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October 2017 Newsletter

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BUDGET CHANGES IMPACT DEPRECIATION AND TRAVEL DEDUCTIONS  

When the 2017 Federal Budget was handed down in May there were a number of changes made to legislation that impacts residential property investors. Here’s a succinct overview of the changes:

  • Travel: from July 1, 2017 the Government has disallowed deductions for travel expenses related to inspecting, maintaining or collecting rent for a residential rental property. This measure is designed to address concerns that many taxpayers have been claiming travel deductions without correctly apportioning costs, or have claimed travel costs that were for private travel purpose.

Note: this measure will not prevent investors for claiming a deduction for costs incurred in engaging third parties, such as real estate agents, for property management services.

  • Capital Gains Tax:the CGT discount on certain affordable investment properties is proposed to be increased to 60% from July 1, 2018. In order to benefit, certain conditions would need to be met:
    • Rent must be managed through a community housing provider
    • The investment must be held for at least three years

 When can you continue to claim depreciation on both building structure and assets?

  • If you purchased a brand-new property after May 10, 2017. This hasn’t changed; you can continue to claim depreciation exactly the way you have done so to date.
  • If you engage a builder to construct a home 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 an investment property, you will still be able to claim depreciation on it when you have finished the renovations
  • Note: existing investments will be grandfathered, which means that those who purchased a property before May 9, 2017 may still claim depreciation under the old rules (the new legislation came into force July 1, 2017). If you fall under this category, you may still claim depreciation on plant and equipment assets, regardless of whether the property is new or second-hand. To claim, you have to present official documentation such as bank statements and receipts and accurate depreciation and capital works schedules.

Note: the proposed changes do not apply if you buy the property through a corporate tax entity, super fund or a large unit trust

You can’t claim depreciation if:

  • You purchased a second-hand residential property after May 10, 2017 which contains “previously used” depreciating assets. You won’t be able to claim depreciation on those assets
  • You renovate a house while living in it, then sell the property to an investor. The asset will be deemed to have been “previously used” and the new owner can’t claim depreciation

 

BUILD TO RENT: COULD IT SOLVE AUSTRALIA'S HOUSING WOES?

Build to rent. It’s a relatively new term in Australia – but one that’s starting to gain traction. Simply put, build-to-rent provides long-term residential leases through a single institutional landlord. The idea is to ease the stress on the housing market and help solve the affordability crisis.

It’s an asset class that’s steadily grown in importance in the US, Europe and, since 2015, the UK, where there are close to 84,000 built to rent units in various stages of planning or completion across the country. In London build-to-rent properties currently represent one in five housing starts. The previous Mayor’s decision to target 5,000 built to rent homes per year has been helpful in encouraging local authorities to support the development of covenanted build to rent homes and adopt the use of discounted market rent (DMR) as policy.

“Many of the public policy issues in the UK are similar to those in Australia – and the [UK] government has recognised that increasing housing supply is the solution,” says Ken Morrison, chief executive of the Property Council of Australia. He says build-to-rent has “enormous potential” and could bring much-needed supply into the Australian housing market.

The US (where it’s known as “multi-family”) is certainly at the forefront of this asset sector. A million such properties have been completed in the past three years and the sector is larger than the real estate investment trusts that hold office buildings, shopping centres and warehouses. According to EY research, in the US the multi-family sector is regarded as having the lowest risk among the property asset classes. Even Australia’s REST Superannuation has taken a toe hold in the US and now has 3000 build-to-rent apartments there.

So where does Australia sit in the equation?

In an article in the Australian Financial Review, REST director for property investments said it will probably take about 10 years for the build-to-rent sector to be properly established here. Some are pondering whether the returns will be worth it. CoreLogic’s home value index for August showed that in Sydney and Melbourne were at an all-time low of about 3%.

That said, it’s a model that’s been backed by Stockland, Australia’s largest residential developer; while Mirvac is looking at launching a major build-to-rent apartment vehicle where it will build and hold units in capital cities and will operate the dedicated blocks; and Lendlease’s chief executive has flagged his interest in the model, and although it’s mainly focused on the US and Britain where the markets are advanced, the company is also pushing for changes to make the local sector viable.

And late last year, Macquarie Capital and US real estate group Greystar announced they will form a joint venture to provide rental housing in Asia Pacific.

As revealed by the Financial Review, Mirvac recently called for interested parties to form a “club” of build-to-rent investors to stump up to $1 billion to build hundreds of apartments for an expected upfront yield of 4.5%, considered the “holy grail” of this sector.

The Mirvac model is set to mirror those of the US and Europe. Think 100-plus unit towers with high-end amenities and located in major capital cities, operated by the company.

Many pundits say that to work from a taxation perspective, the build-to-rent model needs to have the buy-in of government and, indeed, be a collaboration between industry and government.

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