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Supreme Court decision confirms attorney’s power to make Binding Death Benefits Nomination

By Sarah Camm

In a significant decision handed down last week, the Supreme Court of Queensland has held that a Binding Death Benefits Nomination (“BDBN”) executed by an attorney was valid.

Justice Bowskill’s decision in Re Narumon [2018] QSC 185 is significant because, until now, the question of whether an attorney has (or should have) this power has been unclear, and has been the subject of some discussion in the legal community.

The reason for this uncertainty is as follows:

  • An attorney can be given power to make financial and legal decisions on behalf of a principal, however the execution of a BDBN is not included in the examples of these types of decisions in the Powers of Attorney Act 1998 (Qld);
  • An attorney cannot be given the power to make decisions about special personal matters, including making a will and appointing an attorney, in part on a policy basis, because of the potential for abuse;
  • A BDBN, which provides direction for payment of a benefit after death of the principal, could be said to be testamentary or will-like in nature; but
  • BDBNs differ from a will in that they often lapse, and must be renewed or re-made every three years, depending on the rules of the particular fund.

 

Facts in Re Naruman

In 2013 Mr Giles made a lapsing BDBN with his SMSF, nominating his wife and their son to receive 47.5% of his death benefits each, and his sister to receive 5%.

Shortly after making the 2013 BDBN, Mr Giles lost capacity. Under an existing Enduring Power of Attorney, his wife and sister were appointed his attorneys for personal and financial matters.

In 2016, before the 2013 BDBN expired, the attorneys executed an extension of the 2013 Nomination. They also executed a new BDBN, because they were concerned that the 5% distribution to Mr Giles’ sister in the 2013 BDBN, who is not a dependent as required by superannuation legislation, would invalidate the document.

The Court had to determine:

  1. Whether the 2013 BDBN was valid, despite the nomination of his sister to receive 5%
  2. Whether an attorney can execute a BDBN on behalf of the principal member
  3. Whether the extension of the 2013 BDBN or the new BDBN executed in 2016 were conflict transactions, and whether this invalidated the documents

 

The 2013 BDBN

The Court found that the 2013 BDBN was valid, but that as the member had no power to nominate his sister, and the trustee was not authorised to pay the benefit to her, the nomination of Mr Giles’ sister to receive the 5% benefit was of no effect.

 

Attorneys executing BDBNs generally.

The Court found that nothing in the Superannuation legislation appears to restrict an attorney of a member executing a nomination on behalf of that member, noting that the terms of the fund deed itself actually govern the rights of a member to make a BDBN.

The terms of Mr Giles’ fund deed did not prohibit an attorney executing a BDBN on behalf of a member and in fact expressly contemplated that they could.

The Court then considered the Powers of Attorney Act 1998 (Qld) itself and held as follows:

The effect of a BDBN, if valid, is to bind the trustee of the superannuation fun to pay benefits, following the member’s death, to the nominated persons (and, if relevant, to do so in the nominated way). That does not seem to fall within any of the examples in the definition of a financial matter, including as a legal matter relating to the principal’s financial matters. But the examples are not exhaustive and do not limit the meaning of the provision. It is difficult to see why the exercise of a member’s right under a SMSF deed, to require the trustee of the fund to pay benefits, after their death, in a particular way would not be “a matter relating to the [member’s] financial… matters”. Given the breadth of meaning of the word “financial”… such an act does fall within the meaning of this term.[1]

The Court also held that, although it deals with benefits of a member after their death, a BDBN is not a testamentary act, so it does not fall within the restricted ‘special personal matters’.

While acknowledging the possibility for abuse by allowing attorneys to make a BDBN on behalf of the principal, the Court noted that several protections against abuse exist in the making of an EPOA, as well as in the attorney’s duties to act honestly and in the principal’s interests, and to avoid a conflict of interest.

 

The 2016 Extension

The Court held that there was no conflict of interest in the execution of the extension by the attorneys. This Court accepted that the reason for executing the extension was to ensure continuity in Mr Giles’ estate planning and that his wishes continued to have effect. While the attorneys gained some benefit, this was held to be incidental to the exercise of the power, and coincided (rather than conflicted) with the interests of the principal. The 2016 extension was therefore held to be valid.

