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Depreciation – The property investor’s friend

By Skye Nicholson

Don’t be another property investor who forgoes thousands of dollars of unclaimed money, simply for being none the wiser! This tax time, we look into claiming depreciation deductions for your investment property.

In recent data released by SQM Research this week, it is noted that the national vacancy rate sits at 2.1%, with Brisbane specifically siting at 2.9% [1]. This reflects 9,331 rental vacancies, and, as a direct result, tenants are more inclined to request rent reductions. At a time where vacancy rates in investment properties are ever-so-prominent and asking rent is decreasing, investors should be maximising tax breaks where possible.

Every investor has an “Investment Property Strategy”, increasing the amount of return you receive on your investment property at tax time is a crucial element to be included in that strategy. While depreciation tax breaks are predominately greater on newer properties, they are applicable for all investment properties and should be incorporated into your Strategy irrespective of a property’s construction date and construction type. The process of claiming depreciation directly improves your cash flow by reducing your taxable income or assessable income, and accordingly, increases the potential to expand your portfolio further.

The table below highlights the average depreciation deduction for investors who requested schedules during the financial year 2015-2016.

AGE OF RESIDENTIAL PROPERTIES SELECTED: 2015-2016 FINANCIAL YEAR [2].

Description: Construction dates: Percentage of total:  Average first full year deduction
Old Pre 1987 22.3% $4,899
Pre 2000 1987 – 2000 16.9% $7,543
Up to 15 years old 2000 – end of 2012 26% $11,303
Fairly new 2012 – 2015 13.3% $12,316
Brand new  Built after 1/3/2015 21.5% $12,680

It is clear that, regardless of the age of the property, it is worthwhile to speak with a specialist quantity surveyor on exactly what can be claimed with respect to your investment property. As demonstrated in the above, residential properties that have been constructed prior to 1987 can receive an average depreciation deduction of $4,899.00 in the first financial year alone. This means investors in those circumstances could pocket roughly $94.00 a week! Even those who have a depreciation schedule set up may be underestimating just how much they could be claiming. We note also, these figures are merely indicative on investors who requested depreciation schedules.

Practical Aspects

Maximising property depreciation requires a thorough understanding of the legislation surrounding depreciation deductions, and how to structure your depreciation report so that deductions are utilised to their full potential. In the following paragraphs, we look into the practical aspects for you.

The Australian Taxation Office (ATO) sanctions depreciation of assets that have “a limited effective life and can reasonably be expected to decline in value over the time it is used” [3]. Further, the two main types of expenses that can be depreciated for investment properties at tax time are as follows:-

  1. Wear and Tear of Fixtures and fittings – Plant and equipment (Division 40); and
  2. Capital Works expenses – Capital Works Allowance (Division 43).

The ATO recognises that the ageing of investment properties, and items within the property that suffer wear and tear, cause a decline in overall value. In light of same, the ATO allows investors to claim this financial loss as a tax deduction each financial year against their assessable income.

Noting the above, deductions can only be claimed for the period during the financial year that the property is rented or is available for rent. This means that if you live in a property and intend to rent it out in future, investment property depreciation is not available to you until the property is used specifically for the purposes of rent generation, whereby providing an investment return/benefit to you.

1. Plant and equipment depreciating assets (Division 40).

Division 40 of the Income Tax Assessment Act 1997 (Cth) (“the Act”) provides that an amount that is equal to the decline in value of the “Depreciating asset” is claimable at tax time. As a result, lowering your assessable income, and which in turn provides you with a greater tax return.

In accordance with section 40-B of the Act, “Depreciating Assets are assets with a limited effective life that are reasonably expected to decline in value” [4]. In other words, depreciating assets are plant and equipment items within the property that have a limited “effective life” as determined by the ATO. The depreciation deduction available on that item is then calculated with respect to said effective life.

These items are removable fixtures generally described as ‘not structural’. Items for example include, carpet, blinds, kitchen appliances, light shades, security systems, elevators, air conditioners, hot water systems, etc.

The depreciation deduction available on these items is calculated with respect to the specified “effective life”.  Accordingly, this forms one significant aspect of an investor’s depreciation schedule. We refer you to section 40-30 of the Act for a more definitive list of the claimable assets.

