The 9th of May 2023 brought the much-anticipated Australian Government Budget for 2023-24. They have labelled it as ‘Stronger foundations for a better future’ and within the document, the Australian Government has focused the plan on the below points:
- Delivering cost of‑ ‑living relief;
- Strengthening Medicare;
- Growing the economy;
- Broadening opportunity, and
- Strengthening the Budget.
So – What does the budget 2023-24 announcement mean for property depreciation?
We take a look at the 3 key changes that directly affect residential and commercial property investors:
Support for Build-To-Rent Projects
The Budget for 2023-24 has provided support for build-to-rent projects through various measures. As per the Budget Measures, Budget Papers No.2:
‘For eligible new build-to-rent projects where construction commences after 7:30 PM (AEST) on 9 May 2023 (Budget night), the Government will:
- increase the rate for the capital works tax deduction (depreciation) to 4 percent per year;
- reduce the final withholding tax rate on eligible fund payments from managed investment trust (MIT) investments from 30 per cent to 15 per cent.
This measure will encourage investment and construction in the build-to-rent sector, expanding Australia’s housing supply.
This measure will apply to build-to-rent projects consisting of 50 or more apartments or dwellings made available for rent to the general public. The dwellings must be retained under single ownership for at least 10 years before being able to be sold and landlords must offer a lease term of at least 3 years for each dwelling.’
Example
VK Developments Pty Ltd started a new project based in QLD under the government’s build to rent scheme – it is due to start construction in June 2023. This development consists of 55 brand-new individual 2-bedroom units. Each of these will be retained by VK Developments for the purpose of renting to a mixed tenancy base with long term leases available of 3, 5 and 10 years.
The table below outlines the changes in the depreciation rate and what depreciation is claimable for just one of the units with and without the increased depreciation rate. You can see that these deductions across 55 units make a substantial incentive for this relatively new style of housing.
To claim maximum depreciation, these developers need to organise a depreciation schedule from a quantity surveyor. The cost for a depreciation schedule is a one-off fee that is 100% tax deductible and can help boost cash flow.
A change to the Small Business – Instant Asset Write-Off
During recent years, there have been numerous changes to this policy and the Government announced on May 9th that again, they will be backing Australian small businesses by improving cash flow and reducing compliance costs by temporarily increasing the instant asset write-off threshold to $20,000, from 1 July 2023 until 30 June 2024. As per the Budget Measures, Budget Papers No.2:
‘Small businesses, with aggregated annual turnover of less than $10 million, will be able to immediately deduct the full cost of eligible assets costing less than $20,000 that are first used or installed ready for use between 1 July 2023 and 30 June 2024. The $20,000 threshold will apply on a per asset basis, so small businesses can instantly write off multiple assets.
Assets valued at $20,000 or more (which cannot be immediately deducted) can continue to be placed into the small business simplified depreciation pool and depreciated at 15 per cent in the first income year and 30 per cent each income year thereafter. ‘
The provisions that prevent small businesses from re-entering the simplified depreciation regime for 5 years if they opt-out will continue to be suspended until 30 June 2024.’
Cash flow is essential for small businesses. It is important to claim all tax deductions available. This can be achieved by maximising asset-related deductions through depreciation and instant asset write-off in cases where it is applicable.
Support for the Small Business Energy Incentive
The Government also announced in the budget, that they will be supporting business investments into power savings assets for small and medium businesses. As per the Budget Measures, Budget Papers No.2:
‘Small and medium businesses, with aggregated annual turnover of less than $50 million, will be able to deduct an additional 20 percent of the cost of eligible depreciating assets that support electrification and more efficient use of energy. Up to $100,000 of total expenditure will be eligible for the Small Business Energy Incentive, with the maximum bonus deduction being $20,000.
A range of depreciating assets, as well as upgrades to existing assets, will be eligible for the Small Business Energy Incentive. These will include assets that upgrade to more efficient electrical goods such as energy-efficient fridges, assets that support electrification such as heat pumps and electric heating or cooling systems, and demand management assets such as batteries or thermal energy storage. Full details of eligibility criteria will be finalised in consultation with stakeholders.
Eligible assets will need to be first used or installed ready for use between 1 July 2023 and 30 June 2024. Eligible upgrades will also need to be made in this period.
Certain exclusions will apply such as electric vehicles, renewable electricity generation assets, capital works, and assets that are not connected to the electricity grid and use fossil fuels.’
Example
Mal and Jess are café owners. They already have a solar system installed but with no batteries.
Using the new Small Business Energy Incentive scheme, they decide it would be more energy efficient to add batteries to their existing system.
In August 2023, the purchase price of the batteries is $12,000. Under the Small Business Energy Incentive scheme, they can claim this $12,000 as well as an extra 20% (which is $2,400).
Mal and Jess are now entitled to claim $14,400 as a small business instant write-off against the café’s income for the purchase of their new batteries.
Budget night always provides and interesting view on what is to come for the coming year and above we have touched on just some of the new incentives and changes announced. Please visit Budget 2023-24 for more information and insights and as more relevant information becomes available, we’ll be sure to provide updates.
If you would like to discuss your residential or commercial investment property for depreciation purposes, we would be happy to have a chat with you. You can reach out to us on 1300 922 220.
