Govt sets mandatory code for rent relief

Prime Minister Scott Morrison has revealed that he has reached an agreement on a mandatory code for the provision of rent relief by commercial landlords to tenants.

On Tuesday, 7 April, Mr Morrison said the mandatory code agreed to with the national cabinet will be legislated and regulated as appropriate in each state and territory jurisdiction.

Mr Morrison said the code will apply to tenancies where the tenant or landlord is eligible for the JobKeeper program and where they have a turnover of $50 million or less.

“The code is designed to support those small and medium-sized enterprises, be they a tenant or indeed a landlord,” Mr Morrison said.

“The code brings together a set of good faith leasing principles. Landlords must not terminate the lease or draw on a tenant’s security. Likewise, tenants must honour the lease.”

Landlords will be required to reduce rent proportionate to the trading reduction in the tenant’s business through a combination of waivers of rent and deferrals of rents over the course of the pandemic.

Waivers of rent must account for at least 50 per cent of the reduction in the rental provided to the tenant during that period, while deferrals must be covered over the balance of the lease term and in a period no less than 12 months.

“If the lease term goes for three years, you can advertise the cost of the lease of the rental deferral over that three-year period, after the end of the pandemic period. But if the lease only has another six months to run, then the tenant would have a minimum of 12 months after the pandemic period in order to cover up on the deferrals of the rental payments,” Mr Morrison explained.

A binding mediation process

Mr Morrison also said the rental relief arrangements negotiated by the tenant and landlord will be overseen through a binding mediation process that will be run by the states and the territories.

“The point here is simple: it’s the same request we made of landlords and tenants about 10 days or so ago when I stood up on this issue, and that is they sit down and they work it out. This must be shared,” he said.

Further, Mr Morrison said banks also must “come to the table” and provide support to landlords.

In particular, he wanted to send that message to international banks operating in Australia which he said that in many cases are providing that support, especially to many larger landlords.

“We will expect those banks to be providing the same levels of support and co-operation as we are seeing from the Australian banks who are aware of these arrangements,” Mr Morrison said.

“What this does is preserve the lease. It preserves the relationship. It keeps the tenant in their property and it keeps a tenant on the lease, which is also good for the landlord, and it preserves the lease that is in place that underpins the value of those assets.

“This is seen as a proactive, constructive and co-operative mechanism for landlords and tenants to see this through together.”

Depreciation changes for investment property

 

Depreciation changes for investment property

This article has been provided by BMT Quantity Surveyors BMT Quantitiy Surveyors logo

 

 

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.
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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.

Negative gearing at 4 year low

The cost to the federal budget of  negatively geared rental property deductions has fallen 12.5 per cent to $10.9 billion, the lowest level in four years because of record low interest rates.

A the start of a federal election campaign in which negative gearing will be a key issue, the latest Tax Office statistics show the country’s two million landlords claimed interest deductions of $21 billion, a decline of 9 per cent, while earnings from rents were flat at $38 billion.

The figures, published on Friday and based on taxpayer’s 2013-14 tax returns, show 62 per cent of landlords are returning net losses, down from 64 per cent the year before.

A record 776,672 taxpayers earned a net profit from their investment property in fiscal 2014, an increase of 44,322 people compared with the year before.

 

Capital gains jump $4b

The Tax Office statistics show net capital gains being reported by taxpayers jumped 37 per cent to $14.4 billion, far faster than the rise in the property or stock markets.

The big rise was because losses from the global financial crisis have now washed through the system, inflating the level of gains.