Paul Glossop: Good day! Welcome again to Pure Property Investment One-on-One. I’m joined today by Tuan Duong from Duo Tax. Tuan, thanks for joining us mate.
Tuan Duong: Yeah, pleasure.
Paul Glossop: We’re a Buyers’ Agency and an investment property Buyers’ Agency as well as owner-occupied Buyers’ Advocates. In the investment property space, from a quantity surveyor’s perspective, we are big proponents of making sure you maximize your cash flows, you maximize your profits. Obviously, that is why we’re ultimately buying investment properties. From that perspective, what I would ask from your side and where your expertise lies by this is what is a depreciation schedule? And what are some of the things that investors probably need to know? Because as far as I’m aware, oils aren’t oils when it comes to property and depreciation. And I think, from your side of things, you see on the right side of the ledger to be able to give guidance and understanding on what people need to consider.
Tuan Duong: I’d be more than happy to Paul. I guess a lot of the most commonly found with investment properties is that there are various types of properties that we can look at. Certain properties will yield higher depreciation relative to older properties. I guess, one of the key factors is that newer assets have higher residual values in their components and ultimately provide higher depreciation. When you look at the depreciation schedule, there are two components being; capital works and also plant and equipment. So capital works ultimately is the bricks and mortar of a property. From the build date, we’re allowed to claim 40 years of depreciation. Anything built after September 1987 is entitled to claim that building allowance. With plant and equipment, it is claimable regardless the age of the building. So, regardless of it built on the 50s and on the 60s, we can claim that depreciation on those plant and equipment items, and they can be carpets, air conditioners and what not. Now, with some legislated changes that come into play with the proposed changes from the Federal budget, there are some new rulings around that that have been drafted. That has more to do with plant and equipment, and the problem with that is people are claiming these depreciable assets over and over again. And also, as you would know it would be called double-dipping, so to speak. So what the government is trying to do is limit that depreciation claim to only just capital works. For example, if you got a property that is built in 1987, you can claim depreciation on the capital works component, but because it is a second-hand property at this age that you bought say yesterday, then effectively, you will no longer be able to claim the plant and equipment side of things.
Paul Glossop: Okay, fair enough. And I think, as you said, there’s probably a few key changes lately in the May 9th Federal budget 2017, which is probably worthwhile noting when you do buy an investment property or you are potentially planning on buying your next property, and not to say, from my side of the ledger, and you’re are quite aligned with this one as well Tuan is that depreciation isn’t necessarily a reason to buy property. Depreciation is a surrogate, it’s a bonus, it helps cash flow. And it can potentially assist you in holding your portfolio for longer without injecting further cash into it.
However, just because the property is new and has a higher intrinsic residual cash flow, or residual depreciation as compared to a 50s or 60s property for example, it doesn’t mean it’s going to perform over the twenty years better from a capital growth perspective. So, you really need to understand what you are buying, why you’re buying it, and is depreciation going to be something that you are going to be relying on to make sure you keep your head above water.
Words of the wise, if it is. I think it is a pretty dangerous strategy, but I think it’s worthwhile knowing that if you do buy a property, make sure you talk to someone like Tuan in his position to give you the full understanding of what you can claim to maximize your cash flow in that property.
So, it’s key guys to have that discussion if you haven’t had so already. Or if you are planning to buy that next property, engaging someone like Tuan in that quantity surveyor space to give you the advice and ultimately draft up a schedule which can hopefully better your tax position and better your cash flow on that property long term.
I hope you found that quite useful. And if you do want to get in touch with Tuan or anyone from his team, his details are at the bottom of your screen.
Likewise with ours, you can contact us per our number below and we’ll chat with you soon. Cheers!