careful to make sure that our builders, electricians and plumbers, the key trades, are all licensed to do that work. We have a due diligence process that involves licence checking and reference checking for all our tradespeople,” she said.

The words due diligence may make employing a carpenter, plumber or tiler sound like hard work, Janson said it’s only a few simple steps people need to take to make sure they’re working with the right person.

“It might not be the first thing you do, but it’s a really good thing to let them know that you want to know that they have everything in order.

“You need to know that they’re licensed for the work they’re going to do, that’s not so important for something like a painter but if it’s work that needs a licence by law then you need to check it. You need to check that they’ve got the appropriate insurance and then you need to check that they’ve got a White Card.”

Janson said asking a tradesperson to provide those details is not something that should be considered an insult or breach of privacy and an unwillingness to provide them is a likely red flag.

“They know that those are requirements by law, so it’s a not a surprise to tradesman that they need to have them, or that you might ask them to show you them.

“If they don’t provide those details, you would want to wonder why they wouldn’t supply them. It’s probably because they don’t have them and then you don’t want them on the job.

“The problem is that you have them [an unlicensed or uninsured tradesperson] do work on your property and something goes wrong with it then you’re actually exposing yourself to risk because you’ve engaged somebody who is unqualified and you could be liable.

Another red flag people should be on the lookout for is builders who want owners to take liability for the work they’re doing.

“Somebody who claims to be a builder might suggest that they’ll do the work but you do it under an owner-builder certificate. That’s a deadest giveaway that they’re not properly licensed or that they don’t have the home owner warranty insurance required for the job.

“What it essentially means is that you’re taking on the liability for the work, which is really not a good idea. It’s not extremely common, but it’s a ploy that some try.”

While proper licencing and insurance is a vital thing to check before giving the go ahead for work to start, Janson said that is not a promise of quality work.

“The main thing is that anybody you work with you actually do some background checking on them. It’s not like you have to background check everyone you quote, but before you engage them make sure you follow up with some reference checks.

“What I like to do is to try and find tradies that are working locally because you can go directly to the owner where they’re working and get an uncensored account of their work. You’re not getting a filtered reference; you can get a frank and honest review of their work.”

Janson said homeowners should expect quality work from tradespeople they employ, however she also said they have an important role to play in making sure that is what they receive.

“A lot of issues arise out of poor communication. A really good thing to do is to draw up a scope of work, which is really just a to-do list of the work that needs to done and has specific outlines.

“That also helps if you’re getting more than one quote and it makes sure you’re comparing apples with apples and that nothing gets left out. It’s also a good idea to put a requirement in there that they build to the standard of the building code of Australia and to observe WorkCover regulations”
 

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‘Lunacy’ negative gearing distorting Sydney housing market: Report

Sydney’s housing affordability crisis is being artificially exacerbated by “lunacy” tax incentives, a new report has claimed.

According to the analysis by the UNSW’s City Futures Research Centre, up to 90,000 properties are sitting empty in some of Sydney’s most sought-after suburbs as investors chase capital gains over rental returns.

The analysis’ researchers, Professor Bill Randolph and Dr Laurence Troy, said this is thanks to the “perverse outcomes” of tax incentives such as negative gearing, Fairfax has reported. 

“Leaving housing empty is both profitable and subsidised by government,” Randolph and Troy told Fairfax

“This is taxation lunacy and a national scandal.”

According to Fairfax, the 2011 census revealed that in Sydney’s “emptiest” neighbourhood of the CBD, Haymarket and The Rocks, one in seven dwellings was vacant.

Close behind were Manly-Fairlight, Potts Point-Woolloomooloo, Darlinghurst and Neutral Bay-Kirribilli, which all had vacancy levels above 13%. These neighbourhoods, together with central Sydney, account for nearly 7,200 empty homes.

The UNSW analysis of the 90,000 unoccupied dwellings across metropolitan Sydney compared the number of empty homes in a suburb against the rate of return investors made by renting out a property.

It found that properties in neighbourhoods with lower rental yields and higher expected capital gains were more likely to be unoccupied.

Gordon-Killara on the north shore had the highest share of vacant apartments, with more than one in six unoccupied on Census night, according to Fairfax. By contrast, only one in 42 dwellings (2.4%) in Green Valley-Cecil Hills, in Sydney’s west, was unoccupied.

These results suggest property investors in some of Sydney’s most desirable areas have become indifferent to whether their investment property is rented or not. Instead, investors are chasing capital gains with rental losses offset by negative gearing and capital gains concessions. 

According to Troy and Randolph, this calls into question Sydney’s housing supply and affordability problem.

“If you choose to accept that there is a housing shortage in Sydney, then the sheer scale and location of these figures strongly suggest that this is an artificially produced scarcity,” they said, according to Fairfax.
 

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Promote downsizing through altered pension means test, lobby group urges

Elderly home owners who are asset rich but have little income should be afforded the ability to downsize by a more accommodative aged pension means testing program according to one property lobby group.

The Property Council of Australia (PCA) believes many older Australians are effectively trapped in unsuitable homes, as they wish to move to age-appropriate accommodation yet can’t do so because of the effect selling their family home would have on their pension eligibility.

“Many older Australians have a desire to move to more age appropriate accommodation, like a retirement village apartment or villa, but will be hit with a reduction in their income despite owning exactly the same amount of assets if they make the move,” PCA executive director – retirement Mary Wood said.

“The Property Council is proposing an adjustment be made to the means test, to exempt some proceeds from the sale of the family home by full-rate age pensioners aged over 75. The cost to the Budget is minimal,” Wood said.