 

The new 2016 BDBN

The Court was not prepared to hold that the new BDBN made in 2016 was valid. The new BDBN removed the 5% nomination to Mr Giles’ sister, and nominated Mr Giles’ wife and son to each receive 50% of the benefit. While the change was minor, it was held that without express authority in the EPOA to enter into conflict transactions, the attorneys could not make a BDBN which changed what Mr Giles had proposed in favour of themselves.

 

Conclusion

Re Narumon does resolve some ambiguities in this important discussion. It is important to note however that the Court was considering circumstances where there was an existing BDBN to refer to. The Court did not exclusively determine whether, even if the EPOA did have a conflict clause, the execution of a BDBN either changing the member’s existing nomination or where the member had no previous nomination, would be valid.

Unfortunately, Binding Death Benefits Nominations are often overlooked in the Estate Planning process. EPOAs, too, are seen as a DIY document, simply containing a number of tick boxes for completion. Trust Deeds are often drafted by an accountant, and executed without a legal advice from your estate planning solicitor.

The decision in Re Narumon highlights the importance of having well considered advice over all aspects of your estate plan. At Just Us Lawyers we can review your existing EPOAs, BDBNs and other estate planning documents to ensure that they will do what you want them to.

We can draft appropriate conflict clauses to ensure your attorneys have the appropriate powers to act in your interests, and provide you with certainty and peace of mind that your affairs will be taken care of.

[1] Re Narumon [2018] QSC 185 at [69].


Tips for Property Sellers

By Remy Forster

The most stressful part of selling a property is generally considered to be the steps taken prior to a contract being signed – constant open homes, receiving (and rejecting) unreasonable offers, staging a house and negotiating with tenants are all common aggravations. Unfortunately the work of selling a property doesn’t stop there, and it is usual for a step or two to be missed in the process of preparing for a property settlement once the stress of finding a Buyer has been alleviated. Below we outline the major items to prepare for as a Seller to help you get your property settlement completed on time.

 

1. Make sure you can sell the property.

Not all Sellers are disposing of property that they legally own. If you are selling a property on behalf of someone else, or if you will be acting on their behalf for a part of the conveyance due to their absence, it is vital that you have the correct documentation in place for the settlement to be completed. For example:

  1. If you have changed your name since you purchased the property, you will need to be able to provide evidence that you are the same person (for example a marriage certificate or change of name certificate),
  2. If you are assisting a partner or spouse in selling a property, your legal representative should not be able to accept your instructions on their behalf without a signed authority (such as a Power of Attorney),
  3. If you are selling the property on behalf of a family member, partner or spouse and you intend to execute all associated documentation on their behalf, you will need a registered Power of Attorney (for further guidance on this, see our blog on registering a Power of Attorney[1]), or
  4. If you are selling the property on behalf of a deceased estate, you will need evidence that the estate is being administered and/or has been registered. The title to the property will also need to be transferred out of the name of the deceased and into the name of the personal representative before settlement documentation can be executed.

If you are unsure as to whether you have sufficient documentation, or if you have the legal ability to sell a property, we would recommend that you contact your legal representative prior to executing any sale contracts.

 

2. Release your property debts.

In order to sell your property, you will need to be able to release any debts held over the property title. Most sellers will only have a mortgage over the property title, and having this debt released requires you to contact the financial institution which holds the mortgage (for further guidance on this, see our blog on tips for discharging a mortgage[2]). However, if you have any other debts over the property, such as a writ or caveat, you will also need to contact the parties who hold these debts to arrange the debts to be released. If you have a debt over the property to a less formal party (for example, a mortgage over the property which has been lodged by a family member), you will still need to contact that party for them to arrange releasing their debt over the property.