2. Capital Works Allowance (Division 43).

Division 43 of the Act, more commonly referred to as “Capital Works Allowance” covers deductions available to investors for fixed items/assets and the structural elements of the property. Essentially, this division provides a system of deducting capital expenditure incurred by the investor in respect of the construction of a building, and other capital works, to lower assessable income, similar to the purposes of Division 40 of the Act.

The age and type of fixed assets and construction determine the allowance provided under the Capital Works Allowance division. This can be complex and we recommend you engage a Quantity Surveyor to provide advice over the allowable deductions.

At Just Us Lawyers we strive to understand your investment strategy and to help you fashion legal solutions to achieve your property goals – from discussing and advising on property holding entities, planning issues and objections, and contract design, to helping you with your conveyancing needs.

For the best Conveyancing lawyers in Brisbane call/email Just Us Lawyers or complete our enquiry form for a quote today

[1] Vacancy Rates Steady In May, Asking Rents Dip (2018) Sqmresearch.com.au

[2] Maverick, BMT Quantity Surveyors. 2017. Depreciation data highlights investment trend www.bmtqs.com.au

[3] Guide to depreciating assets 2017, Page 3, Australian Taxation Office, “a limited effective life and can reasonably be expected to decline in value over the time it is used.”

[4] Income Tax Assessment Act 1997 Federal Register of Legislation, Division 40 Capital allowances, Section 40-10, “Depreciating Assets are assets with a limited effective life that are reasonably expected to decline in value.”


Be on time! Or suffer the consequences

Unlike other Jurisdictions, such as New South Wales, those familiar with conveyancing understand that in Brisbane residential property contracts “time is of the essence”.

But what does that actually mean?  

This was considered by the Queensland Supreme Court of Appeal in the matter of Caprice Property Holdings Pty Ltd v McLeay.

The contract involved an expensive Gold Coast property. The contract was due and the parties had nominated 3pm as the time for settlement. The Buyer’s solicitors arrived and were informed that the release of mortgage would not be available for another 15 minutes. The Buyer declined to wait any more than five minutes and left. The Seller’s solicitor contacted the Buyer’s solicitors shortly thereafter and requested that the Buyer return stating that the Sellers had reserved their rights to settle any time up to 5pm. The Buyer’s solicitor did not agree to re-attend settlement nor did the Buyer attempt to make any other arrangements for settlement.

The Seller’s solicitor then sent a fax to the Buyer’s solicitor at 4.36pm holding the Buyer in breach of the contract as it had not effected settlement by 5pm. This fax was sent prematurely, in that it was not 5pm, and the Buyer was not yet in breach of the contract. The Buyers argued that this facsimile was intimidation because it was sent before 5.00pm, and they were, as a result, excused from having to settle.

The court disagreed with the Buyers. The court held that rather the Buyer’s refusal to return on the settlement date excused the Sellers from performing their obligations under the contract and the Buyer was in breach of the contract in failing to settle because time was of the essence.  As a consequence, the Sellers were fully entitled to terminate the contract after 5.00pm for the Buyer’s failure to comply with the contract.

The lesson to be learnt by the parties to residential conveyancing contracts is that it is always important to look at the terms of the contract before taking rash action – no matter how inconvenient the practices of the other party may be. Most standard contracts for the sale of residential property in Queensland provide that settlement must take place up to 5.00pm on the settlement day. Failure to make yourself available will entitle the other party to avoid the consequences of the contract, even if the failure is caused by the bank’s inability to get it’s act together.

If you are the Buyer, who is at fault, as a minimum you will forfeit your deposit. If you are the Seller, the Buyer can terminate without loss of the deposit and the agent will probably still be able to claim his commission from you.

It is essential that you be ready, willing and able to complete the sale at the time set out in the contract because in Queensland, as the term says, time really is of the essence!

For further information on conveyancing and how we can assist in pre-contract advice please contact our Conveyancing Team based at our Wilston office.  