The PCA claims figures from the Australian Bureau of Statistics show a third of older low income households have less than $5000 in liquid assets available to them.

“A typical older Australian will have $600,000 in property assets but will be living day-to day on a fixed income”, Wood said.

“We need to put in place the right policies that help older Australians downsize. All too often, a pensioner considers downsizing only to reject it because it would mean a hit on their pension.”

Wood claims the PCA’s proposed means test changes would provide a better quality of life for older Australians while also strengthening the pension system.

“The reasons for downsizing are often health related – wanting homes without steps, or big backyards to maintain, and lower rates and utility costs.

“It makes little sense, both from an economic and a health and wellbeing perspective, to trap older people in large and often unsuitable family homes, with little money available to spend.

“This type of targeted reform that removes the current disincentive to downsize will benefit income poor pensioners, as well as make the pension system fairer and more sustainable.”
 

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Budget surplus trumps concerns about negative gearing, CGT changes

Altering the tax breaks offered to real estate investors should be considered by policy makers if they are serious about returning Australia’s Federal Budget to surplus in the near future.

According to Paul McClintock AO, national chairman of the Committee for Economic Development of Australia (CEDA), structural economic and taxation reform are a pressing issue for Australia, however it is likely they can only be addressed when the national economy is performing strongly

“Australia needs to have a much larger national conversation around structural economic reform, in particular tax and key areas such as bracket creep, corporate tax rates and GST,” McClintock said.

“Reform is much easier during periods of fiscal strength. Removing the deficit by 2018-19 will allow Australia to reset the conversation on economic reform,” he said.

McClintock said the current realitly of the Australian budget is that “we have been spending more than we earn for too long and we need a realistic approach to returning to surplus.”

According to the Deficit to balance: budget repair options report, which was compiled by the CEDA’s Balanced Budget Commission, to return the budget to surplus by 2018-19 the federal government would be required to cut expenditure by $2 billion and increase revenue by $15 billion.

The Better Budget report presents five options for how the additional revenue could be raised, all of which include altering current property tax arrangements such as the capital gains tax (CGT) discount or negative gearing.

Two of the proposals suggest the current capital gains tax discount should be halved, which would bring in an additional $3.6 billion in revenue, while another two proposals include reducing the CGT discount by 75% to generate an additional $5.4 billion in revenue.

Another proposal included reducing the CGT discount to 40% and not grandfathering purchases made before the change to generate $1.7 billion.

The removal of negative gearing for all assets purchased after December 2105 is also put forward in one proposal, a move that would generate $2.6 billion.

All of the proposals also include a range of other changes, including superannuation taxes, taxes on luxury cars, taxes on petrol and changes to work related tax deductions.

The changes to the CGT discount put forward by the report are in line with the plans announced by the Labor party, which would also restrict negative gearing to newly built housing from 1 July 2017.

Those proposals have been heavily criticised by numerous property lobby groups, however when questioned following an address at the National Press Club to launch the report, McClintock said any drop off in investment activity caused by the changes would not be drastic.

“With things like negative gearing, a system that was designed to compensate people for high inflation rates, the inflation rates are lower, there is a strong argument to suggest you can lower that and still produce an environment where people are willing to invest,” he said.

“Our judgment call is that, yes, of course it will have some marginal impact, so will everything, but it’s a manageable impact.”
 

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Surge in demolitions as investors, home owners look to redevelop Sydney’s west

Opportunities presented by affordability and infrastructure projects in western Sydney has resulted in a surge in the number of people knocking down older homes in the area and looking to redevelop.

According to John Castellano, group sales and marketing manager for Elderton Group, home detonations – once a popular choice in Eastern Suburbs and North Shore – have started the move west as a range of buyers look to improve the housing stock in the area.

“There are a few different types of buyers who are doing it for different motivations. There are those that are doing it to their own home and the drivers there are that they’re set up and they’ve got their networks around them and want to stay there,” Castellano said.

“Then you’ve got the others who might be coming into an area and they may be forced to buy an older home and knock it down because that’s what’s available and then the third one is your buyer coming in looking to do some multi-unit developments, a duplex or something like that,” he said.

While there are plenty of people looking to upgrade their family home in are they’re comfortable with, Castellano said there has been a marked increase in the number of investors looking to buy in Sydney’s west and try their hand at a development project.  

“That’s increased dramatically, incredibly so. If you’re talking a typical duplex they’re usually looking to sell one and keep one, if we’re talking a larger development, like a group of townhouses, that’s generally somebody looking to sell on,” he said.  

“I think it’s going to become even more popular. As supply dries up affordability becomes a huge issue and people will continue to look at the areas that have traditionally been more affordable and see what opportunities are there.”

In particular Castellano said suburbs with existing infrastructure are proving to be extremely popular, though he said future projects in the region are also drawing buyer attention.

“St Mary’s is incredibly popular, Blacktown is popular and Penrith is popular. Anywhere that is set up and has a transport hub set has been incredibly popular. They’re areas I didn’t think would be this popular, I’ve worked on developments in those areas in the past, as recent as five or six years ago and the interest in them has increased dramatically.

“We’ve also had some big infrastructure announcements in those areas. We’ve got a second airport going in out there and people’s brains are taking straight away and long term there’s some great potential there.”

Of the investors looking to those suburbs, Castellano said the majority are from outside the area and he cautioned them to do their research before committing to a project.

“You do need to do a hell of a lot of diligence. Depending on the size of the project, you may want to get a planner involved and I’d certainly recommend speaking to council first, even before purchasing a property to do that sort of thing.

“Get a planner involved, get an architect involved. Really talk to those people that are doing this on a day to day basis.”
 

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