 

3. Obtain a Capital Gains Clearance Certificate

Due to recent legislative changes, certain property settlements require the Sellers to provide evidence from the Government that the Buyers are not required to withhold a portion of the purchase price. This evidence is provided by the Government in the form of a “Capital Gains Clearance Certificate” upon application by the Seller. We recommend that all Sellers verify if their property falls within the requirements for this Certificate to be provided (for further guidance on this, see our blog on Capital Gains Clearance Certificates[3]) and apply for the Certificate once their property is listed for sale. Certificates are valid for twelve months when issued, and a new application can be submitted if the Certificate expires prior to the property settlement occurring (applications can be made online[4]).

 

4. Have your identity documents ready

It is a requirement in Queensland for all legal representatives to verify the identity of their clients in conveyancing transactions. For sales this is especially important to ensure someone is not fraudulently selling a property they do not own, or do not have right to. This requirement means your legal representative should ask for a certified copy of 100 points of identity documentation, or for you to complete a Verification of Identity with a verification provider (for example, Australia Post). The most common documents which you can use to verify your identity are your current Australian passport, current Australian Driver’s license and any change of name or marriage certificates which show your name has changed since your passport and/or driver’s license were issued (if you don’t have these documents available, please see Schedule 8 of the Participation Rules which list a table of the possible documents you can provide[5]). If you cannot provide sufficient documents to prove your identity, your legal representative may not be able to act on your behalf in the transaction.

 

5. Check if you will be available during the transaction.

In the mysterious ways of the universe, it is common for the perfect Buyer for your property to come along when you already have a trip or other adventures planned. It is always important when signing a contract that you make sure you will be available for at least a portion of the transaction, and that you advise your legal representative if you will not be available for the entire time. During a conveyancing transaction there will be additional documents for you to sign as the transaction progresses, and most likely instances where your legal representative will need to contact you for your instructions. If you are unable to complete these steps, it will make it difficult for your settlement to be completed on time.

 

6. Disclose, disclose, disclose.

Standard conveyancing transactions require Sellers to disclose certain information about the property to any potential Buyers, and these disclosures need to be reflected on the Contract the parties sign. For example, a Seller is required to disclose to the Buyer:

  1. If they have conducted work on the property under an Owner Builder License,[6]
  2. If there are any work notices issued by the local council for the property[7],
  3. If there are any tree disputes registered with QCAT that involve the property[8], or
  4. If there are any defects or circumstances relating to the Body Corporate which would materially prejudice a Buyer.[9]

If the Seller does not disclose this information, the Buyers may be able to either terminate the Contract or pursue the Seller for costs. We recommend that Sellers gather any information about the property that they have in preparation to disclose this information to the Buyers.

 

7. Gather your settlement documents

If you’re selling a residential home, you may not have any documents to gather or collect. Below is a list of documents which affect some property sales and we recommend that you peruse to see if they apply:

  1. Certificate of Title – some Sellers have an original Certificate of Title for their property. These Certificates were only originally issued prior to the 1990’s, and since then have only been issued upon request by the party who owns the property. You can check if you have a Certificate of Title by viewing a copy of a Title Search for your property (which your real estate agent should have ordered as part of preparing the contract of sale).
  2. Tenancy documents – if the property has tenants and you have copies of rental agreements, rental ledgers or bond forms, you will need to provide these to your legal representative prior to settlement. If you have a property manager, they may hold these documents for you.
  3. Building finals – if you have conducted any work on the property since you purchased it, you may have copies of final inspection certificates for this building work. It is not a legal requirement in Queensland for you to provide these to the Buyer (unless there is a special condition in your contract requiring this), but having these on hand can smooth over issues which arise during the conveyancing process.
  4. Rates, water and body corporate notices – the Buyers are supposed to conduct searches on these accounts during the conveyancing process, however if they do not, having copies of these notices will assist your legal representative in preparing for settlement.

Finally, you will need to make sure you have collected all keys, remotes and access cards that you hold for the property for these to be handed to the Buyer following settlement.

If you have any queries about the conveyancing process, or generally about what to do when selling a property, please contact our Conveyancing team.

