Defects bond? Jail the dodgy developers!

This post, an expanded version of last week’s roundup intro, appeared in this form in the Australian Financial Review.

Happy New Year! Two pieces of legislation came into force as the bells rang out across Australia (at half-hourly intervals) this week.

The first, which applies nationally, limits the tax deductions you can make for travel costs associated with managing your investment property.

There are a few exceptions, of course. According to the ATO website, you can continue to deduct travel expenditure “if the losses or outgoings are necessarily incurred in carrying on a business for the purposes of gaining or producing assessable income.”

Meaning, I think, if you really, really need to inspect your property, the tax office might let you claim your bus fare.

And you can also dodge the limits if you are a corporation, a non-self-managed superannuation fund, a public unit trust, a managed investment trust, or a unit trust or partnership whose members tick the above boxes.

Clearly, this is directed at ‘Ma and Pa’ investors whose visit to ‘check’ their holiday rental flat in Byron, Brisbane or Broome, just happened to coincide with their annual holidays.

But it also means that your twice-yearly trip to Singapore to discuss what you’re going to do about your investment property in Bankstown is definitely not deductable (if it ever was).

The new limits are retrospective to July 1 last year and you’ll find the ATO notice here.

Meanwhile, the long-awaited defects bond for new apartment blocks in NSW has come into force. It requires apartment block developers to deposit two percent of the contract cost of their buildings in a fund managed by Fair Trading.

The money sits there for two years unless claimed by the purchasers of the properties to pay for defects that have become apparent, post-purchase.

The bond has been created so that owners aren’t left high and dry when dodgy developers shut up shop and morph into another entity, leaving all their shoddy work behind them in a vapour trail of unpaid bills.

Sounds good and our best developers will actually welcome this as a way of dealing with a whole posse of cowboys who have ridden into town in recent years. Other states will doubles follow if this works in Sydney.

But pessimists will say that this just locks defects into the developers’ budgets, so shoddy work will increase, not decrease.

Also, developers will just add the two percent to the cost of the units so you aren’t much better off (except you now have a fund to access … if you can).

And that’s the really big question mark over the fund. You can be sure those same lovely people who underpay their builders, who then underpay their sub-contractors, who then leave you with a leaky roof, will move heaven and earth to make sure we, the customers, can’t get our grubby little hands on very much of ‘their’ money at all.

Oh, and two percent isn’t even close to what will be required to fix some of the horrors we’ve seen over the past few years.

Are we being too cynical? Optimists will say that now the principle of a defects bond has been established, the government can tweak the percentage to more closely match the realities of the industry.

But there’s a whole series of bureaucratic bridges to be crossed before we get there. Fair Trading plans to use independent assessors to decide if the contract prices on which the bonds will be based are fair, and to decide whether the defect claims are valid, before a cent is paid out.

Those of us still living with the consequences of self-assessed building surveys shudder at the thought of how badly and quickly this could go wrong.

But at least it’s a start. However, a better plan might just be to start jailing developers who intentionally set out to defraud their customers. You wouldn’t need a bond then.

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