Investment Property TaxationClaim depreciation deductions in the lead up to the end of financial year
In the lead up to the end of financial year, owners of investment properties should arrange a tax depreciation schedule to be compiled by a specialist Quantity Surveyor. A tax depreciation schedule is a document which helps a property investor’s Accountant to process a claim for the depreciation of a building structure and the assets contained within the property.
The Australian Taxation Office (ATO) requires investors to report any income earned from a property investment as part of their income tax return. As part of this process, the ATO allows investment property owners to claim a deduction due to the wear and tear of a building structure and its fixtures over time. This claim is called depreciation. Depreciation is considered a non cash deduction, meaning investors do not need to spend any money to be able to claim it.
Property investors often assume they are ineligible or it is not worthwhile to claim depreciation because they think they have not owned the property for long enough or they believe their property is too old. The reality is, it is worthwhile making a claim on any property.
Claiming more depreciation from older properties
Property investors can claim tax depreciation in two ways, as a capital works deduction for the decline of the buildings structure and for the depreciation of all plant and equipment items contained both inside and outside of the property. ATO legislation states that owners of residential investment properties in which construction took place before the 18th of July 1985 are not entitled to claim capital works deductions. However, a capital works deduction may be available for any recent renovations that have been completed since this date. Owners of older properties should request a specialist Quantity Surveyor to conduct a site inspection to ensure no available claims are missed.
Despite the date restrictions on capital works claims, depreciation of plant and equipment can usually be claimed regardless of a buildings age. Therefore owners of all property types will still receive significant deductions. Some examples of plant and equipment items which may be claimed include carpets, stoves, blinds, hot water systems, light shades and heaters.
61 per cent of depreciation schedules prepared by BMT Tax Depreciation are for properties which have been pre-owned and 33 per cent of these are for properties built prior to 1985. BMT Tax Depreciation usually finds an average of $4,042 in annual depreciation during the first five years for the owners of investment properties which were built prior to 1985.
Owners of investment properties which are part of larger development complexes, such as units and apartments, are also entitled to claim common property items such as driveways, lifts, pool pumps, outdoor furniture and common stairways. Depreciation claims on common areas will substantially increase deductions for the owners of both new and older properties.
For many property investors, the additional income received from a depreciation claim can make a huge difference in turning what might be a negative cash-flow investment into a property which produces a positive cash-flow.
Claim $4,852 in 29 days
It is important to note that when a property has been owned and rented for only a short period, investors will still see substantial benefits by obtaining a depreciation schedule. Partial year deductions can often be maximised, resulting in extra cash for the owner.
Even if a property is purchased towards the end of the financial year, a tax depreciation specialist can find valuable deductions for the owner. For example, one owner who purchased a house for $550,000 and only began renting a property from the 2nd of June (29 days prior to the end of financial year), was able to claim $4,852 in depreciation for these 29 days.
It is important for investment property owners to contact a specialist Quantity Surveyor like BMT to conduct a site inspection and obtain a depreciation schedule leading up to the settlement of the property.
A specialist Quantity Surveyor can use legislative tools to make partial year claims more beneficial to property owners, regardless of the time a property is owned and rented. Methods such as immediate write-off and low-value pooling will increase deductions over a short period of time for the new owner.
Immediate write-off applies to any item within a property which costs less than $300. These items can be written off immediately regardless of how many days the property is owned in that year.
Low-value pooling is a method whereby depreciation of plant and equipment items is claimed at a higher rate to maximise deductions. Low cost assets and low-value assets are placed in a low-value pool where they can be claimed at a rate of 18.75% in the year of purchase and 37.5% for each year afterwards, regardless of how long the property has been owned and rented.
Seek expert advice
The ATO recognise Quantity Surveyors to be one of the few professionals with the appropriate construction costing skills to calculate the cost of items for depreciation purposes. Quantity Surveyors are qualified under the Tax Ruling 97/25 and also gain access to the latest ATO rulings and information through their affiliations with industry regulating bodies.
Quantity Surveyors work regularly with Property Managers and Accountants to maximise deductions available to property investors.
***sourced from BMT Tax Depreciation