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

 

[1] https://justuslaw.com/powers-attorney-implications-registration/

[2] https://justuslaw.com/discharging-a-mortgage-tips-advice/

[3] https://justuslaw.com/youre-selling-750k-consider-frcgw-tax/

[4] https://www.ato.gov.au/Forms/Capital-gains-withholding-clearance-certificate-application-online-form-and-instructions—for-Australian-residents/

[5] https://www.dnrm.qld.gov.au/__data/assets/pdf_file/0004/307129/participation-rules-electronic-conveyancing-v3.pdf

[6] http://www.qbcc.qld.gov.au/buying-existing-home/buying-or-selling-owner-built-property

[7] https://www.brisbane.qld.gov.au/planning-building/applying-post-approval/after-approval/post-approval-operational-works/unauthorised-work

[8] http://www.qcat.qld.gov.au/matter-types/tree-disputes

[9] S223 https://www.legislation.qld.gov.au/view/pdf/2017-07-03/act-1997-028


Know your Devil

By Natalie Smyth

Like so much with the law, the devil is usually in the detail, and what might seem a good idea at the time may have consequences from left field.  It is no different with conveyancing contracts for the sale of residential property in Brisbane.

Take the example of Tara.  Tara made her living as a medium sized property developer in Brisbane.  She purchased land and developed one or two apartment blocks per year with an average of 10 to 15 units each. When the market was good, Tara had no trouble selling her apartments. She was very proud of her finishes and the quality of her fittings. “They sell themselves really”, she told me.

But recently things have been different. There has been a glut of good product on the market and prices were falling.

Tara was sick and tired of Buyers putting down a small deposit and walking away when they found an apartment which was cheaper. It was unfair she thought, after all the planning and work she put in for Buyers, to be able to walk away like that with very little consequence.  She decided to do something about it.

Tara told her agent that she would now require Buyers to put down a deposit of thirty percent and the contract of sale must now specify that the deposit was non-refundable.  Her agent told her she may lose some prospects but Tara said she didn’t care, “If they are not prepared to do that, they are not serious anyway”,  she replied.

For a while everything worked well. She was attracting Buyers who were fair dinkum. But then one Buyer, having paid the 30 percent deposit refused to pay the balance. Tara was very patient and gave the Buyer every opportunity to come up with the balance of the purchase price but the Buyer just refused to pay.

“Oh well, so be it, the deposit is non-refundable, I will just take that and find another Buyer….the deposit will compensate me for the extra interest I have had to pay, while the Buyer has been dithering around”, she thought.

However, when Tara came to sign the transfer documents for the new Buyer she found that the previous Buyer had placed a caveat on the property preventing the sale.  If that was not bad enough, the previous Buyer had now engaged a solicitor who had written to her bank demanding that the mortgage be removed from the property and the Bank was listening, they wanted Tara to pay back the mortgage. Tara needed to mortgage her apartment blocks to finance the construction, she simply didn’t have the funds to pay for everything upfront.

The previous Buyers solicitor claimed that the contract of sale, even though it was in the standard REIQ form, was an Instalment Contract and the deposit wasn’t really a deposit at all but part payment of the purchase price which gave the previous buyer an interest in the apartment. A ‘non-refundable’ deposit can make a contract an Instalment Contract with unintended consequences.

What is an Instalment Contract?

In most land contracts in Queensland, the Buyer will pay a deposit that is held by the ‘stakeholder’ (usually the agent or Seller’s lawyer) until settlement. On settlement, the Buyer will then pay the balance of the purchase price, in exchange for the Seller providing them with clear legal title to the property.

An Instalment Contract, as the name suggests, has the Buyer make payment of the purchase price by a number of instalments. It is sometimes called a vendor finance arrangement. Usually, these instalments will be non-refundable.

Most importantly, Instalment Contracts change the legal relationship between the Buyer and Seller, and provide more protection to Buyers than under a standard REIQ contract.

Can a non-refundable deposit make a contract an Instalment Contract?

Section 71 of the Property Law Act 1974 (Qld) defines an Instalment Contract as one in which the Buyer must make a payment, other than a deposit, without becoming entitled to a transfer of the land.