For the best Conveyancing lawyers in Brisbane call/email Just Us Lawyers or complete our enquiry form for a quote today


When “sufficient to complete” is simply not enough

By Natalie Smyth

Purchasers entering into a Contract for the purchase of residential or commercial property in Queensland may require the Contract to be subject to obtaining satisfactory finance. Such a provision is often an important and essential term of the Contract entitling a purchaser to terminate the Contract in the event that satisfactory finance is not obtained.

In circumstances where the finance condition is vague or uncertain as to be meaningless, it can render the clause unenforceable and purchasers may find themselves in a situation where they are legally bound to complete the Contract in the absence of obtaining finance.

In the Fourteenth Edition of the REIQ Contract for the sale of Houses and Residential Land, in order for the Contract to be subject to the finance condition, all of the “finance amount” “financier” and “finance date” sections in the reference schedule must be completed. It is common practise for real estate agents in Queensland to complete the reference schedule of the Contract, and we often seen the phrase “sufficient to complete” next to the “finance amount” heading, as opposed to an exact dollar figure.

Failure to insert an exact dollar figure could be problematic in circumstances where a purchaser also requires finance to cover:-

  1. any potential transfer duty imposed on the transfer of property;
  2. title registration fees; and
  3. legal fees.

It could be argued that a purchaser who obtains finance for the balance purchase price has obtained an amount that is “sufficient to complete” the purchase. The fact that a purchaser, who requires finance to pay a stamp duty liability or legal fees, has only been able to secure finance for the balance purchase price, may find themselves unable to rely on the finance condition, as technically, those liabilities are extraneous to completion of the Contract.

What is the Court’s view?

In the High Court case of Meehan V Jones & Ors (1982), a purchaser sought specific performance of a contract of sale expressed to be executed subject to “the Purchaser or his nominee receiving approval for finance on satisfactory terms and conditions in an amount sufficient to complete the purchase.”

Facts of Meehan v Jones

The purchaser had obtained finance and had notified the Seller of his intention to proceed with the Contract, however, in the interim the Seller had found another purchaser and did not wish to proceed with the first Contract. Accordingly, the Seller sought to resist the claim for specific performance on the grounds that:-

  1. the finance clause was uncertain and therefore rendered the contract void; and
  2. That the clause, if certain, reserved to the purchaser a discretion or option to elect to carry out the contract, which rendered the contract illusory.

The Court’s decision

The High Court recognised that the finance clause in the Contract was potentially ambiguous in the sense that it failed to define the extent of the purchaser’s obligations with respect to the search for finance and the criteria to be used in the determination of whether such finance was in fact satisfactory, however, ultimately decided that the purchaser was entitled to specific performance of the Contract.

The Court held that the contract was not void for uncertainty because:

  1. “The courts should be astute to adopt a construction which would preserve the validity of the contract” (per Mason and Wilson JJ); and
  2. “It was only if the court was unable to put any definite meaning on the contract that it could be said to be uncertain” (per Gibbs CJ and Murphy J).

The Court was unanimous in holding that “subject to finance” clauses will not generally result in a contract for sale being held void for uncertainty, and the fact that a clause might contain some ambiguity will not preclude a court from ascertaining the intention of the parties with respect to the clause in question.

Further in the case of Clarke v Relstar Pty Ltd (1982), a contract expressed to be subject to the purchaser’s obtaining finance by a given date on terms wholly satisfactory to the purchaser to enable him to complete the transaction was held to be not void for uncertainty.

In the case of York Air Conditioning and Refrigeration (Australasia) Pty Ltd v The Commonwealth , Williams J commented, “If the court comes to the conclusion that parties intended to make a contract, it will if possible give effect to their intention no matter what difficulties of construction arise.”

Does this also apply to commercial contracts?  

Note 7 of the REIQ Contract for the purchase of commercial land and buildings provides: “the dollar amount of the loan being sought must be inserted in item U. Do not insert the words ‘sufficient to complete this purchase ‘or words of a similar effect.”  We understand the reason for this notation, is to avoid the situation described above, whereby a purchase may require an amount of finance that is above that required to complete the Contract.

As far as we are aware there is yet to be decision of  a court determinative of this issue..

