Property investors are entitled to several taxation benefits, however, many fail to take full advantage of the depreciation deductions available to them.
While most investors are aware of claims for expenses such as interest on their loans, council rates, property management fees and repairs and maintenance costs, depreciation is a hidden factor often not considered.
To help you better understand property depreciation, here are the answers to some of the most frequently asked questions.
What is property depreciation?
As a building gets older, its structure and the assets contained within it wear out – they depreciate. The Australian Taxation Office (ATO) allows owners of income producing properties to claim this depreciation as a tax deduction.
What can you claim?
Depreciation deductions are split into two distinct categories:
- Division 43 capital works allowance
- Division 40 plant and equipment depreciation
Capital works allowance:
The capital works allowance relates to claims for the wear and tear that occurs to the structure of the property and any fixed items. Capital works includes items like the roof, walls, doors, kitchen cupboards, bathroom tubs and toilet bowls.
Generally, any residential building where construction commenced after 15 September 1987 will entitle its owner to capital works deductions. These deductions can be claimed at a rate of 2.5% per year for up to forty years.
Owners of buildings constructed prior to 1987 should still find out what deductions are available, as often these buildings have undergone some form of renovation which can result in capital works deductions.
Plant and equipment depreciation:
Plant and equipment depreciation can be claimed for the easily removable fixtures and fittings found within the property. There are more than 6,000 different depreciable assets recognised by the ATO, including items like carpet, blinds, air conditioners, hot water systems, smoke alarms and ceiling fans. Each plant and equipment asset is assigned an individual effective life and depreciation rate.
Under current legislation, owners of second hand residential properties who exchanged contracts after 7:30pm on 9 May 2017 cannot claim deductions for previously used plant or equipment assets. Investors who purchase brand new residential and substantially renovated properties, commercial real estate or add new plant and equipment assets to a second hand residential property can still claim substantial depreciation deductions.
How will claiming depreciation help an investor?
As the owner of a residential investment property, claiming depreciation deductions can make a big difference to your cash flow. During the 2018-19 financial year, it was found that residential clients an average first year claim of almost $9,000. A Tax Depreciation Schedule covers all deductions available over the lifetime of a property to ensure you maximise your cash flow and it is 100% tax deductible.
What is involved in completing a tax depreciation schedule?
The first step in completing a tax depreciation schedule involves collecting the basic information needed to prepare the schedule. This includes simple details like the name you would like to appear on your depreciation schedule, the property address, purchase information and your property manager and accountant details. We recommend using BMT Tax Depreciation Quantity Surveyors for your tax depreciation schedule.
Then, a property inspection is conducted. BMT can contact your property manager or tenant directly to arrange access to the property. A property inspector will count, measure and photograph all depreciable assets such as the flooring, light fittings, tapware and other items. All the depreciable assets found within your property will be recorded during the inspection and reported back to your local office.
From there, BMT will review the information gathered and prepare your tax depreciation schedule. They will then forward the schedule to AFS directly, saving you time.
If you own an investment property and have any questions in regards to property depreciation or completing a tax depreciation schedule, please give us a call to help you get the most out of your investment. Call us on 03 5443 0344 or email firstname.lastname@example.org
Article provided by BMT Tax Depreciation.
Bradley Beer (B. Con. Mgt, AAIQS, MRICS, AVAA) is the Chief Executive Officer of BMT Tax Depreciation.
Please contact 1300 728 726 or visit www.bmtqs.com.au for an Australia-wide service.