Budget changes to depreciation

[depreciator]

Had a client on the phone this morning asking about these. I said I would put the changes into dollar terms.
We've had no ATO or AIQS notification about these, but I think they went through parliament last week. It was tucked away in Budget Paper # 2. When I spoke to the ATO on Friday, the person I spoke to was pretty vague.
As most of you would know, you can depreciate Assets (AKA Fixtures and Fittings) using either the Prime Cost or Diminishing Value Method.
The DV rate has been increased from 150% to 200% i.e. they depreciate more quickly. This would be to stimulate spending.
The changes apply to Assets bought on or after May 10 this year. To benefit from these new rates, you would have to exchange contracts on a property after this date.
Or you would have to buy Assets for an existing property on or after this date.
If you are using the Low Value Pool, this will only apply to Assets costing over $1,000.
So here are a couple of examples:

DV rate before changes 150% = 150/10




Item Cost/Value Year 1 Year 2 Year 3
Split System $2500 $375 $318.75 $270.93
Carpet $3500 $525 $446.25 $379.31

DV rate after changes 200% = 200/10




Item Cost/Value Year 1 Year 2 Year 3
Split System $2500 $500 $400 $320
Carpet $3500 $700 $560 $448

Scott

[depreciator]

Sorry about the formatting, but you'll get the drift. It looked fine until I hit the 'post' button.
For example, a $2,500 split system would have depreciated at $375 in the first year. Now it's $500 in that year.

[WashingtonBrown]

We feel it is too early too suggest these rules apply to anyone who has bought an investment property....however we hope it does.

If they do, an article in the AFR was quite silly. It suggested that the reduction in the tax rates was a nail in the coffin for property investors.

However, the 150% increase in DV to 200% will MORE than offset the reduction in tax rates.

Regards

[JamesGG]

Hiya,

For what it is worth, the NTAA today advised that these changes were officially accepted by the ATO last Friday.

Top stuff Scott for bringing this to the forum's attention :)

Cheers

James.

[depreciator]

Thanks James.

[WashingtonBrown]

directors of Napier & Blakely....

We were talking about how positive this would be for investors....


This came in the post today...

http://www.propertyreview.com.au/index.php?id=758

Seems a bit bullish - when u consider there are 100% items and you cant depreciate those any quicker!!

We believe around 25% ish... But either way - certainly substantial.

Regards

[WashingtonBrown]

changes will apply to all property investors.

More so those that are carrying on a business and not those where the investment is defined as passive income.

Regards

[WashingtonBrown]

http://www.budget.gov.au/2006-07/overview/html/overview_12.htm

[depreciator]

Sorry, but the changes will indeed apply to owners of residential property.

They were due to go before the House of Reps on May 11. I don't think they've gone through yet, but most Members won't even understand them, so they're not going to be opposed.

I'd say the ATO by now would confirm over the phone that the changes will apply to Assets in residential properties, but in the same breath they will no doubt say that they haven't been passed yet.

There will be no confirmation in writing from them for a little while.

It's in the same Bill as the changes to income tax rates, so it's not getting much attention. The depreciation bit 'amends Division 40 of the Income Tax Assessment Act 1997'. There is no proposed distinction in the Tax Laws Amendment Bill 2006 between Assets owned by businesses and individuals. End of story.

I have an Explanatory Memorandum from the Office of the Treasurer that provides greater detail. It's not scintillating reading, but if anybody wants it, send me an e-mail.

Scott

[WashingtonBrown]

Cant wait to read it!!!! Some good bed time material!

[WashingtonBrown]

By the time one of our clients have exchanged on a property post the recent date....it will probably be about 3 months!

[depreciator]

Yep, and there was no inkling of it coming so it's not as if investors would have been holding off on large Asset purchases till after May 10 and rushing now to buy stuff.
This is one of those things that small operators who do Depreciation Schedules sporadically (and poorly) won't be aware of. This will disadvantage their clients.
And this, as Tyron will agree, is another reason to use large providers who do tax work all the time even if it costs an extra $100 or so tax deductible dollars.
Scott

[WashingtonBrown]

But on the logistic stuff I think i will still wait for the ATO interpretation of this Bill prior to changing my reports. Read the em and whilst no separation - will just wait....

Am surprised to say the least rates would go up - at time when they continually comment on high the deductions for property owner has been.

Regards

[XBenX]

Hrmmm positive cashflow investors looking at new property certainly got a leg up in the budget.