Conclusion:-

  1. The courts will attempt to give proper effect to commercial transactions;
  2. If the courts can ascertain the intention of the parties with respect to the clause, and deduce a meaning from the clause, it will likely not be void for uncertainty;
  3. “subject to finance” clauses will not generally result in a contract for sale being held void for uncertainty; and
  4. the fact that a clause might contain some ambiguity will not preclude a court from ascertaining the intention of the parties with respect to the clause in question.

Despite Chief Justice Gibbs’ comment in Meehan v Jones with respect to “subject to finance” clauses, that their “natural effect is to leave it to the purchaser to determine whether or not the available finance is suitable to his needs,” in circumstances where a purchaser obtains finance for the balance purchase price, but requires a finance amount that is above that required to complete the contract (i.e for a stamp duty liability), in the absence of obtaining additional finance, the purchaser may still be bound to complete the Contract.  Accordingly, the phrase “sufficient to complete” is potentially ambiguous, and we therefore recommend that purchasers insert a specific dollar amount  (or a figure expressed as a percentage of the purchase price) next to the “finance amount” heading in the reference schedule that includes not only the balance purchase price, but also stamp duty costs, legal and title registration fees.

We recommend that you seek pre-contract advice from our team at Just Us Lawyers prior to signing any Contract for the Sale and Purchase of residential or commercial property in Queensland.

Just Us Lawyers – for the best Conveyancing lawyers in Brisbane call/email Just Us Lawyers or complete our enquiry form for a quote today


Finance Clauses, a way out or a way in to a legal minefield

By Natalie Smyth

Buyers of property often rely on Finance clauses to give them a way out of a contract to purchase a house they really can’t afford. But for the unwary they can be nothing more than a legal minefield entangling the parties in protracted litigation.

 A recent decision in the District Court of Queensland considered, inter alia, whether a conveyancing contract for the purchase of residential property in Queensland was subject to finance, and whether the Buyer could rely on the finance condition to terminate the Contract.

Whilst the decision was inconclusive (as the matter is still ongoing), it serves as good reminder for purchasers of residential property to obtain independent legal advice prior to entering into a Contract for sale.

Relevant Facts of Mewing v Duncan [2018] QDC 52

  • The parties entered into an REIQ Contract for the sale of a particular residential property on 20 November 2016.
  • On the third page of the schedule to the Contract in the finance section of the reference schedule after the heading “finance amount” were the words “Sufficient to complete”, and after the heading “financer” were the words “Buyer’s choice.”
  • There was no date inserted after the heading “finance date.”

The Fourteenth Edition of the REIQ Contract for the sale of Houses and Residential Land contains a notation next to the finance condition in the reference schedule of the Contract as follows:- “Unless all of ‘finance amount’, ‘financier’ and ‘finance date’ are completed, this contract is not subject to finance and clause 3 does not apply.”

Clause 3.1 of the REIQ Contract provides:- “This contract is conditional upon the Buyer obtaining approval of a loan for the finance amount from the financier by the finance date on terms satisfactory to the Buyer. The Buyer must take all reasonable steps to obtain approval.”

Accordingly, as all three sections in the finance section of the reference schedule of the Contract had not been completed, prima facie, the Contract did not appear to be subject to the finance condition.

Despite the deficiencies in the Contract, did the Court decide that the Contract was subject to finance?

The Buyer argued that she had told the agent (who had prepared the Contract) that it was to be subject to finance, and that she had relied on the agent to have completed the contract in such a way as to make it subject to finance. To this, the court remarked “if the [Buyer] relied on the real estate agent to complete the contract in such a way as to render it subject to finance, the applicants may be estopped from denying that the contract was subject to finance, regardless of the written terms of the document.”

The Court further remarked that “it is at least arguable that the agent was the agent of the applicants for the purposes of making representations as to the effect of the way in which they had completed the contract form, and if such a representation were made and were relied on by the respondent, it would be binding on the applicant.”

Despite the above remarks, the Buyer had not submitted sufficient evidence to the Court to substantiate that the agent had represented to the Buyer that the Contract was subject to finance and that the Buyer relied on that representation. Noting that the Buyer in this case was self-represented, the Court adjourned the matter to allow the Buyer an opportunity to submit further evidence to substantiate her case.