A deposit is defined in the Property Law Act to be an amount that:

  • does not exceed 10% of the purchase price (for existing lots), or 20% of the purchase price (or proposed/off the plan lots); and
  • is paid or payable in one or more instalments; and
  • is liable to be forfeited to the Seller in the event of default by a Buyer.

Where a deposit is truly non-refundable, it is not ‘liable to be forfeited’. The Buyer is deemed to have already paid to the Seller part of the purchase price. Even though, the contract itself specified that the amount was a deposit, it does not overrule what is provided in the Property Law Act.

What are the consequences of an Instalment Contract?

Instalment Contracts provide more protection to Buyers than a standard REIQ contract. In summary, where a contract is deemed to be an Instalment Contract because of a non-refundable deposit these protections are:

  • Restriction on Termination by Seller on default of the Buyer

Under a standard contract, a Seller can terminate the contract and forfeit the deposit if the Buyer breaches it in a material way. However, section 72 of the Property Law Act requires a Seller under an Instalment Contract to provide a Buyer with 30 days’ notice to remedy this failure to pay, before the Seller is able to terminate the contract or take any other action. This means that time is not of the essence in relation to the payment of monies. The settlement date may be extended by up to 30 days by the Buyer without a Seller’s consent.

  • Property cannot be Mortgaged under an Instalment Contract

Under a standard REIQ contract, there is no prohibition against mortgaging the property after the contract is formed, provided that the mortgage is removed from title at or before settlement. However, Section 73 of the Property Law Act provides that under an Instalment Contract, a Seller must not mortgage the property without the consent of the Buyer.  However, you can insert a Special Condition into the contract that provides the Buyer’s consent to the registration of a mortgage.

  • Registration of Caveat by Buyer under an Instalment Contract

Section 74 of the Property Law Act provides that a Buyer under an Instalment Contract has an express right to lodge a caveat over the Land.

When we told Tara that she would have to pay the previous Buyer out she was very upset. But when we told her that, as the price for removing the caveat, she would also have accede to the demand of the previous Buyer’s Solicitor to pay a share of the profit from the sale as well as his legal costs, she was furious.

“The Previous Buyer is an absolute devil. I have been taught a very expensive lesson. I should have made sure of the details before getting the agent to change the contract and then I wouldn’t be in this mess,” Tara complained.

The creation of an Instalment Contract can severely impact a Seller’s right to terminate a contract, if a Buyer defaults. It is important to get legal advice before you enter into any contract, including Instalment Contracts.

What can I do to avoid an Instalment Contract?

As a general rule, special conditions should not express or imply that the deposit is ‘non-refundable’, and the Seller should be under an obligation to refund the ‘deposit’ if the contract is terminated because of the Seller’s default. However, don’t try this at home. You should always obtain legal advice before including conditions that allow for release of the deposit.

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


Cyber scams and Conveyancing

By Remy Forster

Recent news of scammers hacking into the software system of PEXA to divert funds from a MasterChef star have made gripping headlines, see Dani Venn: MasterChef star hacked out of $250,000.00. Cyber scams are not a new development – after all, it would be difficult to find a member of Generation Y who hasn’t heard of Nigerian princes. What has emerged over the past few years is a worrying trend of cyber scams targeting the legal arena, and specifically targeting conveyancing transactions. So far 2018 has included numerous incidents of cyber scams affecting conveyancing transactions, including Buyers transferring deposits to incorrect accounts and sale proceeds being deposited into incorrect accounts.

It is an obvious trend that cyber scams which affect law firms and their clients would most often be associated with conveyancing transactions. Conveyancing transactions are easy targets mostly due to:

  1. They comprise the most common legal transactions,
  2. They involve large sums of funds being transferred to multiple parties,
  3. A majority of the communication in the transactions are via email, with little telephone communication or face-to-face contact, and
  4. Online programs for the transactions being relatively new and still in the process of being established.

Fraudsters are now taking advantage of these risks to try to defraud clients in conveyancing transactions through a variety of methods.

