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Australian Law Articles - Property

Property Purchases "Off The Plan"

First published as "Off plan or off planet"
in The Australian Newspaper - Wealth Liftout - 30 July 2003 Page 5
Reproduced with the permission of the copyright owner Bina Brown

There are advantages and drawbacks of getting in early, writes Bina Brown

The large number of cranes hovering around inner-city and prime coastal areas are an indication of how many new apartment blocks are under construction.

For many people, the combination of a construction and property boom has presented a chance to buy off the plan and secure a property at today's values. They are banking on the property increasing in value during construction and that it will sell at a higher price or be easily rented on completion.

Other investors have been able to turn a quick profit by selling on the property bought off the plan at a higher price before construction is completed.

General manager of investment sales at the Mirvac Group, Graeme Katz, says while the speculative end of the market has slowed there is still strong demand for new property.

Katz estimates that half of the buyers of Mirvac properties will be owner-occupiers, 25 per cent investors and 25 per cent "speculative".

"People are speculating with a focus on capital growth. In a way it's a futures play. They are happy to move in but then they are also happy to sell before completion," he says.

While the glossy marketing material for many of the off-the-plan investments emphasises the tax savings, in most states they are the same as if an investor is buying a new property with the depreciation allowance and warranties on the development and appliances.

Once the property is completed and being rented, the same tax rules apply as to any investment property.

Baldry Financial Planning director Suzanna Baldry says the tax benefit from buying off the plan, or a new home, should not be underestimated, but it should not be the sole purpose for the purchase.

Investors can claim a 2.5 per cent depreciation allowance on the construction costs which in the case of a new development, can be substantial.

However, when it comes to selling the property the depreciation allowances comes off the costs base for the purposes of capital gains tax calculations and can add to the capital gain.

Ms Baldry says it is important for people buying off the plan to get details of the eligible construction costs, which start from the first turn of the soil. If you don't get it at the time of the purchase you may have to pay for a quantity surveyor to prepare one.

A further saving by buying before construction is completed can come in the form of stamp duty, which is proportional to the value of the building. Victoria has concessional stamp duty savings which can be between $10,000.00 and $30,000.00.

Colin Sloan, a solicitor in the property section of Port Macquarie-based GWM Lawyers and Conveyancers, says there are risks with any property transaction but buying off the plan comes with its own variety of risks.

In NSW, a building legislation amendment (Quality of Construction) Act addresses a previous concern with off the plan.

From July 1, 2003 in the case of purchases of strata units off the plan (or house and land packages), the buyer is not required to complete the contract unless a final occupation certificate has been issued by council. He says, the changes are good news for buyers who can have some degree of assurance that the building is at least habitable.

"There were some concerns about operations where buildings were put up very quickly when services weren't connected and interiors were not complete," he says.

One precaution purchasers should take is to understand the issues that arise in the development construction; apart from the unit itself these will include the style, appearance and finish of the common areas, likely noise, proposed security system, visitor parking, access to garages, ventilation, garbage disposal and landscaping.

Sloan says buying property off the plan and selling it before completion at a higher price is not foolproof because property does not always go up: "If the bubble bursts it's a very risky strategy because you have exchanged contracts based on a price that once the building is complete you will have to meet that obligation even if the value has dropped."

A further risk is that with large number of new apartments appearing on the skyline there may not be the tenants to fill them all.

One benefit from buying new property or property off the plan is the capital works deduction of 2.5 per cent per annum, although it may mean an increase in the capital gain on sale.

The example shown for a $450,000 apartment illustrates how the tax benefits can work in practice.

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