We are advised that the dispute between the Buyer and Seller remains unresolved. No doubt there is a contest regarding what representations the agent is alleged to have made on behalf of the seller.

Key Takeaways

  • It is important for Buyers to remember that real estate agents are appointed by the Seller and accordingly will act in the interests of their client. If an agent has made a representation to you, whether it be with respect to the property condition, or the terms of the Contract, we recommend that such representation be reflected in the Contract as a special condition or a warranty.
  • In the event that a situation arises whereby a Buyer may seek to rely on a representation made by an agent, it may be difficult, in the absence of written documentation, to produce sufficient evidence to substantiate that the representation was in fact made and relied upon by the Buyer.
  • Whilst it may be possible for a purchaser to rely on a representation made by an agent with respect to a particular contractual term, the best course of action is to obtain independent legal advice prior to signing the Contract to ensure that any such representations have been reflected in the Contract.

Had the purchaser in the above mentioned case engaged a solicitor to review the Contract prior to signing same, the deficiency in the contract with respect to the finance particulars could have rectified, and accordingly, the parties could have avoided the dispute as to whether the Contract was or was not subject to finance.

Separate to obtaining pre-contract advice or legal assistance throughout a conveyancing transaction, it is apparent from the facts of this case, that when parties become embroiled in litigation, they will certainly benefit from engaging the services of a solicitor to assist them with preparing evidence sufficient to establish and support their case.

If you would like to read the court’s judgement in detail – you can access the case via:-  https://www.sclqld.org.au/caselaw/QDC/2018/052

Other considerations

Notably in this case, the words “sufficient to complete” were used to describe the “finance amount” required to complete the transaction. In our next blog (due out on Friday 8 June 2018)  “When sufficient to complete is simply not enough”  we examine the Court’s view on the adequacy of this frequently used phrase.

What can we do to help?

If you are considering purchasing or selling a property in Queensland, in addition to acting in the conveyance, Just Us Lawyers can provide you with pre-contract advice, review a Contract that has been prepared by a third party to ensure its accuracy, and formalise representations made by a Seller or agent into special conditions or warranties that will form part of the Contract.

Just Us Lawyers – for the best Conveyancing lawyers in Brisbane call/email Just Us Lawyers or complete our enquiry form for a quote today

 


How important are SPECIAL CONDITIONS?

Whether you’re purchasing your first family home or increasing your property portfolio, purchasing property is an important financial decision that is not to be taken lightly. It is crucial that you sign a contract in accordance with your current circumstances and needs. Typically this is achieved through Pre-Contract Advice and/or Contractual Negotiation. 

WHAT ARE SPECIAL CONDITIONS

In addition to the standard terms of a Contract, it is common practice to insert special conditions prior to execution. This provides additional protection and rights with respect to the property transaction. Special conditions are also inserted to vary or delete existing standard terms to benefit either or both parties.

Listed below are some common special conditions that can be inserted for the benefit of the Purchaser:-

  1. Body Corporate Pet Approval – if purchasing a unit or townhouse with the intention of a pet residing in or on the property, the Purchaser must ensure the body corporate will approve.
  2. Due Diligence – this allows the Purchaser to investigate the land being purchased through a range of property searches. This may be necessary to ascertain development restrictions, permitted uses, current building structure approvals and certification etc.
  3. Prior Sale – are funds from your sale to be used to assist in the purchase of the new property?  It would be beneficial to insert a condition with respect to the satisfactory settlement of your prior sale Contract.

When a Special Condition is inserted into any Contract it must be clear and concise, warranting avoidance of potential future dispute, as a condition could be void if it is deemed vague or confusing.

Once you have entered into a property transaction by way of a fully executed Contract of Sale, it is legally binding, therefore we recommend engaging Pre-Contract advice in which we can draft appropriate conditions, negotiate and provide advice with respect to terms you would be bound by.

For further information on special conditions and how we can assist in pre-contract advice please contact our Conveyancing Team based at our Wilston office.  

For the best Conveyancing lawyers in Brisbane call/email Just Us Lawyers or complete our enquiry form for a quote today

 


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