The first method used by hackers is to intercept deposit payments made by Buyers to real estate agents. Hackers attempt this by accessing a real estate agent’s emails, waiting until the agent has sent their account details to a potential Buyer, and then sending a “follow up” email to the Buyer advising the original account details were incorrect and supplying alternate account details. The Buyer then transfers the deposit funds to the alternate account, not being aware that they have sent their deposit funds to the fraudster instead of the real estate agent. Cases of this fraud have emerged steadily over the past twelve months [1] and will no doubt continue to rise.

A second method is to intercept settlement payments made by Buyers to their legal representatives. Hackers use the same method described above, but instead access the legal representative’s emails and contact clients following the legal representative requesting their client transfer them funds for their property settlement. Incidents of clients losing funds to these instances of fraud have also increased over the past 12 months [2].

Finally, the third method is to intercept the disbursement of funds from a property settlement. This method is more sophisticated, and generally requires the property settlement to be settled using an online system such as PEXA. Hackers access the legal representative’s emails, use their emails to set up a new user on the representative’s PEXA system, change the entered account details for a PEXA transaction from the Sellers’ account details to the hacker’s account details, and hope that the legal representative doesn’t notice the change in account details prior to the transaction settling [3]. Instances of this type of fraud are becoming more prominent as use of the PEXA system increases.

All three methods rely on some form of access to the emails of the real estate agent or the legal representative, and that the parties involved in the conveyancing transaction won’t verify the information they have received through a secondary method. Law firms do have a responsibility to alleviate as much of the risks with conveyancing transactions as possible by implementing the following: [4]

  1. Requiring staff to delete emails from any suspicious email addresses without opening,
  2. Requiring staff to use secure passwords, and to change these passwords regularly,
  3. Ensuring accounts for any inactive staff are deleted, and monitoring established accounts to ensure no unauthorized accounts have been set up,
  4. Requesting that any potential clients contact the office via telephone before being engaged for legal services,
  5. Warning clients of potential fraud risks, and requesting that clients telephone their office if they receive a request by email to transfer funds,
  6. Where possible, encouraging clients to hand over funds as cheques in place of EFTs,
  7. Requesting clients provide their account details on physical documents instead of emailing account details, and
  8. For PEXA settlements, requiring staff to not enter in client account details in advance of the settlement and to triple check the entered account details match their client’s details before signing off on the property settlement.

Unfortunately, as outlined in the above items, there is also a partial responsibility on clients in conveyancing transactions to remain vigilant throughout their transaction for potential fraud. This by no means implies that clients are entirely to blame if they are the victim of a fraudulent action, and in some cases (such as PEXA fraud), clients have limited or no actions they can complete to prevent these actions. However, for instances of fraud to decrease, all parties involved in conveyancing transactions should complete the transaction with no presumptions and with secondary verification of crucial information.

PEXA settlements are not mandatory in Queensland, and if you are concerned about your transaction proceeding via PEXA we recommend you contact your legal representative no later than 10 business days prior to settlement to request that your settlement proceed via the traditional paper settlement method. Just Us Lawyers are registered for PEXA settlements, but still conduct a majority of their conveyancing transactions using the traditional paper settlement method. For more information on how PEXA settlements work, see PEXA’s website[5] and our previous blogs about our experiences settling through the PEXA system[6]

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

[1] https://www.smartcompany.com.au/industries/property/consumer-affairs-victoria-warns-real-estate-agencies-and-buyers-over-new-email-scam/

[2] http://www.abc.net.au/news/2017-10-25/scam-targets-conveyancing-clients-in-sa/9086172 and http://www.abc.net.au/news/2017-09-19/elderly-woman-loses-more-than-half-a-million-in-property-scam/8959218

[3] https://www.propertyobserver.com.au/forward-planning/advice-and-hot-topics/85862-pexa-warning-as-conveyancing-fraud-funds-end-up-in-thailand.html

[4] http://www.qls.com.au/Knowledge_centre/Ethics/Resources/Cyber_security

[5] https://www.pexa.com.au/buyers-sellers

[6] https://justuslaw.com/advent-e-conveyancing/ and https://justuslaw.com/e-conveyancing-reality-follow/


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.

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[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.”


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